Series 6 : Investment Company Products and Regulation (Lesson 2 Practice Questions)

A customer would like to establish a systematic withdrawal plan that will pay her $500 a month in retirement. She should select a A) Fixed dollar plan B) Period certain plan C) Fixed share plan D) Fixed time plan

A) Fixed dollar plan A mutual fund fixed dollar systematic withdrawal plan will pay a specified sum each period until the money runs out.

Which two of the following statements are TRUE regarding customers who invest in unit investment trusts? I. They own units, also called shares of beneficial interest II. They own an interest in the same securities for the UIT's life III. Their interest is actively managed IV. Their interest is passively managed A) I and II B) I and IV C) II and III D) II and IV

A) I and II Customers who invest in unit investment trusts own units in a fixed portfolio of securities. Consequently, investors know the securities held by the trust for the life of their investment. UITs are not managed; they are simply monitored

Which of the following funds subjects investors to the broadest range of equity securities with the lowest management fees? A) S&P 500 Index ETF B) A global stock mutual fund C) A diversified domestic closed-end fund D) A DJIA Index ETF

A) S&P 500 Index ETF Index funds traditionally carry the lowest management fees since there is little active fund management. The S&P 500 offers a broader range of companies than the DJIA Index which includes just 30 industrial stocks.

All of the following statements are true when shares of a mutual fund are redeemed EXCEPT A) The shareholder will receive the POP next calculated B) The fund will pay the investor the redemption value C) Contingent deferred sales charges may apply D) The redeemed shares are not sold to other investors; they are canceled

A) The shareholder will receive the POP next calculated Mutual fund shares are redeemed at the NAV next calculated. They are purchased at the POP.

Over a three month period, a mutual fund investor invests $100 per month in mutual fund shares. The share prices each month are as follows: Month 1: $20 per share Month 2: $25 per share Month 3: $22 What is the investor's average cost per share? A) $13.55 B) $22.14 C) $22.33 D) $24.25

B) $22.14 The investor's average cost per share in a dollar cost averaging strategy is calculated by adding the investments (3 x $100 = $300), and dividing by the total number of share purchased. The customer purchased a total of 13.55 shares: Month 1 purchase was 5 shares (100/20); Month 2 purchase was 4 shares (100/25); Month 3 purchase was 4.55 shares (100/22). $300/13.55 shares purchased is an average cost of $22.14 per share

On Monday Paul invests $25,000 in an inverse ETF. On Tuesday the market rises 6% and on Wednesday the market falls 3%. What is the value of the ETF? A) $25,705 B) $24,205 C) $25,750 D) $24,705

B) $24,205 A 6% market rise would mean a decline of $1,500 for the inverse ETF (bringing its value to $23,500). A subsequent drop of 3% in the market would translate to a gain of $705, bringing the value of the ETF to $24,205.

The structure of a unit investment trust includes all of the following functions EXCEPT A) A custodian B) A board of directors C) A trustee D) A sponsor

B) A board of directors A unit investment trust differs from other investment companies in that it has no board of directors, corporate officers or investment advisor.

What type of closed end fund offers current income that is exempt from regular federal income tax? A) A U.S. Government bond CEF B) A municipal bond fund CEF C) An international bond CEF D) A convertible security CEF

B) A municipal bond fund CEF Municipal CEFs return current income that is exempt from regular federal income tax by investing in state and local municipal bonds.

Most hedge funds are offered to investors through A) An IPO B) A private placement C) A Secondary offering D) A shelf offering

B) A private placement Hedge funds are sold through private placements to accredited and institutional investors. They are exempt from the SEC registration process for public offerings

Which of the following types of mutual funds is most likely to include only equity investments in its investment portfolio? A) A balanced fund B) An aggressive growth fund C) A high yield fund D) An asset allocation fund

B) An aggressive growth fund Growth objectives are usually satisfied by stock. The manager of an aggressive growth fund seeks stocks that are likely to have greater growth potential than the market overall. These are typically stocks of small to mid-sized company.

Which of the following closed end funds are likely to hold portfolios of both equity and debt instruments? I. Global income funds II. Option income funds III. Convertible security funds IV. Tax free income funds A) I and II B) I and III C) II and III D) II and IV

B) I and III Both global income funds and convertible security funds hold bonds and preferred stock. In a global income fund preferred stock produces dividend income. In a convertible security fund, the preferred stock generates income, but also the alternative to convert to common stock.

Which of the following statements best describes a mutual fund's 12b-1 fee? A) It is usually assessed at the time shares are purchased B) It is charged annually as a flat fee or percent of NAV C) It charged when fund shares are redeemed D) It cannot be charged in combination with other types of sales charges

B) It is charged annually as a flat fee or percent of NAV A mutual fund 12b-1 fee covers the distribution of fund shares. It is charged as an annual flat fee or most commonly as a percentage of NAV, in addition to other sales charges. The maximum amount of 12b-1 fees for distribution is .75%; an addition.25% is allowed for shareholder services

An investor would like to invest in a fund that holds only the securities of companies that are committed to being "green". A type of fund that may be appropriate is a A) Blend fund B) Specialty fund C) Balanced fund D) World allocation fund

B) Specialty fund Specialty or sector funds concentrate their investments in a specific area. "Green" funds, technology fund or health care funds are examples of specialty funds. These funds can be risky because of their single area of focus.

A customer would like to buy an investment company product that offers share redemption. Which products should be purchased? A) Closed end and open-end company products B) UIT units and open-end shares C) ETFs and closed end company products D) Interval funds and BDC products

B) UIT units and open-end shares Unit investment trusts and open-end investment companies (mutual funds) must redeem their units or shares within 7 calendar days of investor request.

