Types & Characteristics of Pooled Investment Unit 14

In which type of real estate investment does an investor have a reasonable expectation of receiving periodic distributions in the form of dividends? A) A real estate investment trust (REIT) B) Undeveloped land C) The purchase of a primary residence D) Rental real estate

A) A real estate investment trust(REIT) A REIT is an indirect form of ownership of real estate. For tax purposes, at least 90% of the REIT's investment income is distributed to investors in the form of a taxable dividend. Unlike DPPs, there is no flow-through of losses

Which of the following may be done only with the approval of the shareholders of an investment company? I. A change from diversified to nondiversified status II. The purchase of particular bonds on the open market III. Personnel changes in the transfer agent's organization IV. A change in the fund's objectives A) I and IV B) I and III C) II and III D) II and IV

A) I and IV Any substantive change in an investment company's form, structure, investment objective, or business operation must be approved by a majority vote of the outstanding shares. Bond purchases are left to the fund's portfolio manager, and the transfer agent is trusted with its organization's personnel changes.

Under the 1940 Investment Company Act, an investment company may take all of the following forms EXCEPT: A) a limited partnership with partners as passive investors B) an open-end investment company C) a unit investment trust D) a closed-end investment company

A) a limited partnership with partners as passive investors An investment company is not a limited partnership. Investment companies are organized as open-end companies (mutual funds), closed-end companies, unit investment trusts, or face-amount certificate companies.

All of the following are characteristics typical of a money market fund EXCEPT A) it has a high beta and is safest in periods of low market volatility B) it is offered as a no-load investment C) its net asset value normally remains unchanged D) the underlying portfolio consists of short-term debt instruments

A) it has a high beta and is safest in periods of low market volatility A money market fund has almost no price volatility, because the underlying portfolio consists of low-beta instruments, and the fund is deliberately managed for low beta (see the Glossary of Terms if you are not familiar with beta).

When shares of a closed-end investment company are purchased by an investor, the price paid is based upon: A) the current asking price B) the current bid price C) the net asset value plus commission D) the net asset value

A) the current asking price Closed-end investment company shares are priced based on supply and demand. The ask is the price that investors will pay for purchasing shares, and the bid is what investors receive when selling. Investors will also pay a commission because this is what the broker charges for executing the transaction. Shares of open-end investment companies are bought and redeemed based on NAV, but that is not so of closed-end companies.

One way in which closed-end management investment companies differ from open-end investment management companies is that A) they trade at a price independent of their net asset value B) they were in existence prior to 1940 C) their portfolio may contain common stock, preferred stock and debt securities D) they are federal covered securities

A) they trade at a price independent of their net asset value Unlike open-end companies (mutual funds) where the price is based on the net asset value (NAV), closed-end companies trade at a market price based on supply and demand which could be above, below or the same as the NAV. Both are federal covered, both can have equity and debt in their portfolios (although only closed-end companies can issue senior securities) and both were in existence prior to passage of the Investment Company Act of 1940

According to the Investment Company Act of 1940, an open-end investment company must compute its NAV: A) weekly B) monthly C) no less frequently than once per day D) annually

A) weekly Mutual funds must calculate the value of fund shares at least once per business day; funds may calculate the value more often and will disclose this fact in the prospectus.

Which of the following statements regarding a mutual fund that offers class A, B, and C shares are TRUE? I. Class A shares have a front-end sales charge and a low 12b-1 fee. II. Class B shares have a declining contingent-deferred sales charge and a high 12b-1 fee. III. Class C shares have a high 12b-1 fee and a level contingent-deferred sales charge. IV. Class B and C shares allow investors to put the shares back to the fund for their original purchase price for up to 1 year after purchase. A) I and II B) I, II, and III C) I only D) I, II, III, and IV

B) I, II, and III There is no put provision that guarantees the return of an investor's purchase price associated with mutual fund shares.

Which of the following hedge funds characteristics is least accurate? A) They require large entry-level investment amounts. B) They are heavily regulated by capital market authorities. C) Most can borrow funds and use derivatives. D) Their investment style is generally aimed at producing "absolute" returns.

