Series 6 Progress Exam 3A and B

J & J Securities is planning to form a mutual fund that will invest in small-capitalization stocks and have as its main goal aggressive growth. J & J may NOT offer shares of the fund to the public until it has: a. At least $100,000 of capital stock outstanding b. More than 100 shareholders c. Been registered for at least 14 months d. At least 200% asset coverage

A

A client who invests the same amount of money per month in a mutual fund over a period of time is: a. Dollar cost averaging b. Dollar averaging c. Averaging the dollar d. None of the above

A A client investing the same amount of money each month in a specific security over a period of time would be dollar cost averaging.

Which of the following events is most likely to cause the NAV of a bond mutual fund to increase? a. The Fed eases the money supply b. Inflation is increasing c. The S&P 500 Index is increasing d. The S&P 500 Index is decreasing

A If the Fed eases the money supply, interest rates (the cost of money) would decrease. Falling interest rates would cause bond prices—and the NAV of bond funds—to rise.

An investor who is studying the holdings of various funds is interested in an equity income fund. The investor would most likely choose a fund that holds the securities of: A. Companies that consistently earn above-average income B. Companies with liberal payout ratios C. Growth companies D. Companies whose bonds are investment grade rated

B An investor who is primarily interested in income from equities will most likely choose a fund that holds securities of companies that have liberal payout ratios. Companies that earn above-average income may not necessarily pay their income out as dividends as is generally the case with growth companies. Growth companies may have earnings that are growing at a rapid rate, but they may retain the earnings in order to finance future growth.

An investor has just purchased a stock fund with a beta of 1.6. This numerical designation means that the fund: a. Has an expense ratio of 160 basis points per annum b. Is more volatile than the market in general c. Is ranked in the top 16% of its peer group d. Is expected to earn a return 1.6% greater than the S&P 500 Index

B Beta is a measurement of the volatility of a given investment as compared to the market in general. The market is assumed to have a beta of 1.0. Any investment with a beta greater than 1.0 is more volatile than the market. Any investment with a lower beta is more stable. In this question a beta of 1.6 means the fund is 160% or 1.6 times as volatile as the general market.

Functions of the investment adviser include all of the following, EXCEPT: a. Providing and analyzing research on financial and economic trends b. Appointing the officers of the fund c. Timing investment decisions to take advantage of industrial trends or broad economic changes d. Implementing the appropriate diversification of the fund's portfolio

B Investment advisers are responsible for implementing a strategy that attempts to meet the fund's objectives in accordance with its fundamental investment policies. The board of directors appoints officers of the fund.

When is the Statement of Additional Information supplied to a client for a mutual fund offering? A. When a prospectus is mailed B. Upon request C. Quarterly D. When the semiannual report is mailed

B The cover page of a mutual fund prospectus indicates that an investor may receive a Statement of Additional Information upon request. There is no requirement for periodic distribution.

Which of the following statements is TRUE regarding open-end investment companies? A. They may issue common stock, preferred stock, or bonds B. New shares are continuously being issued C. Shares are sold at the NAV plus a commission D. Shares are redeemed by the fund at the asked price

B The only statement that is true is that shares are continuously being issued by the fund. Open-end investment companies will only issue common stock which sells at the NAV plus a sales charge (for load funds). Open-end investment company shares may be redeemed at the fund's current NAV.

An investor who writes a check on a mutual fund account is: A. Borrowing money from a bank B. Drawing on a cash deposit C. Redeeming mutual fund shares D. Using a revolving charge facility

C A check that is written on a mutual fund account directs the fund to redeem enough shares to cover the check. This activity could result in a capital gain or loss on each check transaction if the fund's shares fluctuate in value, thereby creating a liability when filing an annual tax return. Ultimately, it is most convenient to write checks on a money-market mutual fund account. Since money-market mutual funds maintain a constant $1 per share NAV, redemptions (whether done by check or other means) do not result in capital gains or losses.

The Investment Company Act of 1940 regulates: a. Hedge funds b. REITs c. ETFs d. The level of commissions paid on mutual fund trades

C ETFs (exchange traded funds) must register with the SEC as either an open-end investment company or a unit investment trust. Hedge funds are private investment pools. REITs, real estate investment trusts, are not a type of investment company. The commissions or sales charges on mutual funds is established by FINRA.