An investor may receive a "tax-free" dividend from a mutual fund A) under no circumstances. B) if the fund portfolio held municipal bonds. C) if the portfolio contained U.S. government notes and bonds. D) if the mutual fund is considered a "regulated investment company"

B) if the fund portfolio held municipal bonds. If the mutual fund portfolio held 'tax-free' municipal bonds, any dividends paid by the fund will be treated as tax-free distributions.

The most important factor to consider when deciding on whether a particular mutual fund is appropriate for an investor is the A) track record of the fund manager. B) investment objectives of the mutual fund. C) amount needed to invest to qualify for a breakpoint. D) fee structure of the mutual fund.

B) investment objectives of the mutual fund. The investment objectives of the mutual fund should be well aligned with the investment objectives of the investor

Acme Fund has an NAV per share of $9.20 and an 8% sales load. What is the dollar amount of the sales charge? A) $0.60 B) $0.74 C) $0.80 D) $10.00

C) $0.80 POP = (NAV/ 100% - SC%) = $9.20/.92 = $10.00 To find the dollar amount of sales charge take the POP and subtract it by the NAV. $10.00 - $9.20 = $0.80.

An investor seeking long-term growth through capital gains may be best served by deploying capital into a(n): A) Money market fund B) Fixed-income fund C) Equity fund D) Asset allocation fund

C) Equity fund For an investor with this goal, the best option will be the equity fund.

A customer purchases into the investment at the next calculated POP. The customer is purchasing which of the following? A) Shares in an ETF trading on an exchange B) Shares in a closed-end company C) Shares in an open-end company D) Shares in either an open-or closed-end company

C) Shares in an open-end company Mutual fund shares are purchased at the next calculated public offer price (POP) and are sold at the next calculated net asset value (NAV). Mutual funds use forward pricing and they price their fund every business day at 4 pm eastern

Which of the following types of mutual fund trades would NOT typically require a separate trade confirmation? A) Equity fund purchase B) Equity fund sale C) Systematic investment or withdrawal D) Exchange between funds

C) Systematic investment or withdrawal Systematic investment (dollar cost averaging) plans and systematic withdrawal plans make automatic or preplanned purchases or sales in mutual fund shares, sometimes for relatively small amounts. They normally appear on customer statements but not on separate trade confirmations.

A mutual fund shareholder may not be permitted to vote on which of following? A) A change in the investment objectives of the fund B) A change from diversified to non-diversified status C) The appointment of a new Board of Directors member when one of the 10 elected members has retired D) A decision to terminate operations

C) The appointment of a new Board of Directors member when one of the 10 elected members has retired A shareholder vote is not required to fill a seat on the Board if more than 2/3rds of the members were elected. All other choices require a vote.

A customer that invests in a unit investment trust owns A) Shares in a fixed portfolio of securities B) Shares in a portfolio of securities that is actively managed C) Units in a fixed portfolio of securities D) Units in a portfolio of securities that is actively managed

C) Units in a fixed portfolio of securities Customers who invest in unit investment trusts own units in a fixed portfolio of securities. This is considered an advantage to some investors because they know the securities held by the trust for the life of their investment.

A type of investment company product that is typically organized as a closed-end fund but does not trade on a national exchange and offers investors access to alternative investments that are usually only available to institutional investors is a(n) A) no-load fund. B) target date fund. C) interval fund. D) diversified investment company.

C) interval fund. These are interval funds, which are organized as closed-end funds, and provide investors with access to asset classes that are typically only accessible to institutional investors such as hedge funds. The payouts on these funds can be higher than that of traditional mutual funds

An investor purchasing 1,000 shares of a certain mutual fund that has a maximum sales charge of 8½ % and a NAV of $10.30 at the time of purchase will pay a total sales charge of (rounding to the nearest dollar) A) 88 B) 96 C) 875 D) 957

D) 957 POP = (NAV/ 100% - SC%) = $10.30/.915 = $11.26 SC = POP - NAV = .957 Total Sales Charge = .957 x 1000 shares = $957

On which of the following is a majority vote of the outstanding mutual fund shares required? A) A change in the asset allocation of the fund B) A change in the fund's transfer agent C) A change in the funds trading strategy D) A change from diversified to non-diversified status

D) A change from diversified to non-diversified status Investors vote on the election of Board of Directors members and on major fund changes, such as a change in the overall investment objectives, a change in diversified to non-diversified status, or termination of the fund. Changes to custodians or transfer agents are not subject to shareholder vote. The investment advisor has responsibility for trading and allocating funds to meet the fund's stated investment objectives.

The fraud provisions of the act of 1934 apply to which of the following? A) Manipulation of the price of a municipal security B) Participation in an all-or-none offering and reporting the offering as firm to the client C) Short sale of municipal security serial bonds D) All of the above cases and for all types of securities

D) All of the above cases and for all types of securities The fraud provisions of the act of 1934 apply to all persons and for all types of securities. No person or transaction is ever exempt from the antifraud provisions of the Securities Act of 1934

Dividends from mutual fund shares that are comprised of interest from U.S. Treasury obligations are A) Taxable as ordinary income B) Qualified dividends that are taxed at capital gains rates C) Exempt from federal income tax D) Exempt from state and local income tax

D) Exempt from state and local income tax Mutual fund dividends that include interest from U.S. government bonds are exempt from state and local income taxation

Closed-end funds are subject to regulation by which of the following? I. The Securities Act of 1934 II. The Investment Company Act of 1940 III. The Investment Advisors Act of 1940 A) I and II only B) I and III only C) II and III only D) I, II, and III

D) I, II, and III Closed-end companies are subject to regulation under all major securities Acts, including the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the Investment Advisors Act of 1940. The Securities Act of 1933 also applies when the closed-end fund is first issued.