B) They are heavily regulated by capital market authorities Hedge funds are unregulated collective investment vehicles. This means they cannot be generally marketed to private individuals because they are considered too risky for the less financially-sophisticated investor. The initial outlay is usually quite high. Financial leverage and derivatives are a common practice with hedge funds. By hedging, the portfolio manager attempts to produce returns in both up and down markets

An individual seeking capital and possible guidance with a start-up would most likely seek funding from A) a unit investment trust. B) a venture capital fund. C) an open-end investment company. D) a hedge fund.

B) a venture capital fund. A venture capital fund, typically organized as a limited partnership, seeks opportunities to get in on the ground floor. In additional to an ownership position, usually at least 10%, the venture capitalists provide managerial input. Because these start-ups are rarely publicly traded, they are of little interest to the other investment company choices

All of the following may receive breakpoint discounts EXCEPT A) an investor in an individual retirement account an B) investment club C) a pension plan trustee D) a husband and wife in a joint account

B) an investment club Breakpoints are not available to investment clubs.

Your married customers, ages 48 and 50, have a combined annual income of more than $200,000. They are concerned about the effects of rising inflation, and because they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the most suitable for these customers? A) NavCo Tax-Free Municipal Bond Fund B) ABC Investment-Grade Bond Fund ATF C) Overseas Opportunities Fund D) XYZ Government Income Fund

C) Overseas Opportunities Fund Investment in an overseas equity fund will provide diversification not necessarily subject to U.S. inflation. The tax-free fund will not provide additional diversification nor the best hedge against inflation. A high-grade bond fund will not add diversification

An investor is looking for a packed product that can provide rental income as well as potential capital gains. You would most likely recommend A) a growth mutual fund. B) a GNMA pass-though. C) an equity REIT. D) a mortgage REIT.

C) an equity REIT When you see "rental," you immediately think of renting real estate. Of the two basic types of REITs, an equity REIT is the one that owns property. Rental income is received from the users of those properties. As an owner of real estate, there is always potential to sell the property for a gain. Think of the difference between an equity REIT and a mortgage REIT as the difference between a stock and a bond. A stock offers the possibility of income through dividends and a bond through interest. But, it is only the stock (equity) where there is a real potential for capital gain.

How often must an investment company file reports with the SEC as required by the Investment Company Act of 1940? A) Monthly B) Semiannually C) Annually D) Quarterly

C) annually Registered investment companies are similar to other publicly registered entities in that an annual audited report must be filed with the SEC

A client owning shares of a closed-end investment company entering an order to liquidate the position would receive a price based on A) the offering price computed after the order is received. B) the previous net asset value per share. C) supply and demand for the shares. D) the next computed net asset value per share.

C) supply and demand for the shares. Closed-end investment company shares are traded in the same manner as any other corporate stock. That is, the price received when selling or the price paid when buying, is determined by supply and demand and has no direct relation to the net asset value. If this question was asking about an open-end investment company, the choice would be the next computed NAV, not offering price (that is the price when the investor is buying, not selling).

If a customer's portfolio is heavily invested in common stock mutual funds, what is the customer's greatest risk? A) Loss of diversification B) Loss of liquidity C) Changes in interest rates D) Loss of principal

D) Loss of principal A mutual fund with a portfolio of common stock is subject to market risk. If the market falls, the value of the fund's shares also fall, subjecting the owner to loss of principal

If an investor wants to invest in the electronics industry but does not want to limit his investments to only one or two companies, which type of fund would be most suitable? A) Hedge B) Bond C) Money market D) Specialized

D) Specialized A specialized or sector fund invests 25% or more of its assets in a particular region or industry.

If you were describing an investment that trades on an exchange with a price set by supply and demand, rather than its underlying value, it would be A) an open-end fund B) a hedge fund C) a forward contract D) a closed-end fund

D) a close-ended fund The stock of closed-end investment management companies trades on exchanges and, like any other exchange security, is priced based on supply and demand. Although closed-end funds compute their NAV, market forces determine price.

An individual seeking capital and possible guidance with a start-up would most likely seek funding from A) an open-end investment company. B) a unit investment trust. C) a hedge fund. D) a venture capital fund.