The fund that would most likely have the highest portfolio turnover is a(n): A. Municipal bond fund B. Utility income fund C. Aggressive stock fund D. Investment-grade bond fund

C Portfolio turnover gives an indication of the level of trading conducted by the investment adviser. Income fund turnover levels are traditionally lower than aggressive stock fund turnover levels. Aggressive stock funds tend to have the higher portfolio turnover rate because the fund manager is regularly making new purchases that meet the fund's criteria, and selling those securities that do not meet the standards of the manager.

Zelda opened an account with the Centaur Balanced Fund by investing $1,000. She also signed up for the fund's automatic investment feature, which will deduct $100 from her checking account each month to invest in the fund. Which of the following benefits does this feature provide? A. The earnings in her account are tax-deferred B. She will pay no sales charges since she is not using the services of an RR C. Her purchases will be dollar cost averaged D. She can redeem her shares at any time for at least the amount she has invested

C Since she will be investing a fixed amount on a monthly basis, she will be dollar cost averaging. However, dollar cost averaging does not guarantee her against loss. It means that the average cost of the shares in her account will be less than the average of the prices at which she will be purchasing shares. This method reduces timing risk—the risk that a large single investment will be made at a disadvantageous price and/or time.

The maximum sales charge that may be charged over the life of a contractual plan is: a. 6% b. 8 1/2% c. 9% d. 50%

C The maximum sales charge that may be charged over the life of a front-end load contractual plan is 9%. The maximum percentage that may be deducted from the payments made in the first year is 50%.

A registered investment company that has a sales charge is required to have directors on its board that are independent from the management company. What is the minimum percentage of independent directors that must be maintained on the board? a. 25% b. 40% c. 45% d. 51%

D A majority of the directors must be outside directors and have no business relationship with the fund's sponsor or management company of the fund.

The advantages of owning mutual fund shares do not include: A. Professional supervision of the fund portfolio B. Wide diversification of investments C. Regular systematic investment of small dollar amounts D. Control over the investment portfolio

D Investment companies offer the advantage of professional supervision of the fund portfolio. The shareholder does not exercise control over the investment portfolio. This is left to full-time professionals, the fund managers. Investment companies seek to obtain appropriate diversification of securities in the fund portfolio while, at all times, attempting to meet the fund's objectives. A major purpose of buying investment company shares is to make systematic investments, often in small amounts.

In order to qualify as diversified, an investment company must: a. Have at least 75% of its assets invested in a prescribed way b. Own investments in at least 10 different industries c. Own stock in at least 25 different companies d. Both (b) and (c)

A To call itself diversified under the Investment Company Act of 1940, an investment company must accept two specific restrictions on 75% of its portfolio. (1) It cannot own securities of any one company in an amount that would be greater than 5% of its total portfolio. (2) Within the restricted part of the portfolio, it may not own more than 10% of the voting stock of any one company. The remaining 25% of the portfolio can be invested in any manner.

The board of directors of a mutual fund would like to change the investment objectives of the fund. This could be done provided that: A. Holders of the fund were given the choice of switching into a similar fund with the same objectives B. More than 50% of the shares voted for the change C. More than 10% of the shareholders voted for the change and the board of directors approved D. There was unanimous agreement among senior management

B A change in the investment objectives of a mutual fund would require more than 50% of the shares to vote for the change.

Which of the following is TRUE regarding the backdating of a letter of intent? A. It may be backdated 13 months B. It may be postdated 270 days C. It may be backdated 90 days D. Backdating or postdating are fraudulent under FINRA rules

C A letter of intent (LOI), allowing an investor to reach a breakpoint without initially investing the entire amount, covers a period of 13 months. The letter may be backdated 90 days.

Which of the following choices best describes the price that a mutual fund investor receives when she redeems her shares? A. The bid price of the previous day's close B. The current offering price C. The next computed bid price on the day that the shares are redeemed D. The next computed asked price on the day that the shares are redeemed

C A mutual fund investor who redeems her fund shares will receive the next computed bid price on the day that the shares are redeemed.