What is the common name for open-end management companies? A) Hedge Fund B) Swap Exchange Facility C) Commodity trading fund D) Mutual fund

D) Mutual fund Mutual funds are structured as open-end investment companies under the Investment Company Act of 1940. They allow asset management firms to pool investors' capital and create diversified portfolios of securities.

To achieve an appropriate mix of investments that are managed to align with risks by an investor's retirement date, an investor should select which of the following types of funds? A) Asset allocation fund B) Balanced fund C) Interval fund D) Target date fund

D) Target date fund A target date fund is designed to rebalance to a greater percentage of conservative assets as retirement approaches. An asset allocation fund is rebalanced by the investment advisor in response to changing market conditions, not with regard to a future date

An investor in a unit investment trust holds A) Shares that are fixed in value B) Units that are fixed in value C) Shares that fluctuate in value D) Units that fluctuate in value

D) Units that fluctuate in value An investor that owns an interest in a unit investment trust holds units that fluctuate in value based on the securities held by the trust. The securities are fixed; in other words, once selected they are held for the life of the trust with very few exceptions.

An individual who invests $250 every three months into a mutual fund portfolio is engaged in A) breakpoint sales. B) averaging the dollar. C) a fixed-share withdrawal plan D) dollar cost averaging.

D) dollar cost averaging. This is dollar cost averaging and is a very popular approach to purchasing mutual fund shares. This enables the investor to purchase more shares when prices are lower and fewer shares when prices are higher. The result of this strategy will be an average cost per share that is lower than the average price per share.

The entity that is charged with management of mutual fund selling agreements on behalf of a mutual fund is the: A) Sponsor B) Network agent C) Transfer agent D) Custodian

A) Sponsor The mutual fund sponsor, aka underwriter, has responsibility for managing selling agreements for the distribution of the fund's shares.

Which of the following securities is least susceptible to trading abuses like market timing and illegal late trading for the purpose of taking advantage of a favorable NAV calculation? A) An index mutual fund B) A currency ETF C) A balanced mutual fund D) An international mutual fund

B) A currency ETF Mutual funds calculate NAV after market close each business day. Trading abuses like late trading or market timing involve manipulating a purchase or sale order to take advantage of the previously calculated price rather than the next calculated price as required. An ETF is exchange traded, so it trades at the market price rather than the NAV calculation.

Which of the following features do open end and closed end companies have in common? A) Both are redeemed by the issuer B) All sales must be accompanied by prospectus C) Both calculate NAV D) Both charge 12b-1 fees

C) Both calculate NAV Both open end and closed end funds calculate the net asset value of the fund each business day. Only open-end funds charge 12b-1 distribution fees and are redeemed by the issuer. Open end funds must always be sold with prospectus. Closed end funds must only be sold with prospectus when they are newly issued, but not when they are traded in the secondary market.

A mutual fund that is classified as diversified cannot do which of the following? A) Own more than 5% of a target company's stock B) Distribute less than 95% of its net investment income C) Invest more than 5% of assets in a single target company D) Own mutual fund shares in a single sector only

C) Invest more than 5% of assets in a single target company To be diversified, a mutual fund must invest 75% of its assets so that no more than 5% are invested in the stock of a single target company, and it owns no more than 10% of any target company.

To purchase closed end company shares in the secondary market, an investor will pay which of the following? A) Front-end load B) 12b-1 fee C) Back-end load D) Brokerage commission

D) Brokerage commission After their initial offering, closed end company shares are bought and sold in the secondary market. Investors pay brokerage commissions to make trades in the secondary market.

The shares of which of the following investment companies are NOT redeemed by the issuing companies? I. UITs II. Open end companies III. Closed-end companies IV. ETFs A) I and II B) I and III C) II and III D) III and IV

D) III and IV The shares of mutual funds and units of UITs are redeemed by their issuing companies. The shares of closed-end companies and ETFs are traded on exchanges, and are not redeemed by their issuers.

A mutual fund share report shows a NAV of $4.10 and POP of $4.20. The sales charge percent that applies to this transaction is A) 2.38% B) 2.44% C) 1.19% D) 1.22%

A) 2.38% Sales charge is a percentage of the POP. To calculate, find the amount of the sales charge ($4.20 - 4.10 = .10) and divide it by the POP. 0.10/4.20 = 2.38%

For which of the following investors is a portfolio of 60% capital preservation funds, 10% money market funds, and 30% blue chip stock funds most appropriate? A) A 70-year-old retiree B) A 55-year-old saving for college C) A 35-year-old stock broker D) A custodian acting on behalf of an UGMA account

A) A 70-year-old retiree This portfolio is conservative and has the appropriate mix of safety and growth for a retiree. Retirees should have some equity in their portfolio to keep pace with inflation, but lower risk and an emergency fund for cash access are also important.

An investor that is interested in long term growth and a reliable income stream could benefit from a recommendation of which of the following funds? A) A balanced fund B) An asset allocation fund C) A target date fund D) A blend fund

A) A balanced fund Balanced funds hold portfolio assets that are designed to provide growth and a reliable income stream. They are also called combined or hybrid funds, or equity income funds. Blend funds are stock funds that invest in both global and value stocks.

