SIE unit 4 - Packaged Investments

The sales charge for Class A shares may not exceed A) 8.5% of the total investment. B) 6.25% of the total investment. C) 8.5% of the NAV of the shares purchased. D) 6.25% of the NAV of the shares purchased

A) 8.5% of the total investment. Explanation: Though they are almost always much smaller, sales charges for Class A shares may not exceed 8.5% of the money invested. For example, if an investor spends $1,000 for Class A shares, no more than $85 may be charged as a sales load.

Which of the following would be unlawful regarding use of a mutual fund prospectus? A) Calling an investor's attention to a section that may be interesting B) Failing to highlight a small section the customer has specifically asked about C) Leaving a typographical error in the text unmarked D) Sending a prospectus to someone who has shown no interest in the fund

A) Calling an investor's attention to a section that may be interesting Explanation: A prospectus for any security, not just one for a mutual fund, may not be marked, highlighted, or otherwise altered in any way, nor may steps be taken to call an investor's attention to some passage or section that might be of special interest, even if the potential customer asked that it be done. ***Key take away a prospectus may never be tampered with.

If a registered representative allows a customer to unknowingly buy investment company shares in an amount just under a dollar bracket that would qualify for a reduced sales charge, or encourages such a purchase, this is known as A) a breakpoint sale violation. B) markup violation. C) market manipulation violation. D) short sale violation.

A) a breakpoint sale violation. Explanation: In a breakpoint sale, a customer unknowingly buys investment company shares in an amount just under a dollar bracket that would qualify for reduced sales charges. As a result, the registered representative receives a somewhat higher commission but the customer pays higher sales charges, reducing the number of shares purchased and resulting in a higher cost per share.

All of the following would be included in the expense ratio of a fund except A) front-end or back-end load. B) salaries and administrative fees. C) 12b-1 fee. D) portfolio management fee.

A) front-end or back-end load. Explanation: The expense ratio includes ongoing operating expenses but not sales charges. A front- or back-end load is a sales charge.

All of the following are true regarding breakpoints for mutual funds except A) the first breakpoint investors can achieve is mandated by industry rule to be at the $10,000 investment threshold. B) a breakpoint sale is considered to be a sale just below a breakpoint. C) the greater the investment, the lower the sales charge. D) breakpoints must be disclosed to potential investors.

A) the first breakpoint investors can achieve is mandated by industry rule to be at the $10,000 investment threshold. Explanation: There is no standardized industry mandated breakpoint schedule. Offering breakpoints and where they occur is at the discretion of the investment company. In accordance with a breakpoint schedule, the greater the investment, the lower the sales charge will be. A breakpoint sale occurs when a sale is made just below a breakpoint with the intent of the registered representative to be the recipient of a higher sales commission. In this light, disclosure of breakpoints when they are offered is required.

What does the mortality guarantee of a variable annuity insure? A) That payments will continue for the life of the annuitant B) That payments will continue for the annuitant's life expectancy C) That each monthly payment will meet a specific minimum D) That total payments over the annuitant's life will meet a specific minimum

B) That payments will continue for the annuitant's life expectancy Explanation: The mortality guarantee of a variable annuity, which the insurance company assumes as part of mortality risk, insures that payments will continue for the life of the annuitant. It does not guarantee the size of the payments.

All of the following statements are true except A) a closed-end company may issue bonds. B) a bond mutual fund may issue bonds. C) a bond mutual fund may not issue bonds. D) a closed-end company may issue preferred stock.

B) a bond mutual fund may issue bonds. Explanation: A bond mutual fund invests in the bonds of other companies. It may not itself issue bonds or preferred stock. They can only issue common shares. Closed-end companies are much like any other company. They may issue bonds and preferred stock, once they have sold common stock and become a publicly traded company.

Class B mutual fund shares are also known as A) contingent-deferred shares. B) back-end load shares. C) partially loaded shares. D) deferred-load shares.