Listed below are the net asset value and offer prices of two investment companies: Net Asset Value Offer Price Fund A $9.20 $10.00 Fund B $12.50 $12.00 Based upon the information shown above, you can determine that: A. Both funds are open-end B. Both funds are closed-end C. A is closed-end and B is open-end D. B is definitely closed-end and A is probably open-end

D When the net asset value is higher than the offering price, the fund definitely is closed-end. Closed-end funds have a price determined by supply and demand, and their prices may be more or less than the net asset value per share, while open-end funds are prohibited from ever selling their shares for less than the net asset value. Thus Fund B, which has an offering price less than its net asset value, must be a closed-end fund, while Fund A could be either.

Slacker Investments is launching a new fund that will invest in companies with good fundamentals but ones that are in sectors that are currently out of favor with the market. This is a: a. Hedge fund b. Growth fund c. Value fund d. Sector fund

C A value fund invests in stocks that appear to be bargains. These include companies that have good fundamentals but are in sectors that are currently out of favor with the market.

Which of the following does NOT issue redeemable securities? a. Open-end investment company b. Closed-end investment company c. Face-amount certificate company d. Unit investment trust

B All investment companies issue redeemable securities except closed-end investment companies. Once issued, shares of closed-end funds trade between market participants in the secondary market.

Which of the following transactions would require that a prospectus be delivered with the sale? A.The president of a corporation exercising stock options in the company B. The sale of a mutual fund to a public customer C. A mutual fund selling to its sponsor at NAV D. A mutual fund redeeming shares at NAV

B Mutual fund shares are always considered new issue shares and sales are required to be accompanied by a prospectus. Officers exercising options, and sales by the fund to its sponsor, are considered nonpublic transactions and no prospectus is required. The sale by a customer back to the fund (redemption) does not require a prospectus.

What price of a mutual fund will an investor receive when redeeming his shares? a. The NAV calculated at 4 p.m. the day the redemption is submitted b. The most recent NAV calculated prior to the receipt of a proper redemption request c. The NAV next computed after the receipt of a proper redemption request d. The average of the NAV on the day of the redemption

C An investor's redemption request will be based on the NAV next calculated after the receipt of a proper redemption request (forward pricing). What constitutes a proper redemption request will be described in the fund's prospectus and can vary from fund to fund. For example, some funds might require a written request with a signature guarantee, while other funds might permit redemption requests to be submitted by telephone or over the Internet.

Mary has been consistently investing in the Highrise family of funds. Because she has kept her investments concentrated in one family of funds, she has been able to reduce the sales charge on some of her purchases. Mary has been using which mutual fund feature? A. Breakpoint sales B. Rights of accumulation C. Letter of intent D. Reinvestment

B Under rights of accumulation, investors can combine purchases made within a family of funds to reach breakpoints and pay a reduced sales charge on the purchases that take into consideration the total investment over a breakpoint level. A letter of intent allows investors to pay a reduced sales charge on an original investment as well as subsequent investments if they sign a letter stating their intention to buy more shares within a family of funds and reach a breakpoint within 13 months. A breakpoint sale is a violation of the Conduct Rules. This occurs when a representative does not adequately describe the breakpoint feature to an investor and is accused of not doing so to maximize the sales commission.

An investor receives a report about a specific investment company which states that its shares are currently selling at a 30% discount from their net asset value. After reading this report, the investor concludes that the investment company is a(n): a. Open-end investment company b. Closed-end investment company c. Specialized fund d. Contractual plan

B The market price of closed-end investment company shares is based on supply and demand for the shares in the marketplace. A closed-end investment company may sell its shares at, above, or below their net asset value. However, open-end investment companies may never sell their shares at a price that is below their current net asset value.

A sell order for shares of an open-end investment company must be executed at a price based on the net asset value: A. As calculated at the close of business on the NYSE the previous day B. As last calculated before the order is received by the dealer C. At the closing price of the fund on the following day D. As next calculated after receipt of the order by the dealer

D When an investor sells open-end investment company shares, the price paid is based on the net asset value next calculated after the order is received (forward pricing).