D) venture capital trust A venture capital fund, typically organized as a limited partnership, seeks out opportunities to get in on the ground floor. In additional to an ownership position, usually at least 10%, the venture capitalists provide managerial input. Because these start-ups are rarely publicly traded, they are of little interest to the other investment company choices.

A registered investment company whose capitalization may include preferred stock and/or bonds is A) the face-amount certificate company. B) the unit investment trust. C) the open-end management investment company. D) the closed-end management investment company.

D) the closed-end management investment company. Only the closed-end company is legally permitted to issue senior securities (preferred stock and bonds).

ABC Investment Company shares are trading at $13.80 on a per-share basis. The net asset value per share is $12.00. Which of the following conclusions correctly defines the relationship between trading price and NAV? A) The fund's shares are trading at a premium of 15% to the NAV. B) The fund's shares are trading at a discount of 15% to underlying NAV. C) NAV per share is calculated as per-market demand and supply for the fund's shares. D) The value of $13.80 is calculated as total assets minus total liabilities divided by total outstanding shares.

A) The fund's shares are trading at a premium of 15% to the NAV. This is a closed-end investment company whose shares are trading at a premium. The premium is 15% relative to the underlying NAV ($1.80 ÷ $12.00). The market price, not the NAV of the fund's shares, is determined by supply and demand in the market. How do we know this is not a mutual fund? There are two ways. Mutual funds do not trade; there is no secondary market for them. Secondly, the sales charge is 13.8% ($1.80 / $13.80) which is far above the maximum 8.5% allowed.

In the context of purchasing shares in a mutual fund, the term "breakpoint" refers to the point at which A) the dollar amount of shares being purchased qualifies the investor for a lower sales charge B) the mutual fund company stops offering new shares to the public C) the investor is assured of making a profit on the shares D) the shares are selling for less than net asset value (NAV)

A) the dollar amount of shares being purchased qualifies the investor for a lower sales charge The term "breakpoint" refers to the point at which the number of shares being purchased is large enough to qualify the investor for a reduced sales load. FINRA prohibits broker-dealers and their agents from making a mutual fund sale at just below the breakpoint merely to obtain a larger commission.

If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as A) a unit investment trust B) a closed-end company C) a growth fund D) a utilities fund

A) unit investment trust. Unit investment trust issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed; it is not traded.

In order to qualify as a REIT, A) a mortgage REIT must have at least 75% of the assets in government-insured mortgages. B) at least 75% of the assets must be invested in real-estate related assets, cash, and U.S. government securities. C) at least 75% of the income must be paid out as dividends to investors. D) at least 90% of the assets must be invested in real-estate related assets.

B) at least 75% of the assets must be invested in rea-estate related assets, cash, and U.S. government securities. A REIT must be invested in real estate. By law, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. That 75% can also include cash and U.S. government securities. If it is a mortgage REIT, there is no specific requirement regarding government-insured mortgages. A REIT must distribute at least 90% of its income to investors, not 75%.

If a client prefers mutual fund investments in companies that primarily generate capital appreciation to companies that pay a steady dividend, what type of mutual fund and associated investment objective would you recommend? A) A growth and income fund B) An income fund C) An index fund D) A growth fund

D) A growth fund A growth mutual fund invests in stocks that are growing rapidly and stresses capital appreciation rather than income. The key is that the growth and appreciation are synonymous

Investors with a short time horizon most likely will invest in which class of mutual fund shares? A) Class A shares, then convert to Class B B) shares Class A shares C) Class B shares D) Class C shares

D) Class C shares Class C shares may be less expensive than Class A or B shares for investors with a short time horizon. The front-end load on Class A shares and the back-end load on Class B shares makes them unattractive for short-term investors. A shares do not convert to B shares; it goes the other way.

Compared to a publicly-traded fund, a private equity fund is most likely to A) provide more details regarding its financial performance. B) disclose less information about its financial performance. C) exhibit stronger corporate governance. D) be more concerned with short-term results

B) disclose less information about its financial performance. Private equity funds are not held to the same financial reporting requirements as publicly-traded funds. Less public scrutiny and limited financial disclosure may lead to weaker corporate governance. Private equity funds generally need several years before the fruits of their labor are ready to be harvested

One of your clients wishes to invest in a fund of hedge funds. You could tell him which of the following? A) Shares of these funds are easy to redeem. B) These funds purchase a large amount of preferred stock. C) Expenses for these funds tend to be higher than those for other funds. D) He can expect to make a profit whether the markets trend up or trend down.