All of the following are permitted under the Investment Company Act of 1940 and rules regarding mutual fund fees and charges EXCEPT: A) Charging a CDSC on a no-load fund B) Charging a 12b-1 fee on Class C share C) Charging a 12b-1 fee on a no-load fund D) Charging a 12b-1 fee on a back-end load fund

A) Charging a CDSC on a no-load fund No load funds cannot have front- or back-end loads. These funds can charge 12b-1 fees and reasonable redemption fees, however. All mutual fund share classes are permitted to charge 12b-1 fees if within the limits of the Act.

A customer asks for an explanation of a mutual fund's expense ratio. Which of the following is the most accurate reply? A) The expense ratio allows customers to compare operating expenses between funds B) The expense ratio compares a mutual fund's sales charge to its net asset value to allow customers to contrast sales charges between funds C) The expense ratio combines sales charges and operating expenses and computes them as a percentage of average net assets to allow customers to compare costs of fund ownership D) The expense ratio computes the fund's 12b-1 fees as a percentage of average net assets to allow customers to compare fund distribution charges

A) The expense ratio allows customers to compare operating expenses between funds A fund's expense ratio is calculated by dividing average operating expenses by average net assets: Operating expenses/average net assets. Sales load is not included in the computation. 12b-1 fees are included in the computation of operating expenses.

A customer plans to invest in mutual fund shares, but does not want to pay a high upfront sales charge. The investor intends to hold the funds for at least 10 years. Which is most appropriate for this investor? A) A shares B) B shares C) C shares D) A or B share would both be suitable

B) B shares B-shares have a contingent deferred sales charge (CDSC), which is also called a back-end load. There is no frontend load on B-shares, and no CDSCs will apply if the shares are held for a long time period. There is an ongoing 12b-1 charge that applies however. A shares have front-end loads, and C shares have level loads.

Which of the following is not a characteristic of a closed-end investment company? A) Intraday pricing B) Continuous offering of new shares to meet investor demand C) Supports diversification of an investment portfolio D) Share value at a discount or premium to NAV

B) Continuous offering of new shares to meet investor demand With closed-end funds (CEF), there is a limited number of shares sold in a public offering, and then those shares may be traded in the secondary market.

A component of the sales charge that is paid by UIT purchasers for the establishment and supervision of the trust known as the A) Trust operating fee B) Creation & development fee C) Portfolio supervision fee D) Administration and evaluation fee

B) Creation & development fee The C&D fee, or Creation and Development fee is part of the initial charge paid for the ownership of UIT units. This fee is paid to the sponsor for the creation and development of the trust.

Rank the following types of funds in order from highest to lowest expense ratios. I. International funds II. Index funds III. Large Cap funds IV. Small cap funds A) I, III, IV, II B) I, IV III, II C) III, IV, I, II D) IV, III, II, I

B) I, IV III, II Of these types of funds, international funds have the highest expense ratios, followed by small caps, large caps, and then index funds. Index funds typically have the lowest expense ratios since they replicate an index and are infrequently traded.

A mutual fund's public offering price is A) The net asset value per share ? the sales charge B) The net asset value per share + the sales charge C) The net asset value per share/the sales charge D) The net asset value per share x the sales charge

B) The net asset value per share + the sales charge The public offering price of a mutual fund share is calculated by adding the sales charge to the net asset value.

A customer contacts her financial representative to sell mutual fund shares she owns. The price she will receive is A) The market price at the time the order is entered B) The next calculated NAV price C) The asked price at the close of the trading day D) The next calculated POP price

B) The next calculated NAV price Investors sell their shares at the net asset value price next calculated, which is the concept of forward pricing. Applicable commission would also be deducted from the proceeds

Mutual fund investors are occasionally charged fees to cover marketing and distribution expenses. These fees are attributable to A) fund management expenses. B) sales charges paid when Class A shares are purchased. C) 12b-1 asset -based fees. D) dollar cost averaging

C) 12b-1 asset -based fees. 12b-1 fees may be charged by a mutual fund to cover various administrative costs, such as distribution and marketing expenses. The maximum 12b-1 fee that may be charged is 0.75%.

An investor is interested in an investment alternative that could provide a hedge against inflation, which he expects to be heating up in the short-term. Which of the following mutual fund choices may be appropriate? A) A high yield bond fund B) A small cap fund C) A commodity fund D) A U.S. government bond fund

C) A commodity fund A commodity fund invests in alternative investments like gold, energy and other resources that can provide a proven inflation hedge. Bond funds lose value when interest rates rise. The stock market is often negatively impacted when interest rates rise too quickly, as in an inflationary cycle

All of the following statements regarding mutual fund breakpoints are true EXCEPT A) The breakpoint for a mutual fund purchase applies even if the fund purchase is made through a brokerage account at another broker dealer B) Financial advisors are prohibited from encouraging a customer to make a purchase just below the point at which a breakpoint would apply C) The breakpoint schedule applies to fund purchases in different fund families D) Breakpoints must be available for a mutual fund to charge the maximum allowable sales charge

C) The breakpoint schedule applies to fund purchases in different fund families A mutual fund's breakpoint schedule applies only to purchases within a single fund family.

Investors that purchase high quality fixed income investments for retirement income will be most concerned with A) credit risk B) principal risk C) inflation risk D) economic risk

C) inflation risk Inflation risk is a major concern for investors who hold portfolios of fixed income investments for funding retirement income. As inflation increases, the purchasing power of their fixed coupon will fall.

An investor plans to purchase a home in the next 6 to 12 months and would like to invest funds for a down payment in a mutual fund. Which of the following choices is most suitable? A) A balanced fund B) A U.S. government bond fund C) A real estate fund D) A money market fund

D) A money market fund Money market funds are appropriate for investments that need to be liquidated for their full value in a short time frame. Although not guaranteed, the value of each share has been held constant at $1, so investors in money market funds do not lose principal and can liquidate their shares for their full value plus interest that was earned.