Sales literature sent to a customer describing the investment merits of a particular investment company must be preceded by or accompanied by a current: a. Prospectus b. Registration statement c. Indenture d. Account application

A A current prospectus must precede or accompany sales literature sent to a customer describing the investment merits of a particular mutual fund. If the literature does not discuss a particular mutual fund but mutual funds in general, a prospectus need not be sent.

A level payment withdrawal plan is: A. A way for shareholders to withdraw set dollar amounts monthly or quarterly B. Used to avoid prepayment penalties prior to age 59 1/2 C. Similar to a periodic front-end load contractual plan D. Required for all account holders above age 70 1/2

A A level payment withdrawal plan is a type of systematic withdrawal plan used to redeem mutual fund shares. Other types include fixed-percentage, fixed-shares and fixed-time period payment plans.

While reading through a prospectus for the Tropical Emerging Growth Fund, a registered representative notes that the fund is described as diversified. What does this tell the representative about the fund? 1. At least 75% of the fund is invested so that no more than 5% of total assets is invested in the securities of one issuer 2. At least 75% of the fund is invested so that the fund owns no more than 10% of the voting securities of one issuer 3. The fund's investments are not concentrated in any one country or industry 4. At least 25% of the fund is invested in one issuer A. I and II only B. III and IV only C. I, II, and III only D. I, II, III, and IV

A The term diversified has a very specific meaning under the Investment Company Act of 1940. At least 75% of the value of the investment company's total assets must be invested so that: no more than 5% of the total assets are invested in any one issuer, and no more than 10% of the voting stock of any issuer is owned by the investment company The other 25% can be invested in any manner the investment company chooses. Note that this definition does not preclude a concentration of investments in one industry, geographical area, or company.

The New Age Trust Series A is a unit investment trust. This means that it is: A. An investment company that issues only redeemable securities, each of which represents an undivided interest in a unit of specified securities B. An investment company with a portfolio that contains bonds only C. An investment company that invests in a specified industry D. None of the above

A A unit investment trust is an investment company that issues only redeemable securities, each of which represents an undivided interest in a unit of specified securities. While many UITs have portfolios that contain bonds only, this is not required by definition under the Investment Company Act of 1940. For example, some UITs have a fixed-equity portfolio that is liquidated on a specified date.

Share price volatility is most pronounced in which TWO of the following funds? 1. Tax-free money-market mutual funds 2. Aggressive growth funds 3. Industry sector funds 4. Investment-grade bond funds A. I and III B. II and III C. II and IV D. III and IV

B Aggressive growth funds invest in stock of companies that exhibit strong growth potential. Their share prices tend to swing erratically as economic conditions change, or when the individual companies either deliver on their potential or fail to meet investor expectations. Industry concentration (sector) funds (e.g., transportation, health care, biotechnology, gold) are as volatile as aggressive growth funds because economic conditions tend to benefit or harm the majority of participants in one industry. Tax-free money-market mutual funds invest in short-term municipal securities; the short maturities keep volatility to a minimum. Investment-grade bond funds are subject to price changes when interest rates change but year-to-year price fluctuations are considerably less than the aggressive growth and industry concentration categories.

A registered representative of a broker-dealer is considering sending a prospective client a summary prospectus for a new nanotechnology fund. Assuming the document is received by the prospect, which of the following statements is TRUE? a. Under UPC guidelines, the client must receive a complete prospectus in either a paper or electronic format within 24 hours b. The client may purchase the fund shares solely based on the contents of this mini prospectus c. The client may purchase the fund shares based solely on the contents of this mini prospectus, assuming he has signed a waiver with the broker-dealer's compliance department attesting to the fact that he is accredited d. The summary prospectus may be used provided the potential buyer has sufficient ability to make an informed decision and has previously signed the predispute waiver clause of his client agreement

B Many mutual funds utilize a shorter summary version of the prospectus, which is referred to as a profile or short prospectus. These reader-friendly documents highlight the most relevant information found in the complete prospectus and are designed to encourage potential investors, who may be intimidated by the complete prospectus, to do their due diligence prior to investing. An investor may buy shares based solely on the contents of this document, but must be made aware that she is entitled to a complete (full version) prospectus prior to making a purchase. A complete copy of the prospectus will be sent along with the client's confirmation of purchase (not necessarily within 24 hours). The predispute clause of a client agreement deals with arbitration, not a prospectus.

