SIE Chapter 4
[A] the purchaser of mutual fund shares indicating the intent to purchase a large quantity of shares over a short-term period of time and it offers the purchaser the ability to receive a breakpoint, or reduced sales load A letter of intent (LOI) is an agreement that allows for a breakpoint to be reached with the total funds invested over a specified period of time (up to 13 months). Once the total investment reaches the amount agreed upon in the LOI, the investor receives a breakpoint on all funds invested. A Rights of Accumulation would be used if an investor intended to buy and accumulate value of mutual fund shares and hoped to achieve a breakpoint in relation to this accumulated value. Broker-dealers have selling arrangements with mutual fund offerors, but would not sign a letter of intent. If a customer wishes to open an account but does not yet have the capital available to do so, the firm would just tell the customer to wait until the funds are available; there is no LOI in this context or scenario.
A Letter of Intent (LOI) is an agreement that is signed by [A] the purchaser of mutual fund shares indicating the intent to purchase a large quantity of shares over a short-term period of time and it offers the purchaser the ability to receive a breakpoint, or reduced sales load. [B] the purchaser of mutual fund shares indicating the intent to purchase and accumulate value in relation to mutual fund shares, potentially qualifying for reduced sales loads on future purchases. [C] a broker-dealer that intends to offer shares of a mutual fund to their customers. [D] a customer of a broker-dealer who intends to open an account at the broker-dealer firm, but does not yet have the capital available for an initial deposit.
LOI
A means in which an investor can receive a reduced sales charge.
[B] the sales load is reduced because a specified dollar amount has been invested The schedule of breakpoint discounts found in a prospectus for a mutual fund shows the levels at which sales charges are reduced for quantity purchases.
A mutual fund breakpoint occurs when [A] redemptions equal the purchases [B] the sales load is reduced because a specified dollar amount has been invested [C] the sales charges to the customer equal the customer's return from their investments [D] there is a break in performance and a downturn in investment value
[D] Sector Fund. Balanced Funds and Money Market Funds are relatively conservative investments for Investment Companies. A Sector Fund is one that invests in a specific industry of geographic area (e.g., biotechnology, gold mines, European countries). A Hedge Fund provides a hedge against market moves by having long and short positions.
A mutual fund investor is seeking aggressive growth. Which of the following funds would be most appropriate for the customer to invest in? [A] Balanced Fund. [B] Hedge Fund. [C] Money Market Fund. [D] Sector Fund.
[D] I, II, III, and IV
A portfolio manager is creating several new mutual funds. Which of the following investment products could the manager purchase for these funds? Warrants on common stock Revenue bonds issued by a municipality Treasury bills of the U.S. Government Equity securities such as the common stock of a corporation [A] III only [B] III and IV only [C] II, III, and IV only [D] I, II, III, and IV
[D] Unit Investment Trusts. U.I.T.'s are funds. They are not issued at a discount and do not mature at par. Face Amount Certificates are issued at a discount and Treasury Bills, regardless of the maturity, are also issued at a discount.
All of the following securities are issued at a discount and mature at par EXCEPT: [A] Face-Amount Certificates. [B] Treasury Bills which mature in 6 months. [C] Treasury Bills which mature in 12 months, [D] Unit Investment Trusts.
[C] II and IV only I is incorrect because capital gains are not included as part of the yield. II is true. III is Selling dividends which is not in the investor's best interest. The investor would benefit by buying after the ex date, when the price of the shares is reduced. IV is true because the investor would receive the next calculated redemption price after the order is entered.
An RR, when making a recommendation for the purchase of investment company shares, could state or imply which of the following? Capital gains distribution should be treated as part of the income yield of the investment. The purchase of shares of two or more funds under the same management may entitle the investor to a reduced sales charge. Purchasing fund shares in advance of a dividend distribution would be advantageous since the investor would immediately realize an investment return. Upon redemption, the investor would not immediately know the total dollar value of the redemption. [A] I and II only [B] II and III only [C] II and IV only [D] I, II, III, and IV
D] A closed-end investment company Closed-end investment company shares trade in the open market in a manner similar to common stock. These shares would not be redeemable to the investment company as is the case with open-end investment companies. Once the closed-end fund shares are issued the investor can only "redeem" them by selling them on an exchange.