An investor is interested in purchasing investment company shares that are priced at $13.50 per share with an NAV of $13.25 per share. These shares are: A) Class A or Class B shares B) Class A shares C) Class B shares D) Closed end or Class A shares

D) Closed end or Class A shares Class A mutual fund shares have a frontend load, so the POP is greater than the NAV. Closed end shares can trade at either a premium or discount to their net asset value, so these shares could also be closed end shares.

An individual enters an online order for the purchase of mutual fund shares directly from the fund's sponsor. He will purchase shares at the A) NAV price calculated on that morning's market opening B) NAV price next calculated C) POP price calculated on that morning's market opening D) POP price next calculated

D) POP price next calculated Mutual fund shares are purchased and redeemed at the next calculated price - the concept of forward pricing. The customer will purchase shares at the public offering price next calculated (POP). Shares are redeemed at the next calculated NAV

All of the following are true of both mutual funds and REITS EXCEPT A) A prospectus must be made available to potential purchasers B) Investors own a proportionate share of diverse assets that is professionally managed on their behalf C) Both have a Board of Directors to establish their strategic direction D) Secondary market trading offers liquidity to investors in either of these investments

D) Secondary market trading offers liquidity to investors in either of these investments Mutual fund shares do not trade on the secondary market. They are redeemed by the fund. There are both publicly traded, and private, but non-traded REITS.

In seeking an investment that will provide growth and capital appreciation, an investor would like your recommendation on a fund with a portfolio invested in companies that have strong potential but are not yet trading at high market prices when compared to other companies. Which type of fund do you recommend? A) Small cap fund B) Large cap fund C) Mid cap fund D) Value fund

D) Value fund A value fund is a fund that seeks to invest in stocks that appear to be undervalued in price based on fundamental characteristics like P/E ratios, performance compared to peer companies, financial statements, etc.

Of the following mutual fund choices, which one is likely to provide the highest level of income? A) A high yield bond fund B) An equity income fund C) A balanced fund D) An index fund

A) A high yield bond fund The portfolio of a high yield bond fund holds bonds that have substantial credit risk in return for high income potential. These bonds are typically rated below investment grade.

An investor in a mutual fund owns which of the following? A) An undivided interest in the shares of the securities held by the mutual fund B) Specific securities within the mutual fund C) A divided share of the securities that are held within the mutual fund's portfolio D) A proportionate interest in the specific portfolio securities that meet the investor's objectives

A) An undivided interest in the shares of the securities held by the mutual fund An advantage of mutual fund investments is that investors own a proportionate share of all the securities within the portfolio (an undivided interest). They can achieve a high degree of diversification for a minimal investment.

An alternative arrangement for UIT sales charges in advisory accounts is the A) Asset based fee B) Contingent deferred sales charge C) Full front-end fee D) Investment management fee

A) Asset based fee Instead of a combination of front-end and deferred sales charges, investors that have fee-based advisory accounts may pay an annual fee based on the assets in the account.

A mutual fund portfolio with an investment objective of safety of principal is likely to include all of the following EXCEPT A) BBB corporate bonds B) Treasury notes C) Cash D) Negotiable CDs

A) BBB corporate bonds BBB corporate bond funds are a low-grade of corporate bonds and would not be included in a portfolio with a primary objective of capital preservation. Government securities and high-grade money market securities are usually included in portfolios designed for capital preservation

The type of share class in which the sales charge is incrementally reduced the longer an investor holds the shares is the: A) Class B share B) Level load sales charge C) Class A share D) Class C share

A) Class B share This is the Class B share, sometimes referred to as the contingent deferred sales charge. These are typically more appropriate for investors who plan to hold their shares for at least seven years

The responsibility of the sponsor of a unit investment trust includes which of the following? I. Selection of the securities for the trust II. Organizing the formation of the trust III. Tax reporting for the trust IV. Recordkeeping for the trust A) I and II B) I and IV C) II and III D) II and IV

A) I and II The sponsor of a UIT organizes the trust and is responsible for the selection of the portfolio securities. The trustee handles administrative functions, including the recording keeping, accounting and tax reporting duties.

When compared to a corporate debenture, a mortgage bond I. tends to yield a lower rate of return II. tends to yield a higher rate of return III. has higher priority in a corporate liquidation IV. has lower priority in a corporate liquidation A) I and III B) I and IV C) II and III D) II and IV

A) I and III A mortgage bond is backed by real property owned by the corporation, while a corporate debenture is backed by the good faith and credit of the issuer. Because of the greater degree of safety, mortgage bonds pay a lower rate of return than unsecured corporate bonds. Secured bonds like mortgage bonds have higher priority in a corporate liquidation.

The pool of capital managed by a closed-end fund can best be described as A) Stable throughout the life of the fund B) Subject to constant inflows of cash due to purchases of new shares C) Subject to constant outflows of cash due to the obligation to redeem shares within seven days D) Continually subject to both inflows and outflows due to purchase and redemption requests

A) Stable throughout the life of the fund Closed-end funds manage a stable pool of capital. The amount invested is fixed, and can only be changed if management determines it wants to raise or reduce capital through activities like rights offerings or tender offers

Which of the following is LEAST likely to impact a bond's credit rating? A) The business plan of the issuer and its ability to execute B) The financial health of the issuer C) The ability of the issuer to pay debt obligations in a timely manner D) The amount of debt that an issuer carries on its balance sheet

A) The business plan of the issuer and its ability to execute Although the business plan of the issuer may impact its financial health if it is unsuccessfully executed, the factors most directly related to the rating assessed by a bond rating agency are the issuer's financial health, and the issuer's ability to pay its debts on time, which may be influenced by the amount of debt the issuer carries. A company's execution of its business plan is more likely to impact its stock price.