B) back-end load shares. Explanation: Class B mutual fund shares are bought with no sales charge at the time of purchase. The sales charge is paid instead at the time of redemption, or at the back end. Hence, they are known as back-end load shares. For this type of share, the sales charge percentage is reduced each year of ownership, typically becoming zero after five years. At this time, they convert to Class A shares.

Advantages to the investor offered by investment companies include 1 ability to invest small amounts in many different securities. 2 special securities prices available only to investment companies. 3 elimination of market risk through pooling of investments. 4 increased purchasing power in the marketplace. A) II and III B) I and IV C) I and III D) II and IV

B) I and IV Explanation: Investors who can only invest relatively small amounts of money can nevertheless purchase interest in many different securities through investment companies. By the same token, they also gain access to increased purchasing power by pooling their investments with others. **They don't get special prices and they don't eliminate market risk.

Which of the following is true of closed end funds but not of open end funds? A) Pay dividends when declared by the board of directors B) Can sell shares of common stock C) Have a fixed number of shares D) Can invest in a variety of securities

C) Have a fixed number of shares Explanation: Open end funds can issue an unlimited number of shares. Closed end funds have a fixed number of shares. The other three choices are true of both open and closed end funds.

Benefits of mutual funds include all of the following except: A) mutual funds are professionally managed. B) mutual funds report distributions annually to investors. C) mutual funds can provide broad diversification inside a single fund. D) reinvested dividends are not taxed until withdrawal.

D) reinvested dividends are not taxed until withdrawal. Explanation: When dividends (or capital gains) are reinvested they are still taxed. All the other options are considered benefits of mutual funds.

Which of the following need not be included in the annual reports a mutual fund provides to its shareholders? A) A graph comparing fund performance to an appropriate index B) Factors and strategies that materially affected performance C) Names and titles of those responsible for portfolio management D) A list of the most poorly performing portfolio securities

D) A list of the most poorly performing portfolio securities Explanation: Aside from the basic financial data a mutual fund must provide at least semiannually, additional disclosures specific to mutual fund companies - investment strategies, comparative performance, personnel managing the portfolio - are intended to enhance and align with full disclosure. A separate list of either good or poorly performing investments is not among the required disclosures.

For which of the following investors would Class C shares be most suitable? A) A relatively inexperienced investor B) An investor who intends to leave the money in the fund for many years C) An investor interested in high-risk, high-potential return speculation D) An investor who intends to redeem the shares within a short time

D) An investor who intends to redeem the shares within a short time Explanation: Because Class C shares have no sales charge levied at the time of purchase but rather levy a withdrawal from the customer's account every quarter, they would be most suitable for an investor intending to redeem the shares relatively soon. Mutual funds are not intended for the speculative investor, those who might trade in and out frequently, and no particular share class is especially suited to the inexperienced investor. ***SHORT time frame

An investor has entered into a contract to pay an investment company a specific sum of money in exchange for the company's agreement to pay the investor a specific (larger) sum of money on a specific date in the future. The investment company must be A) a unit investment trust. B) a mutual fund. C) a closed-end investment company. D) a face-amount certificate company.

D) a face-amount certificate company. Explanation: A face-amount certificate company offers the investor a certificate with a face amount on it. The investor buys it for a discount from the face amount, with the agreement being that the company will pay the investor the face amount on a specific date in the future.

All of the following actions would cause the NAV per share of the mutual fund to increase except A) the fund receives interest. B) the liabilities of the fund decline. C) the fund receives dividends. D) a large number of investors making deposits in the fund.

D) a large number of investors making deposits in the fund. Explanation: When investors deposit money into the fund they buy more shares, so the assets and number of shares increase proportionately and the NAV per share is unchanged. In a similar way, when shareholders redeem shares the assets in the fund go down but the number of shares also decrease proportionally, so the NAV per share is unchanged. In the other responses the assets increase with no proportional increase in the number of shares, so NAV would increase.