C) Expenses for these funds tend to be higher than those for other funds. Funds of hedge funds purchase interests in a variety of hedge funds, which typically use risky strategies to generate profit regardless of market direction. Redemption may be difficult with these funds, and the steps management must take to try to generate profits incur higher expenses than traditional mutual funds.

Net asset value per share for a mutual fund can be expected to decrease if A) the issuers of securities in the portfolio have made dividend distributions B) the fund has experienced net redemptions of shares C) the fund has made dividend distributions to shareholders D) the securities in the portfolio have appreciated in value

C) the fund has made dividend distributions to shareholders if dividends are distributed to shareholders the fund's assets will decrease and value per share will fall accordingly. Appreciation of the portfolio and dividends paid to the portfolio will increase the value. If issuers have made distributions to the portfolio, the net asset value will increase. Net redemptions have no effect on the net asset value, because the money paid out is offset by a reduced number of shares outstanding.

Which of the following is the least suitable mutual fund transaction? A) Encouraging an investor in a high tax bracket with an income objective to invest in a municipal bond fund B) Encouraging a retired 65-year-old investor to invest a small percentage of his savings in a large-cap growth fund C) Encouraging an investor in his early 30s to invest in an emerging markets mutual fund D) Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence

D) Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence is not in the client's best interest, because the client might be subject to substantial additional sales charges

In accordance with the stated provisions of the Investment Company Act of 1940, renewal of an open-end management investment company's investment adviser's contract must be approved by A) FINRA B) the SEC C) the principal underwriter of the fund D) majority vote of the fund's board of directors or of the outstanding voting shares, as well as by majority vote of the noninterested members of the board

D) majority vote of the fund's board of directors or of the outstanding voting shares, as well as by majority vote of the noninterested members of the board When it comes to management investment companies (open-end or closed-end), renewal of the investment adviser's contract is approved annually by the fund's board of directors or a majority vote of the outstanding voting shares. The initial contract must be approved by both the board of directors and a majority vote of the outstanding shares. In both of these cases, initial and renewal, a majority vote of the noninterested (outside) members of the fund's board of directors is also required.

Regarding open-end investment companies, which of the following sales charges is based on the NAV per share? A) Redemption fee B) Commission C) Sales load D) 12b-1 fee

A) Redemption fee the fund has a redemption charge (CDSC), it is based on the NAV per share, not the public offering price (POP). That is, if the client liquidated shares when the NAV was $10 per share and the POP was $10.50, the CDSC would be charged based on the $10 rather than the $10.50. Commission is not a term used with mutual funds. The 12b-1 fee is a charge against overall assets of the fund; it is not considered to be a charge related to the buying or selling of fund shares.

General industry practice is that mutual funds compute their net asset value per share A) once per day as of 4 p.m. Eastern time. B) once per day as of 2 p.m. Eastern time. C) hourly whenever the New York Stock Exchange is open. D) once per week as of the close of the market on Friday.

A) once per day as of 4 pm Eastern time The Investment Company Act of 1940 requires that each business day a fund calculate its NAV per share based on the current value of all the fund's assets. The specific time for pricing is set initially by the fund's board of directors and can be found in the fund's prospectus. Almost all funds price their shares at 4 p.m. Eastern time.

According to the Investment Company Act of 1940, all of the following statements are true EXCEPT A) investment companies can own no more than 3% of the shares of another investment company B) mutual fund shareholders must be sent semiannual statements that identify compensation paid to directors, officers, and other affiliated persons C) 12b-1 distribution charges must be approved semiannually by a majority vote of the outstanding shares and by the board of directors D) persons convicted within the past 10 years of a securities industry crime are not allowed to serve as directors without SEC permission

C) 12b-1 distribution charges must be approved semiannually by a majority vote of the outstanding shares and by the board of directors 12b-1 fees are subject to annual approval by a vote of the board of directors of the company and of the directors who are not interested persons (outside directors) of the company.