Which of the following UIT charges is deducted on an annual basis from the fund's assets? A) Trust operating expense charge B) Deferred sales charge C) MA&E fee D) Trust distribution fee

A) Trust operating expense charge On an annual basis, owners of units in UITs are charged a fee from the trust's assets to cover trust operating expenses. These include portfolio supervision costs, operation and administration expenses and the trustee's fee.

Which of the following investment company products is considered the most tax efficient? A) Unit investment equity trust B) Large cap mutual fund C) Asset allocation fund D) Target date fund

A) Unit investment equity trust The unit investment trust is considered the most tax efficient of these choices because it does not trade the securities selected for the portfolio regularly. This strategy generates very limited capital gains

A moderately aggressive investor is concerned about the long-term effects of inflation and asks which investment choice would be most suitable for a lump sum investment of $50,000. What is your recommendation? A) Units in a blue chip UIT B) High yield bond funds C) Shares in a business development company D) Shares in a small cap mutual fund

A) Units in a blue chip UIT This investor should choose an equity fund to keep pace with inflation. A blue chip fund is suitable for a moderately aggressive investor. Shares in a business development company or small cap fund are suitable for an investor that is more aggressive

Over a three month period, a mutual fund investor invests $100 per month in mutual fund shares. The share prices each month are as follows: Month 1: $20 per share Month 2: $25 per share Month 3: $22 Was dollar cost averaging successful for this investor? A) Yes, because the average price per share was $22.33 and the investor's average cost per share was $22.14 B) Yes, because the average price per share was $22.14 and the investor's average cost per share was $22.33 C) No because the average price per share was $22.33 and the investor's average cost per share was $22.14 D) No, because the average price per share was $22.14 and the investor's average cost per share was $22.33

A) Yes, because the average price per share was $22.33 and the investor's average cost per share was $22.14 A dollar cost averaging strategy is successful when an investor achieves a lower average cost per share than average price per share. The average cost per share is calculated by dividing the total investment by the number of shares purchased ($300/13.54 = $22.14). The average price per share is calculated by dividing the total price per shares by the number of purchases ($67/3 = $22.33. The strategy was successful because the investor's average cost per share of $22.14 is less than the average price per share of $22.33.

An investor who makes transactions once a month using dollar cost averaging would A) buy the same dollar amount of a stock. B) buy the same number of shares of a stock. C) put 70% of the money in a bond fund and buy stocks with the rest. D) buy equal amounts of speculative and blue-chip securities.

A) buy the same dollar amount of a stock. An investor using dollar cost averaging always invests the same amount of money. Depending on the market value of the security, he may buy more or less shares every time he invests.

The Investment Company Act of 1940 classifies all the following as investment companies except a A) real estate investment trust. B) unit investment trust. C) face amount certificate. D) management company.

A) real estate investment trust. The Investment Company Act of 1940 defines three categories of investment companies: face amount certificates, UITs, and management companies. Management companies can be open-end or closed-end. In contrast, a real estate investment trust (REIT) is NOT an investment company. It is legally organized as a trust.

A client seeks liquid investments. Which of the following products may be most appropriate for this client? A) Variable annuity B) Exchange-traded fund C) Exchange-traded note D) Mutual fund

B) Exchange-traded fund The most liquid of these assets is the exchange-traded fund, as it trades on a major exchange throughout the day (intraday trading). Mutual funds may be purchased and redeemed at the next NAV. In other words, once each business day. There is no intra-day trading. Variable annuities are NOT liquid; they are long-term retirement saving vehicles. Exchange-traded notes are unique, structured debt obligations and consequently not as liquid as stocks, conventional bonds, ETFs, and mutual funds

When a UIT reaches the termination date specified at its creation, the trust A) May be either liquidated or extended as determined by the board of directors of the trust B) Is dissolved and no longer active C) Can refile with the SEC for a subsequent primary offering D) Is sold and proceeds are distributed to unit holders

B) Is dissolved and no longer active A UIT is created for a specified period of time. Its termination date is established at the time the trust is created, and the trust is dissolved when that date is reached.

An investor is purchasing mutual fund shares to meet an income objective. If the investor is in a high tax bracket, which fund choice is likely to provide the highest after-tax return? A) Government bond fund B) Municipal bond fund C) Balanced fund D) Municipal money market fund

B) Municipal bond fund Municipal bond funds offer income that is tax-free at the federal level. This is most beneficial for investors with high tax brackets

One of your retail clients would like to know if hedge funds are suitable for him. How should you respond? A) These investments always deliver superior returns if you can tolerate the risk B) These investments are generally inappropriate for retail investors C) These investments are generally appropriate for accredited investors that have adequate savings to cover emergencies D) Since hedge funds are government regulated, there is little cause for concern if purchasing a fund with a reputable manager

B) These investments are generally inappropriate for retail investors Hedge funds are unregulated investment vehicles that generally adopt risky investment strategies to seek high returns. The best response here is hedge funds are generally inappropriate for retail investors. With respect to accredited investors a blanket claim that hedge funds are generally appropriate provided there are adequate savings is not the best response. To make this determination, a registered rep must consider the investor's risk tolerance, time horizon, need for liquidity, and investment goals.