An investment company that only offers non-redeemable shares is which of the following types? [A] Variable Life company [B] An open-end investment company [C] A Whole Life company [D] A closed-end investment company
[B] A sales load of 5.5% will apply to the purchase and the investor should expect some shares to be liquidated to cover the increase in sales load since the agreed upon investment of $75,000 was not met. If an investor signs a Letter of Intent (LOI), the investor will receive a reduced sales load in accordance with the amount that is supposed to be invested under the agreement. In this case, the investor committed to $75,000, so the lowest sales load of 5% would be charged. A portion of shares purchased will go into an escrow account, and if the investor does not invest the agreed-upon amount in the LOI, a portion of the escrow account will be liquidated to compensate for the difference in sales load. The investor would normally still qualify for other available breakpoints per the fund's schedule.
An investor commits via a Letter of Intent (LOI) to purchase $75,000 in ABC Fund shares over the next 13 months. ABC Fund has the following breakpoint schedule: $0 - $24,999 - 6.5% Sales Load $25k - $49,999 - 6% Sales Load $50k - $74,999 - 5.5% Sales Load $75k or more - 5% Sales Load Over the course of the 13 months, the investor only manages to invest $55,000 into ABC Fund. Which of the following is TRUE? [A] The investor will pay the maximum sales load of 6.5% since the amount agreed upon in the LOI was not met. [B] A sales load of 5.5% will apply to the purchase and the investor should expect some shares to be liquidated to cover the increase in sales load since the agreed upon investment of $75,000 was not met. [C] A sales load of 5.5% will apply to the purchase and the investor will be required to pay a penalty since the agreed upon amount of investment of $75,000 was not met. [D] The investor will pay a sales load of 5% since the investor signed the LOI, which locks in the sales load, regardless of amount invested.
[D] Income fund An income fund's objective is to maximize current income (high yield).
An investor seeking a high yield asks his registered representative which type of fund to invest in. The registered representative should recommend which one of the following? [A] Balanced fund [B] Dual Purpose fund [C] Growth fund [D] Income fund
[D] Conversion Privileges The conversion privilege is used by investors that wish to switch from investment objective to another within the same family of funds.
An investor wishing to switch from his growth fund to an income fund within the same family would do so by using the: [A] Reinvestment Privilege [B] Sale and Repurchase Plan [C] Redemption Reinvestment Plan [D] Conversion Privileges
[C] Athens is a closed-end fund, while Troy is an open-end fund. Based on the above information, you can determine that the Athens fund is closed end because the NAV is greater than the Ask. Whenever the NAV is more than the ask, the fund has to be closed end. Troy is probably open end because the NAV is less than the Ask and because the difference between the two is less than 9% (maximum sales load under the Investment Company Act of 1940 is 9%)
Athens Fund has an ask price of $19.25, while the ask price of the Troy Fund is $18.50. The net asset value per share of the Athens Fund is $20.25, while the Troy Fund has a net asset value per share of $17.02. Which of the following is probably true? [A] Both funds are closed-end. [B] Both funds are open-end. [C] Athens is a closed-end fund, while Troy is an open-end fund. [D] Troy is a closed-end fund, while Athens is an open-end fund.
ETNs
Debt instruments issued by banks. Bank promises to repay the principal amount less investor fees. Performance is linked to a specific index
- Minimum purchase requirements -Quantity discounts amounts -Fund management fees - Fund financial statments
Fund prospectus must disclose:
International Fund
Fund that invests in stocks and bonds issued by foreign companies and governments
Growth fund
Fund with objective of capital appreciation. Generally do not pay dividends and have lower yields
Income Fund
Funds that buy dividend paying stocks and bonds with high yields.
Global Fund
Funds that invest in stocks and bonds issued by US and foreign companies
money market fund
Invest in low risk debt securities with short term maturities of 12 months or less. Liquidity and safety.
[C] Sales charge breakpoints The registered representative must be sure that the customer understands they would be better off to put all the money in one fund and pay a lower sales load.
Mr. Dratley wants to invest $75,000 in four different growth funds. Each of these funds has its portfolio managed by a different investment management firm. Which is most important for the RR to explain to the client? [A] Automatic reinvestment plans available from these funds [B] Conversion privilege [C] Sales charge breakpoints [D] Withdrawal programs offered
[B] complete and file the appropriate SEC registration documentation The Investment Company Act of 1940 requires that investment companies complete and file registration statements with the SEC (Securities Exchange Commission). All of the other items listed are not required or are not required prior to offering shares to the public.