Which of the following statements are TRUE of a redemption fee charged by a mutual fund? I. It is used to defray distribution expenses II. It is returned to the fund's portfolio III. It is usually 2% or less IV. It may not be charged by a no-load fund a. I and III only b. II and III only c. II and IV only d. I, II, III, and IV

B Redemption fees are charged by some mutual funds when investors sell shares back to the fund. The fees are added to the fund's portfolio. They are not used to pay for distribution costs as are 12b-1 fees. Most redemption fees are 2% or less. Some no-load mutual funds charge redemption fees to discourage shareholders from frequently switching out of the fund. Excessive switching results in extra expenses for the fund, which is a burden on the remaining shareholders.

Emily is thinking about making an investment in the CashCow Fund and is mainly interested in current income. Emily believes CashCow will produce the current income she needs, but she would like to understand how the manager decides which investments to make. Which section of CashCow's prospectus should Emily consult to find this information? A. Investment Objectives of the Fund B. Investment Policies and Restrictions C. The Fund's Portfolio Manager D. Taxation of Fund Distributions

B The section Investment Objectives of the Fund would state the general goals of the fund, such as current income. Emily wants more specific information about the types of investments and strategies that the fund uses (and those it does not use). This information is more likely to be found in the section Investment Policies and Restrictions. The section entitled The Fund's Portfolio Manager usually describes the investment advisory firm hired to manage the portfolio and also describes how that firm is paid by the fund.

The prospectus for the Outlandish Fund states that redemption requests must be received by a dealer for the fund no later than 4:00 p.m. Eastern time in order to receive the NAV calculated that day. The fund calculates its NAV once each business day as of that deadline. An RR for one of the fund's dealers receives a phone call at 4:15 p.m. Eastern time from a customer with an order to redeem the client's entire Outlandish Fund account that day. Which of the following statements is TRUE regarding the redemption request? a. The RR may treat the request as received prior to 4:00 p.m. since it was received within 30 minutes of the deadline b. The customer's request is considered cancelled and must be resubmitted the following business day c. The customer's redemption request will be based on the next NAV calculated d. The fund may process the request based on the current day's NAV as long as the pricing information has not yet been released to the public

C The customer would receive the next NAV calculated after a valid redemption request has been submitted. Since the request was received after the current day's deadline, the client will receive the next NAV calculated, which for this fund is at the end of the next business day.

Which of the following is/are TRUE about mutual funds? I. The maximum sales charge according to the Investment Company Act of 1940 is 5% II. Investors can receive a reduced sales charge if they sign an 18-month letter of intent to purchase a certain dollar amount of mutual fund shares III. Under the rights of accumulation option, investors can receive a reduced sales charge on new purchases when a breakpoint is reached IV. No-load funds may charge a liquidation fee when an investor sells the fund a. I only b. III only c. III and IV only d. I, II, and IV only

C The only true statements regarding mutual funds are that, under the rights of accumulation option, mutual fund investors can receive a reduced sales charge on new purchases when a breakpoint is reached, and no-load funds may charge a liquidation fee when an investor sells the fund. The maximum sales charge, for contractual plans, under the Investment Company Act of 1940 is 9%. A letter of intent for a reduced sales charge covers 13 months, not 18 months.

Which of the following statements concerning the delivery of a prospectus is TRUE? A. A prospectus may not be delivered electronically B. If a prospectus is delivered electronically, a paper copy must follow within 72 hours C. A prospectus may be delivered electronically D. A prospectus may be delivered electronically provided the client is an accredited institutional investor or a fiduciary for an ERISA-compliant retirement plan

C A prospectus may be delivered to any client (individual or institutional) electronically. Delivery may mean the client has read the prospectus on a fund's Web site and attested to the fact by means of an E-signature (electronic signature), or downloaded the PDF and printed the document. There is no requirement to follow-up with a paper copy once an electronic prospectus has been sent.