All of the following statements are true regarding mutual fund disclosure EXCEPT A) Mutual fund companies must comply with registration and disclosure requirements of the Securities Act of 1933 B) All investors that purchase mutual funds have access to a full statutory prospectus either in print or online C) A summary prospectus may be provided to customers only if they have already received the fund's full statutory prospectus D) A summary prospectus must include seven key items to make it easy for investors to compare information between mutual funds

C) A summary prospectus may be provided to customers only if they have already received the fund's full statutory prospectus Mutual fund companies must provide investor disclosure as required under the Securities Act of 1933. All investors must receive a prospectus, but they may receive a summary prospectus instead of the long and highly detailed statutory prospectus. If provided the summary prospectus, the full statutory prospectus must be available in written or electronic form for customer review. Summary prospectuses must include seven key items to make it easy for investors to compare funds.

A registered rep has engaged in what FINRA refers to as a breakpoint sale. The rep: A) Acted in compliance with industry regulations by discussing breakpoints with a client during a sale B) Has provided his client with an offer to gain a sales charge discount C) Acted contrary to FINRA regulations in failing to disclose the opportunity to take advantage of a breakpoint D) Acted contrary to FINRA regulations through misrepresentation of a breakpoint

C) Acted contrary to FINRA regulations in failing to disclose the opportunity to take advantage of a breakpoint A breakpoint sale is a prohibited business practice in the mutual fund world. It occurs when the sales person either fails to disclose the opportunity to execute a breakpoint, or when the salesperson encourages the sale of mutual fund shares at a point just below where a sales charge reduction would apply.

An investor would like to purchase an interest in a bond fund at a price below the asset value of the portfolio holdings. Which of the following investments may be appropriate for this investor? A) A high yield domestic bond mutual fund B) A fixed income UIT C) An Investment grade corporate closed end fund D) A DJIA ETF

C) An Investment grade corporate closed end fund Closed end fund and ETF shares trade on exchanges at premiums or discounts to their NAV. An investment grade corporate bond CEF trading at a discount to NAV fits this investor's objective. A DJIA ETF is a stock fund

All of the following closed end fund portfolios would be classified as sector funds EXCEPT A) A healthcare equity fund B) A commodity bond fund C) An emerging markets equity fund D) A technology high yield bond fund

C) An emerging markets equity fund Unless defined more narrowly by a distinct region or investment type, an emerging markets equity fund is usually not concentrated in a single market sector. Common sector funds are invested in specific industries like healthcare, technology, energy, financial companies, etc

The function of the sponsor of a mutual fund is which of the following? A) Managing the investment of the fund's assets B) Safekeeping of the fund's securities C) Distributing shares of the fund as agreed to in a selling agreement with the fund D) Handling customer share redemptions and distributions of dividends and gains

C) Distributing shares of the fund as agreed to in a selling agreement with the fund The sponsor of the fund distributes, or is in charge of the sale of the fund's shares. Distributors must have a selling agreement with the fund. The custodian is responsible for safekeeping; the transfer agent for customer redemptions and other services; and the investment advisor for the trading of the fund's portfolio

Which of the following comparisons best describes a primary difference an ETF and a closed-end company? A) ETFs trade on exchanges but closed-end company shares are redeemed B) Closed-end funds have a stated termination date, but ETFs have no stated maturity C) ETFs are passively managed, but closed end company portfolios can be actively traded D) ETFs generate frequent capital gains distribution, but closed-end company investments are more tax-efficient

C) ETFs are passively managed, but closed end company portfolios can be actively traded ETF portfolios replicate an index, so portfolio trading is limited. Closed end company portfolios are actively managed. Because the amount of trading is limited, ETFs are more taxefficient, meaning they do not frequently distribute capital gains to shareholders. Both ETFs and closed end company shares are actively traded in the secondary market.

All of the following are examples of federally taxable closed end bond funds EXCEPT A) U.S. Government bond CEFs B) Mortgage backed CEFs C) Municipal income CEFs D) Global income CEFs

C) Municipal income CEFs Municipal CEFs generate tax free income at the federal and possible the state level, depending on the residence of the investor. Convertible security CEFs, mortgage backed CEFs, and global income CEFs all generate taxable income

An investor that owns no-load mutual fund shares will redeem shares at which of the following prices? A) POP - SC B) NAV + sales charge C) NAV D) POP

C) NAV Mutual fund shares are both purchased and redeemed at their NAV because they are sold with no sales load.

The price at which a fund sponsor sells mutual fund shares to the public is the A) Net asset value B) Net asset value plus commission C) Public offering price D) Public offering price plus commission

C) Public offering price Mutual fund shares are sold to the public at the POP (public offering price). The sales charge is added to the net asset value to arrive at the POP.

Which of these factors is NOT included when computing the expense ratio of a mutual fund? A) Custodial Fee B) Transfer Agent Fee C) Sales charge D) 12b-1 fee

C) Sales charge The sales charge is not part of a mutual fund's expense ratio. It is charged only at the time of sale. The expense ratio includes those expenses deducted from the customer's account each year, such as 12b-1 fees, management fees, administrative fees, and operating costs

Subsequent to signing a letter of intent (LOI) one year ago, the client has yet to make the necessary cash deposit with the fund, as agreed to in the LOI. Which of the following statements is true? A) The client's shares will be liquidated and the account frozen for non- payment. B) The client may use any share appreciation to cover the additional amount owed to the fund. C) The client has approximately 30 days to make the necessary deposit with the fund, or the sales charge will be adjusted based on the amount actually invested. D) The fund will send a written reminder to the client requesting the funds due

C) The client has approximately 30 days to make the necessary deposit with the fund, or the sales charge will be adjusted based on the amount actually invested. A letter of intent is valid for 13 months. If the client does not deliver the appropriate funds to the fund company within that time period, the sales charge will be adjusted to the actual amount deposited with the fund.