Prior to offering shares to the public, an investment company must [A] hire investment bankers to manage the offering. [B] complete and file the appropriate SEC registration documentation. [C] meet the listing requirements of Nasdaq. [D] file advertisements for the offering with FINRA.
[A] closing market value of all the securities in the fund's portfolio plus any interest or dividend income received on the securities in the portfolio The NAV of a mutual fund reflects the closing market value of all the securities in the fund's portfolio plus any interest or dividend income received on the securities in the portfolio. Mutual fund pricing is not based on any average price or the best prices of the day.
The Net Asset Value of mutual fund shares is best defined as the [A] closing market value of all the securities in the fund's portfolio plus any interest or dividend income received on the securities in the portfolio. [B] value of fund shares based on the average price calculated over the time the shares were owned by an investor. [C] value determined by market-makers who make a market in the fund shares. [D] a reflection of the best prices available during that specific trading day.
[B] The fund's current prospectus Due to the disclosure and updating requirements, the funds current prospectus would be the most reliable source of performance statistics of the fund.
The most reliable source of a mutual fund's performance statistics would be found in which of the following? [A] The Wall Street Journal [B] The fund's current prospectus [C] A financial magazine [D] The fund's sales literature
[B] no load. Money market funds do not charge a sales load.
The sales charge on money market funds is usually [A] spread loaded. [B] no load. [C] front end loaded. [D] deducted from the initial investment only.
B] asked price. The term net asset value plus sales charge is synonymous with the asked price.
The term "net asset value plus sales charge" is synonymous with [A] bid price. [B] asked price. [C] redemption price. [D] discount price.
Breakpoint
When an investor receives a reduced sales charge based on a quantity investment
[D] The historical returns produced by the Hedge Fund When determining whether or not an "investor" should or should not invest in a fund you would look at the circumstances of the customer as to suitability. Once you determine that it is a proper investment for the investor, then you consider which fund was suitable for that investor based on its returns and minimum investment requirement.
When determining the suitability of an investor to invest in a Hedge Fund, all of the following would be relevant EXCEPT: [A] The net worth of the investor [B] Whether or not the funds charges will be based on performance of the fund [C] The liquidity requirements of the customer [D] The historical returns produced by the Hedge Fund
[B] Fund A, over the last 10 years has outperformed all other funds in its category and will do the same in the upcoming year. Making statements of fact based on past performance is allowed but making predictions of future results is not allowed. Therefore stating that the fund "will" do the same in the upcoming year would not be allowed.
When making comparisons, predictions, or projections with regard to different funds, which of the following statements would not be allowed? [A] Fund A, over the last 5 years has outperformed Fund B regarding rates of return. [B] Fund A, over the last 10 years has outperformed all other funds in its category and will do the same in the upcoming year. [C] Fund B has consistently paid a higher dividend over the last 3 years when compared to other funds within the same category. [D] Fund B, over the last 5 years has outperformed all other funds in its category but predictions cannot be made on next year's performance.
Close end fund
When the NAV per share of a fund is greater than the ask
[B] II and IV
Which of the following are TRUE concerning a money market fund? I. The rate of return is generally two points under the prime rate. II. The owners are shareholders. III. The client is subject to substantial penalties for early withdrawal. IV. A prospectus must precede or accompany an original purchase. [A] I and III [B] II and IV [C] II and III [D] I and IV
[A] I, III Open-end Investment Companies shares are issued and redeemed daily and since newly issued shares are constantly being offered a current prospectus must be provided to the investor with new purchases.
Which of the following are TRUE of open-end investment companies? Shares are issued and redeemed daily. A fixed number of shares are issued which are then publicly traded. A current prospectus must be provided to the investor with each purchase. Upon initial issuance the investor must be provided with a prospectus, secondary market transactions do not require a prospectus. [A] I, III [B] I, IV [C] II, III [D] II, IV
[A] I, II Hedge funds subject investors to a larger degree of risk and they have low liquidity. Hedge funds have high initial investments (in some cases a minimum $25,000 or more). Hedge funds are not heavily regulated.