Joanne is a 50-year-old woman who just left the job she had held for 20 years. She has a substantial amount accumulated in her 401(k), which she is rolling over into an IRA. She is planning to use this money to retire in 12 to 15 years. Which of the following investments would be the most appropriate for her? a. A bonus variable annuity b. A fixed annuity c. A stock fund d. A municipal bond fund

C Joanne's time horizon is long enough to make a stock fund an appropriate choice for her IRA. Joanne is already receiving the benefits of tax-deferred growth, which is the reason that a variable annuity (choice a) is not an appropriate option. Generally speaking, buying a variable annuity for a tax-deferred retirement account is often an expensive way of needlessly duplicating the tax benefits that most of these accounts already provide. Municipal bond funds are for investors seeking tax-exempt income.

Which of the following items might be deducted from the proceeds of the sale of mutual fund shares by an investor? 1. Contingent deferred sales charges 2. Redemption fees 3. Accrued 12b-1 fees 4. Backup withholding taxes A. II only B. I and II only C. III and IV only D. I, II, and IV only

D 12b-1 charges are deducted only from the mutual fund's portfolio, not from the redemption proceeds of individual investors. A fund that assesses a CDSC or a redemption fee would deduct that fee from the sales proceeds. If a customer has not properly filled out an IRS Form W-9, or if the IRS has determined that the customer is subject to backup withholding, taxes will also be withheld from the sales proceeds.

BigGains Fund is an aggressive growth mutual fund. Market analysts are predicting a bearish trend in the market. Which of the following strategies could the portfolio manager use to protect the fund's net asset value? A.Maintain the fund's current positions B. Buy more shares of common stock C. Liquidate current stock positions and reinvest the funds in long-term debt obligations D. Liquidate current stock positions and reinvest the funds in short-term debt obligations

D A portfolio manager can protect against a bearish move in the market by transferring portfolio assets into cash, that is, money-market instruments. These short-term debt obligations are ideal for the objective of preserving capital. When the anticipated bearish move is over, the manager can move the assets in cash back into the securities the fund normally owns.

Which of the following investment companies does not charge a management fee? a. Open-end investment companies b. Closed-end investment companies c. Face-amount certificate companies d. Unit investment trusts

D A unit investment trust (UIT) does not charge a management fee. Instead, the portfolio within a unit investment trust is supervised, not managed. The portfolio of the trust is fixed and there is no need for an investment adviser.

Which of the following are advantages of investing through an open-end investment company rather than investing individually? a. Individuals generally pay higher commissions than mutual funds b. An investor can own an interest in a larger number of securities c. It is easier to have an interest in higher-priced shares d. All of the above

D All of these are advantages to investing in mutual funds (open-end investment companies). Institutional investors such as mutual funds can negotiate lower commission rates than individuals. The investor can also have an ownership interest in a far greater number of securities, and in securities with higher prices.

Alexa has set up a periodic liquidation plan for the 11,400 shares she owns in the Peak Ultra-Aggressive Growth fund. The fund is currently trading at a NAV of $21.34 per share and a POP of $22.03. Alexa is looking to sell approximately 100 shares per month to supplement her Social Security benefits. Which of the following statements is the most accurate? a. The client will receive at least $2,134 per month b. The client will receive at least $2,203 per month c. The client will get back at least the current value of his account d. The client will have funds available for approximately the next 9 years

D All we know is that the client is looking to sell 100 shares per month. The dollar amount of each payment is not guaranteed and each subsequent payment may rise or fall based on market conditions. If the client sells 100 shares per month the funds will last for 114 months. (11,400 / 100 = 114 months.) 114 months is equal to 9 1/2 years.

If a mutual fund assesses a sales charge (load), why may it reduce or eliminate the sales charge on a purchase of its shares? a. The shareholder was reinvesting a capital gains distribution b. The shareholder has purchased a large quantity of fund shares in the past c. This purchase of fund shares is for a large quantity d. All of the above

D Each of the choices listed will reduce or eliminate the sales charge. Capital gains distributions that are automatically reinvested may be used to purchase new shares at the net asset value (without the sales charge). Under rights of accumulation, shareholders are able to pay the reduced sales charges based on cumulative past purchases. Also, sales charges are reduced when a large dollar amount of shares are purchased under quantity discount privileges, which are described in the prospectus.