Which of the following are TRUE of a REIT? I. It can qualify for special tax treatment under Subchapter M of the Internal Revenue Code if it distributes at least 90% of its taxable income. II. It may loan money for commercial construction projects. III. It generates income by the spread between rental income, the combined mortgage interest, and operating expenses of the property. IV. It is only suitable for an investor who is in a 28% or higher tax bracket, who has a net worth in excess of $200,000, or who is able to benefit from the flow-through of losses. A) I and III B) I, II, and IV C) I, II, and III D) II and III

C) I, II, and III A real estate investment trust (REIT) is an investment that makes direct investments in real estate, generating its income from renting the property (e.g., apartments, shopping malls) to lessees. Alternatively, it can make mortgage loans and generate income from them. Depending on its distribution of income, it may qualify for the same type of special tax treatment as a regulated investment company. REITS are not flow-through vehicles, as are DPPs

Which of the following are features of Class C mutual fund shares? I. Typically charge no front-end load II. Typically charge a front-end load III. Typically impose lower CDSCs than Class B shares for a shorter period IV. Typically convert to Class A shares after they are held for a defined period A) I and III B) II and IV C) II and III D) I and IV

A) I and III C shares generally have the following features: no front-end sales charge, lower CDSCs than Class B shares for a shorter period, and no conversion to Class A shares regardless of how long they are held. Because of these features, Class C shares may be less expensive for investors with shorter investment horizons. They may be more expensive for investors who plan to hold their shares for a long time, because the level load never discontinues.

Under the Investment Company Act of 1940, SEC Rule 12b-1 allows a fund to charge distribution and sales expenses to net assets as a percentage of the total assets. Normally, the cost of distribution of the shares is paid by the underwriter out of the sales load paid by the individual purchaser. For a fund to impose 12b-1 charges, which of the following conditions apply (applies)? I. The board of directors has sole approval authority. II. The majority of the outstanding shares has sole approval authority. III. Both the board and the majority of outstanding shares must approve it. IV. A distribution plan must be written. A) II and III B) III and IV C) I and III D) I only

B) III and IV For the fund to impose 12b-1 charges, the distribution plan must be in writing and approved by a majority of the outstanding shares, as well as a majority of the board of directors, including a majority of directors classified as outside directors.

A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100, even though the customer has made no new investments. Which of the following statements is TRUE? A) The agent should remind the customer of the letter of intent that was signed 12 months ago. B) Shares held in escrow will be liquidated at the appreciated value. C) The letter of intent is considered fulfilled. D) The investment no longer qualifies for a breakpoint.

A) The agent should remind the customer of the letter of intent that was signed 12 months ago. A letter of intent is not satisfied by the price appreciation of the shares. A letter of intent must be met with dollars invested within 13 months, so the customer needs to invest an additional $7,000 to fulfill the letter of intent. The agent should remind the customer of the intention to qualify for the reduced sales charge. The provisions of the LOI hold regardless of the price appreciation. Shares will not be liquidated until 13 months have lapsed.

When an agent explains mutual funds to a prospective investor, which of the following statements may be made? A) Mutual fund shares are liquid and may be switched from fund to fund without tax liability. B) The redemption value of mutual fund shares fluctuates according to the fund's portfolio value. C) Mutual funds must make payment within 7 days of a redemption request and guarantee a return of the original investment. D) A fund always redeems shares at NAV, with little chance of a financial loss

B) The redemption value of mutual fund shares fluctuates according to the fund's portfolio value. Mutual fund redemption values fluctuate according to the value of the securities in the portfolio. The tax liabilities associated with mutual fund switching may not be glossed over. While the redemption rules of the Investment Company Act of 1940 do make mutual funds liquid, investors are not guaranteed to receive an amount equal to the original investment

Investment adviser representatives are often called upon to help clients select an appropriate mutual fund. When making a recommendation, which of the following would not be a consideration? A) The fund's net asset value per share B) The portfolio manager's tenure C) The fund's expense ratio D) The fund investment objective

A) The fund's net asset value per share The price per share (NAV per share) of a fund is not a relevant factor when considering recommending a mutual fund. The fund's investment objective must align with that of the client and it is important to know if the fund's portfolio manager has just come aboard or has been managing the fund for a number of years. All other things equal, the IAR will generally look for the funds with lower expense ratios.