Which of the following are characteristics of a Hedge Fund? Low liquidity High risk Low initial investment Heavily regulated due to the types of investments in the portfolio [A] I, II [B] I, II, III [C] IV [D] III, IV
[C] Money market funds An investor in a low tax bracket would not need the tax-exempt advantages of B or D. If this same investor wanted his investment to keep up with inflation, the money market funds would be the appropriate recommendation
Which of the following investments would be the most appropriate for an investor in a low tax bracket who indicates that protection from inflation is their primary investment objective? [A] GNMA's [B] Tax-exempt unit trusts [C] Money market funds [D] Treasury bonds
[A] money market funds
Which of the following investments would provide an investor with the most liquidity? [A] money market funds [B] limited partnership participation [C] certificate of deposit [D] long-term convertible corporate bond
[B] A document that includes details about the fund including investment objective, performance, sales load structure, fee structure, level of risk, as well as who will manage the fund and how it will be managed. The prospectus for a mutual fund is the best location to find relevant information about the fund such as the investment objective of the fund, performance, sales load, fee structure, risk level, and information on who and how the fund is managed. It will not contain specific pricing information for the fund or a listing of all securities within the fund, because these items will change daily. Though some accounting information may be found in the prospectus, it would not be current up to the most recent trading day. Privacy laws generally prohibit disclosure of shareholder information, so a prospectus will not have a listing of all current investors and the volume of shares held.
Which of the following is the BEST description of the prospectus of a mutual fund? [A] It is the best location to find current market prices for the fund and a listing of all securities contained within the fund. [B] A document that includes details about the fund including investment objective, performance, sales load structure, fee structure, level of risk, as well as who will manage the fund and how it will be managed. [C] A document containing all relevant accounting information for the fund up to the end of the most recent trading day. [D] It is the best location to find a listing of all current investors who own shares of the mutual fund and the volume of shares held for each investor.
[D] The fund's current Net Asset Value (NAV) Because of daily changes to market values of securities held in a fund's portfolio, a mutual fund's Net Asset Value (NAV) would NOT be found in the Statutory Prospectus of a fund. Each of the other items is required in the Statutory Prospectus of a mutual fund.
Which of the following would NOT be found in the Statutory Prospectus of a mutual fund? [A] Minimum purchase requirements and quantity discounts [B] Fund financial statements [C] Fund management fees [D] The fund's current Net Asset Value (NAV)
[B] I and III II is incorrect because Capital Gains are not income. They result from capital gains on the portfolio not dividends or interest.
Which of the following would be correct statements by a registered representative to a customer when recommending the purchase of a mutual fund? Making purchases of funds under the same management may result in a lower overall sales load. Capital gains distributions should be viewed as income yield on the fund shares. Upon redemption of mutual funds shares, investors do not know the exact redemption. Purchasing shares just prior to the ex-dividend date is advantageous to the purchaser of the shares. [A] I and II [B] I and III [C] II and III [D] I, II, III, and IV
[D] II and IV An individual "person" or entity entitled to a quantity discount would be a husband and wife for their own account, and for the account of their minor children and a husband and wife for their joint account II and IV. An investment advisor purchasing for his clients would be considered many separate accounts and an investment club can never qualify for quantity discounts regardless of the number of participants.
Which of the following would qualify for a quantity discount when purchasing mutual fund shares? An investment advisor purchasing for his clients A husband and wife purchasing shares for their own account and for the account of their minor children An investment club made up of 100 participants A husband and wife for their joint account [A] I only [B] I and II [C] II and III [D] II and IV
[A] I and II If Net Asset Value (NAV) is greater than the Ask, the fund has to be Closed-End. Here, Fund C and D have a NAV higher than the Ask, thus they would be Closed-End. This leaves the only options as I and II for the Open-End Funds.
With the facts listed below, choose the open-end funds: Fund A has an ask price of $10.00 and the NAV per share is $9.50. Fund B has an ask price of $8.50 and the NAV per share is $7.75. Fund C has an ask price of $7.00 and the NAV per share is $7.50. Fund D has an ask price of $9.00 and the NAV per share is $9.25. [A] I and II [B] I and III [C] II and IV [D] III and IV
Hedge Funds
form of investment vehicle established for wealthy and semi-wealthy investors. not as liquid and daily trading is not offered
ETFs
funds that mirror a specific index or industry sector basket of securities. Trade like common stock
[D] I, II, III, and IV
mutual fund's portfolio could include which of the following securities? Warrants on common stock Revenue bonds issued by a municipality Treasury bills of the U.S. Government Equity securities such as the common stock of a corporation [A] III only [B] III and IV only [C] II, III, and IV only [D] I, II, III, and IV
