SIE Prep- Chapter 4

The breakpoint on a mutual fund purchase is the

[C] point when the percentage sales charge is reduced. EXPLANATION Breakpoint is the point when the investor receives a reduced sales load on quantity purchases.

Payment for a mutual fund purchase must be received

[C] within 2 business days following the trade date. EXPLANATION When purchasing fund shares, payment must be received within 2 business days following trade date. After redemption of fund shares, customers must be paid by the fund within 7 calendar days.

Following are the prices of two funds published at the end of the day on April 18. NAV Offering Price NAV Change Athens Fund $5.72 $6.08 $-.02 Troy Fund 8.65 9.25 -.04 Assuming no breakpoints or discounts, Investor A buys 300 shares of the Athens Fund at 10 a.m. April 18. He would pay a total of

[D] $1,824 only. EXPLANATION When purchasing fund shares, investors pay the next calculated Offer Price after the order is entered.

Which of the following types of Funds BEST describe the Fund that is committed to holding bonds and preferred stock as well as equities.

[D] Balanced Fund EXPLANATION A Balanced Fund will have a well diversified portfolio of common stock, preferred stock and bonds.

Briana intends to buy over $25,000 in shares of a mutual fund over the next year. Her agent tells her that she can qualify for a reduced sales load on the fund shares if she signs a letter of intent to buy over $25,000 and does so. Which of the following would occur if Briana does not end up investing over $25,000 over the course of the year?

[D] Briana will be required to pay a higher sales load on all shares purchased, with funding typically coming from an escrow account that is established in the event that she does not meet her $25,000 commitment. EXPLANATION When a letter of intent is signed, an escrow account is established where the difference in sales load between the LOI amount and the maximum sales load is normally deposited. If the investor fails to invest the amount agreed upon in the LOI, the escrow account will be used to pay the difference in sales load. The investor will not be billed and could still qualify for reduced sales loads in the future, depending on the scenario. She also would not be required to redeem all shares.

An investor wishing to switch from his growth fund to an income fund within the same family would do so by using the:

[D] Conversion Privileges EXPLANATION The conversion privilege is used by investors that wish to switch from investment objective to another within the same family of funds.

A 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

[D] I, II, III, and IV EXPLANATION Any or all of these investment securities could be included in the portfolio of a mutual fund depending on its investment objective and investment policies.

The Investment Company Act of 1940 requires that certain transactions use "forward pricing" (the valuation of mutual fund share prices as of the next computation). Which of the following transactions require "forward pricing"? I. Shares are purchased directly from the principal underwriter by individual investors. II. Shares are sold on behalf of an investor by the investor's broker/dealer through a wire order. III. Shares are redeemed directly to the fund by a customer.

[D] I, II, and III only EXPLANATION Forward pricing is required for all purchases and redemptions of mutual fund shares.

A Hedge Fund investment would be best suited for which of the following types of investors I. Senior Investors II. Accredited Investors III. Aggressive Investors IV. Qualified Investors

[D] II & IV EXPLANATION Hedge Funds are investments best suited for affluent investors such as Accredited or Qualified Investors since they take on a large amount of risk by using long and short positions, leverage, and derivatives. Hedge Funds would NOT be suitable for Senior Investors. Simply because an investor is "aggressive" does not satisfy the requirement of being either a qualified or accredited investors, you would need to know more information about a customer than simply that they are aggressive.

Which of the following kinds of funds would ordinarily maintain a passive management approach (no investment manager)?

[D] Index Fund EXPLANATION Since an index fund mirrors a portfolio of a specific index, there is no need for an investment manager.

All of the following are benefits of investing in a Mutual Fund EXCEPT:

[D] Many funds offer tax-exempt exchanges between funds within the same family EXPLANATION Although many funds do allow investors to exchange shares of one fund for shares of another fund within the same family without having to pay a "Sales load", that does not mean that the exchange is exempt from taxation. For tax purposes, the investor is still required to report any gains received on the exchange of shares between funds.