An investor has been investing $100 per month in a contractual plan that has a 50% sales charge in the first year and a 4% sales charge per year after the first year. What is the total amount of sales charges that have been paid during the first 17 months? A. $93 B. $450 C. $600 D. $620

D In the first year, the sales charge total is 50% of each $100 monthly payment, or $600 ($1,200 x 50% = $600). For the five additional months, the sales charge will represent 4% of $500, or $20. Therefore, the sales charge total for the 17 months is $620 ($600 + $20 = $620).

Which of the following statements concerning mutual funds is TRUE? A. Portfolio investments are generally static B. Pricing of the fund's shares may fluctuate throughout the day C. Investments grow tax-deferred as long as 90% of net investment income is distributed to shareholders D. All client purchases are executed in the primary market

D Mutual funds often change their portfolio holdings. (Static means the investments stay the same.) Mutual funds are priced only once per day, so there is no fluctuation in pricing throughout the day. Mutual funds do not grow tax-deferred unless placed in a tax-advantaged account. The only correct choice of the four is (d). Mutual funds are always purchased as new issues (primary market trades). This primary market status is the reason that a client receives a prospectus even when buying shares in a fund that has been around for many years.

Which of the following statements is LEAST likely to appear in a mutual fund's prospectus? a. The fund's annual total return over the last ten years was 8.75% b. There is no guarantee that the fund will attain its objectives c. Under unusual circumstances, the fund has the right to fill redemption requests with securities rather than cash (redemptions in-kind) d. The fund's portfolio consists of common stocks, which are expected to outperform inflation over the next ten years

D Statements that can be interpreted as predictions are not allowed in prospectuses, advertising, or sales literature. A variation on this theme is that mutual funds cannot state or imply that past performance predicts future performance. While common stock returns have outpaced inflation in the past, there is no guarantee that this will continue in the future. Many mutual funds reserve the right to make redemptions in-kind, as described in choice (c), for large redemption requests, rather than funding the redemption in cash. This is usually imposed only on redemption requests exceeding $250,000 within a 90-day period.

A regulated open-end investment company has 75% of its portfolio invested in bonds and 25% invested in stocks. Last year, the total market value of the fund's assets under management decreased by 28%. Which TWO of the following may be reasons for the decline? I. The fund was holding too much cash II. Interest rates increased III. The fund paid large commissions to agents for their extra sales efforts IV. A large number of the fund's shares were redeemed a. I and II b. I and III c. II and III d. II and IV

D The key point in this question is that the total market value of the fund's assets has decreased. One reason for the decrease in the assets may have been a high redemption rate by shareholders. Additionally, since the portfolio contains a large percentage of bonds, an increase in interest rates would cause the value of these bonds to decrease.

A 75-year-old client is looking for a high level of income for his retirement fund. He wishes to maintain a balance between income and safety of principal. Which of the following funds would MOST likely meet this requirement? A. A high yield fund B. A high grade fund C. A balanced fund D. A GNMA fund

D This question is a bit tricky, since there are two potentially correct answers. This is a situation you will encounter on the Series 6 Examination as well. The key here in answering these types of questions is to look for the MOST correct answer. When a client states he needs both safety of principal and income, it can be assumed a large portion of his money should be in bonds. This makes choice (c) a poor option, since a balanced fund contains both stocks and bonds, which implies a higher principal risk. A balanced fund is also not a very good vehicle for someone who needs income, since stocks generally pay less in percentage terms than bonds. Choice (a), the high yield fund, invests in junk bonds. High yield equals high risk, so this is not a good choice either. Now we are left with the high grade fund and the GNMA fund. The GNMA fund is a better choice; but why? For starters, GNMA securities are backed by the U.S. government. In contrast, high grade bonds are still corporate bonds. While neither fund is backed by the government, the GNMA is still a safer choice. Also, while the high grade fund may pay a little more in income, GNMA funds pay more interest than Treasuries because GNMA yields are based on mortgages. These two facts are what make the GNMA fund a better choice for this investor.