Your clients Judy and Irwin own a life-cycle fund. This investment is characterized by A) regularly scheduled modifications to the fund's holdings based on recent returns in the S&P 500 Index. B) a general shift from conservative to speculative assets in the fund's portfolio as an investor ages. C) automatic adjustments to the fund's portfolio as an investor approaches retirement. D) a heavy emphasis on tax-deferred investments to offset general tax liability.

C) automatic adjustments to the fund's portfolio as an investor approaches retirement. A life-cycle fund is a type of asset ?allocation mutual fund in which the proportion of various asset classes in a fund's portfolio is automatically adjusted over the course of the fund's time horizon. Typically, the shift will be from more speculative assets to more conservative assets

An investor seeking breakpoints and low annual expenses may want to consider A) a unit investment trust (UIT). B) mutual fund class B shares. C) mutual fund class A shares. D) an actively managed exchange traded fund (ETF).

C) mutual fund class A shares. Mutual fund Class A shares carry a frontend sales charge (load), offer breakpoints, and have lower annual expenses, as compared to Class B.

An investment in a "target-date" fund is one where A) the portfolio's composition will be gradually altered from more conservative to more risky as the target date approaches. B) all tax liabilities are deferred until the target date is reached. C) the mix of assets will be adjusted every year as the target date approaches. D) market and interest rate risk are avoided as the portfolio manager will only purchase risk-free investments.

C) the mix of assets will be adjusted every year as the target date approaches. The types of funds will gradually reduce risk by altering the composition of the portfolio from more risky to more conservative. They are sometimes called "life-cycle funds".

Which of the following features of a mutual fund also apply to purchases of units in UITs? A) Active investment management B) A portfolio supervision fee C) Letter of Intent D) Breakpoint discounts

D) Breakpoint discounts Like mutual funds, UITs may offer breakpoints for larger purchases that may apply to an aggregate purchase of units bought from the same sponsor on the same day. A letter of intent does not apply to UIT purchases because new shares are not continually offered. A portfolio supervision fee is paid to the sponsor of a UIT, but a mutual fund investment advisor is paid a percentage of the assets under management.

A customer wishes to liquidate her mutual fund by taking even payments over the next 20 years. She should elect a A) Fixed dollar plan B) Period certain plan C) Fixed share plan D) Fixed time plan

D) Fixed time plan A mutual fund systematic withdrawal plan that will liquidate shares over a defined time period is a fixed time plan. A period certain is a payout option associated with annuities.

A mutual fund is prohibited from engaging in which two of the following activities? I. Short selling of securities II. Issuing senior equity and debt securities III. Distributing its own securities IV. Borrowing $1 million from a bank if its portfolio assets are worth $1 million A) I and III B) I and IV C) II and III D) II and IV

D) II and IV Although short selling, purchasing on margin and distribution of its own securities are activities that are strictly limited, mutual funds may engage in these activities if they meet strict financial and disclosure requirements. Mutual funds cannot issue preferred stock or debt securities and may only borrow from the bank up to a certain asset value. It must have $3 of assets for every $1 it borrows

An investor that holds units in a UIT wants to redeem the units. These units will be I. sold to another investor on an exchange. II. sold to the issuing trust. III. worth at least the price at which they were issued. IV. valued at the end of the business day of the transaction based on the assets held in the trust A) I and III B) I and IV C) II and III D) II and IV

D) II and IV Investors who redeem are selling their units back to the UIT's issuing trust. The value of the units is determined at the end of the business day based on the current valuation of the securities held in the portfolio

Characteristics of blue-chip companies typically include I. little or no regular dividend payment. II. steady history of dividend payments. III. high growth potential. IV. moderate growth potential. A) I and III B) I and IV C) II and III D) II and IV

D) II and IV Stocks of large, stable companies with a long history of stable earnings and dividends are known as Blue-chip stocks. Because of their size, blue chips offer low growth potential, but produce a steady income stream with relatively high dividend payments. Examples of blue-chip companies (as of 2011) include Coca-Cola, GE and IBM.

The investment portfolio of which two of the following is likely to include both stock and bonds? I. A value fund II. A growth and income fund III. A small cap fund IV. An asset allocation fund A) I and III B) I and IV C) II and III D) II and IV

D) II and IV The portfolios of both growth and income funds and asset allocation funds contain a mixture of stock and bonds. Small cap funds include stock of small companies, and value funds include stock of companies that are perceived to be selling for less than their actual worth.

An investor seeking income through dividends along with price stability, but less concerned with growth potential, may wish to explore which of the following? A) International stock fund B) Small-cap stock fund C) Mid-cap stock fund D) Large-cap stock fund

D) Large-cap stock fund Large-cap stocks are those of companies that have passed their rapid growth phase and are more stable, with consistent dividend payment histories. Conversely, small-cap stocks offer longterm growth potential but limited or no current dividends. An international fund adds further diversification to a domestic portfolio

Regarding interval funds, which of the following statements is most accurate? A) It is an open-end fund that regularly issues new shares to investors. B) The price that investors will receive on repurchase is the public offering price (POP) next computed by the fund. C) They are exchange-traded securities, making them very liquid. D) The fee structure for these funds is relatively high compared to other fund products, making them a riskier asset category.

D) The fee structure for these funds is relatively high compared to other fund products, making them a riskier asset category. Interval funds are typically organized as closed-end investment companies and offer to repurchase investor shares at pre-determined time periods, or 'intervals' during the year. The price paid on these redemptions is the NAV (not POP) as of a specified date