Following are two FINRA mutual fund price reports published at the end of the day on June 19. In this table, the Slippery Fund appears as a NAV Offer Price NAV Change Archimedes Fund $10.55 $11.00 +.04 Slippery Fund $8.18 $8.18 +.06

[D] No load fund EXPLANATION Slippery Fund appears to be no load because the NAV and Offer Price are the same.

All of the following securities are issued at a discount and mature at par EXCEPT:

[D] Unit Investment Trusts EXPLANATION U.I.T.'s are funds. They are not issued at discounts and do not mature at par.

A mutual fund investor is seeking aggressive growth. Which of the following funds would be most appropriate for the customer to invest in?

D] Sector Fund. EXPLANATION 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 retired individual seeking income would consider all of the following funds EXCEPT

[B] Special Situation Fund. EXPLANATION Specialized funds are considered to be the riskiest fund because they are concentrated or limited to certain securities.

Which of the following terms are synonymous when referring to open-end investment company shares?

[A] Net asset value and redemption price EXPLANATION On an open end fund: NAV = redemption price = Bid

A change in the investment objectives of an investment company must be approved by

[A] a majority of the fund's shareholders. EXPLANATION A change in the basic policies of an investment company must be approved by the fund's shareholders.

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. EXPLANATION 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.

Which of the following would be TRUE of an open-end investment company that only invests in municipal bonds?

[B] Dividend payouts of interest received on the municipal bonds within the portfolio would be exempt from federal income taxes. EXPLANATION Due to reciprocity, dividend payouts by a municipal bond fund related to interest payments from the municipal bonds in the portfolio would be exempt from federal income taxes. This would be the only aspect of payout that would be tax-free. Capital gains related to increases in the price of bonds and subsequent sale would be taxable.

Which of the following would be correct statements by a registered representative to a customer when recommending the purchase of a mutual fund? I. Making purchases of funds under the same management may result in a lower overall sales load. II. Capital gains distributions should be viewed as income yield on the fund shares. III. Upon redemption of mutual funds shares, investors do not know the exact redemption. IV. Purchasing shares just prior to the ex-dividend date is advantageous to the purchaser of the shares.

[B] I and III EXPLANATION 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 statements about investment advisory fees paid by a mutual fund is TRUE?

[B] In light of differences between funds, fees will differ from fund to fund. EXPLANATION The management fee paid by a fund to its registered investment advisor is subject to negotiation and varies from one fund to another. The fee is charged against the assets of the fund and not included in the sales charge. It is not subject to approval by the SEC nor regulated by FINRA.

Supply and demand will determine the price paid for all of the following securities EXCEPT: [A] Closed-End Investment Companies [B] Open-End Investment Companies [C] Corporate Debt Instruments [D] Equity Securities like Common and Preferred Stock

[B] Open-End Investment Companies EXPLANATION The pricing of shares of an open-end investment company is determined by the value of the underlying assets held in the portfolio of the investment company and the number of shares of the fund that are outstanding. Each of the other securities listed has a market price that is determined by supply and demand.

A customer owns a common stock mutual fund and asks his RR what would have the greatest effect on the value of the fund. Which of the following would be the BEST response?

[B] The prices changes of the common stocks held in the fund's portfolio EXPLANATION The value of a common stock fund would be directly related to the changing value of the securities in the fund's portfolio. The others could certainly have an effect but not as direct an effect or as strong a relationship as the stocks that comprise the portfolio.

An exchange privilege in a mutual fund means the investor can

[B] exchange shares of one mutual fund for those of another. EXPLANATION The conversion or switching privilege allows investors to exchange shares of one fund for those of another fund within the same family of funds at the fund's net asset value (no sales load is charged).

If an investor is looking for information about a particular mutual fund, the BEST source of that information will be the

[B] fund's prospectus, which contains investment strategy, management style/structure, sales load and fee structure, and more. EXPLANATION The BEST source of information related to a mutual fund will be the fund's prospectus, which will include investment strategy, management style/structure, sales load and fee structure, and other relevant information such as risk factors, etc. Accounting documents may be helpful but would not be the best source of information for an investor, because they show performance of the investment company but do not give information such as investment objective of the fund, risks, fees and sales loads, or management style. The investment manager may be a good source for the prospectus, but would NOT have a specific listing of all investments in the fund at any given point in time during the trading day that would be available to investors or the public. The SEC may also be a good source for the prospectus, but would not provide access to all files and reports to the public.

An open-end investment company may do all of the following EXCEPT

[B] issue bonds EXPLANATION Open-end investment companies may issue only voting common stock- no preferred -and no bonds.

A customer who wishes to purchase mutual fund shares intends to invest a significant amount over the next 12 months. The customer sees that breakpoints are available for amounts that are similar to the amount that the customer intends to invest over the next year. If this customer wishes to take advantage of those breakpoints and receive a reduced sales load on the total funds invested, but does not have all of the capital available to invest today, which of the following is the BEST manner to achieve the goal of reduced sales loads?

[C] A letter of intent between the customer and the fund EXPLANATION Because the customer wishes to achieve the breakpoint or reduced sales load on the total of funds invested (not just future funds), the letter of intent (LOI) is the best choice for this customer. A letter of intent allows the customer to reach a volume discount over a period of up to 13 months on the total amount invested. Rights of accumulation allow the investor to use the sum of accumulated value of fund shares that have already been purchased in addition to new funds invested in order to receive a breakpoint or reduced sales load on new purchases of shares (not the total amount of funds invested). A withdrawal plan is normally associated with mutual fund shares that are being redeemed and is not typical between a customer's bank and a broker/dealer. Margin agreements allow a customer to borrow from the broker/dealer to buy more shares, but cannot always be used in conjunction with mutual fund shares. A margin agreement would not assist a customer in achieving a breakpoint.

An investment company which maintains a diversified portfolio of bonds, preferred stocks, and common stocks would be classified as a(n)

[C] Balanced Fund EXPLANATION A Balanced Fund maintains a diversified portfolio of bonds, preferred stocks, and common stocks

The risks associated with investing in a Business Development Company (BDC) include all of the following EXCEPT

[C] Exchange risk EXPLANATION The exchange risk refers to the foreign currency exchange rate risk. That risk is typically not involved in a BDC investment. The other three risks are applicable to an investment in a BDC: (1.) The credit risk- BDCs are sub-prime lenders. Many of the companies that they lend to are rated "junk" (2.) The market volatility risk- BDC share prices are very volatile (3.).The leverage risk -BDCs borrow at low interest rates and lend at high interest rates. Borrowing too much could be a problem to the BDC because the BDC's investment portfolio is relatively illiquid.

Which of the following would be the MOST important factor to consider when determining the suitability of a mutual fund investment for a customer?

[C] Fund objectives EXPLANATION Fund objectives would have to match the investor's investment objectives.

All of the following kinds of mutual funds will ordinarily provide a high dividend yield EXCEPT:

[C] Gold Fund EXPLANATION Gold Funds generally pay little or no dividends to its shareholders.

A client is contemplating investing in a mutual fund focused on domestic bonds versus investing in a mutual fund focused on international bonds. When should this investor expect to see the international fund have higher levels of income than the domestic fund? I. Interest rates in the U.S. are greater than foreign rates. II. Interest rates in foreign countries are greater than U.S. rates. III. The value of the U.S. Dollar is going down in relation to the currencies of other countries. IV. The value of the U.S. Dollar is going up in relation to the currencies of other countries.

[C] II and III EXPLANATION An investor should expect to see more income when the rates abroad are higher than domestically. Also, the investor should expect to see more income when the value of the U.S. Dollar is going down in relation to the value of currencies abroad.

All of the following could be applied to fixed UITs EXCEPT:

[C] The fact that they are managed EXPLANATION A FIXED unit investment trust would not have an investment manager or be managed since the securities in the portfolio are fixed.

Which of the following investment companies invests in a fixed portfolio with little or no management fee and a low percentage sales charges?

[C] Unit Investment Trust EXPLANATION Unit Investment Trusts are investment companies with little or no management fees and a low percentage sales charge which invest in a fixed portfolio of municipal or corporate bonds.

An investment company that maintains a diversified portfolio of bonds, preferred stocks and common stocks would most likely be classified as a(an)

[C] balanced fund. EXPLANATION A balanced fund attempts to maintain a portfolio evenly divided between stocks and bonds.