Unit 3: Pooled Investments

Asset-based sales charges will generally be lowest when holding a) Class A shares b) Class B shares c) Class R shares d) Class C shares

A

An investor is always purchasing newly issued shares of commons stock when investing in a) a closed-end investment company b) an open-end investment company (mutual fund) c) a unit investment trust (UIT) d) a holding company

B

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 GNMA pass-through b) a mortgage REIT c) a growth mutual fund d) an equity REIT

d

Which of the following investment companies registered under the Investment Company Act of 1940 can include senior securities in its capital structure? a) Unit investment trusts b) Open-end management investment companies c) Face-amount certificate companies d) Closed-end management investment companies

d

One of the characteristics of real estate investment trusts is that they generally a) have a high degree of marketability b) reinvest most of their income c) offer new shares continually to their investors d) pay federal income tax on their earnings

A

In order for a reit to avoid being taxed like a corporation, it must distribute at least a) 75% of its taxable income b) 90% of its taxable income c) 95% of its taxable income d) 100% of its taxable income

B. At least 75% of a REIT's income must come from real estate investments.

The investment company act of 1940 prohibits registered open-end investment companies from engaging in any of the following practices EXCEPT a) issuing common stock b) selling short or purchasing securities for the company's portfolio on margin c) owning more than 3% of the outstanding voting securities of another investment company d) opening a joint account with another investment company

a) issuing common stock

A client investing $50,000 into the KAPCO Growth Fund would most likely be eligible for a breakpoint if purchasing a) the Class A shares b) the Class B shares c) the closed-end shares d) the Class C shares

a. Breakpoints for quantity purchases are available on shares that carry a front-end load. Those are Class A shares. Class B shares have a bank-end load, Class C shares are considered level load, and when one purchases shares of a closed-end company, commission are charged, as would be on any stock purchase.

Which of the following investment vehicles provides for redemption by the issuer? a) Unit investment trust (UIT) b) Exchange-traded fund (ETF) c) Closed-end fund (CEF) d) Face-amount certificate (FAC)

a. UIT typically issues redeemable securities (or units) like a mutual fund, which means that the UIT will buy back an investor's units, at the investor's request, at their approximate net asset value.

Star Mutual Fund, registered under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with the approval of a) the fund's investment adviser b) a majority of the outstanding shares c) the Securities and Exchange Commission d) a majority of the board of directors

b

An investor has a portfolio diversified among many different asset classes. If there was an immediate need for cash, which of the following would probably be the MOST liquid? a) CDL Common Stock Mutual Fund b) QRS Money Market Mutual Fund c) XYZ International Stock Mutual Fund d) Cash value from a universal life insurance policy

b.

When discussing investment companies, the term sales load most commonly refers to a) the fund's sales charge, expressed as a percentage of the NAV b) the fund's sales charge, expressed as a percentage of of public offering price c) the commission earned by the broker-dealer making the sale d) the 12b-1 fee

b. Class A shares of an open-end investment company (mutual fund) have a "front-end" sales charge, or sales load, which is computed as a percentage of the public offering price. That is, if the fund's POP is $10 and the NAV is $9.50, the 50-cents sales charge is 5% of the $10 offering price. In general, the majority of the sales load is paid to the broker-dealer making the sale as compensation. The 12b-1 fee is never referred to as sales load, because it is not related to the sale of shares. However, you will see the phrase 'asset-based" sales charge

Although investing in managed investment companies can provide many benefits, investors should be aware that disadvantages could include all of these EXCEPT a) high expenses b) limited liquidity c) poor management performance d) unpredictability of tax consequences

b. Liquidity is never a problem with open-end companies with the federal law requiring redemption at NAV within seven days and, because almost all CEFs are traded on exchanges, they have a ready market as well. Investors have no say in when the fund elects to take or gain losses and that can have an impact on the investor's personal return.

A customer is interested in an exchange-traded fund (ETF). With regard to the trading of ETFs, the customer should be aware of which of these? I. ETFs can be purchased throughout the day II. ETFs use forward pricing, as all mutual funds do III. Real-time quotes are available for ETFs IV. The NAV calculated at the end of the day, plus a sales charge, will equal the trading price a) I and IV b) II and III c) II and IV d) I and III

c

Which of the following features of exchange-traded funds (ETFs) are also features of mutual funds? a) they may be purchased on a margin b) they may sell short c) they compute their NAV daily d) they are listed on stock exchanges

c

Which of the following types of investment company is permitted to capitalize with common stock and preferred stock? a) a balance fund b) a unit investment fund c) an open-end investment company d) a closed-end investment company

d

One reason that a private equity fund may operate under the Section 3(c)(7) exemption of the Investment Company Act of 1940 is that a) the compensation grid to the manager of a 3(c)(7) fund is higher than to a 3(c)(1) fund b) it would be able to have more than 100 investors c) investors would only need to be accredited rather than qualified d) greater liquidity would be assured

b

One way in which the method of capitalization of closed-end companies differs from that of open-end companies is that the closed-end company can a) be listed on an exchange b) permit reinvestment of dividends c) issue more than one class of stock d) continuously offer additional shares

c. Unlike open-end companies, which can issue one class of stock 9 (not sales charge classes) closed-end companies can issue preferred stock. It is only the open-end company that continuously offers new shares and both permit reinvestment of dividends. The fact that closed-end companies can be listed on an exchange is not a method of capitalization

An investor is reading the open-end investment company section of today's WSJ sees that the Bull in the Teashop Fund has a NAV of $10.65 and an offering price of $11.15. He knows that he would have received which of the following if his redemption order had been received by the fund prior to yesterday's market close? a) $10.65, less redemption fee, if any b) $11.15, less redemption fee, if any c) $10.65, less commission d) $10.65

A. An investor redeeming his shares will receive the NAV less any redemption fee that may be described in the prospectus. Investors redeeming through the fund are not charged a commission.

When comparing mutual funds and ETFs, the disadvantages of investing in ETFs include which of the following? a) commissions both when purchasing and liquidating shares b) a price not set by supply and demand c) the ability to avoid tax consequences d) an expense ratio that is generally lower

a. Because the shares of ETFs are traded like any other stock, commissions are paid both to buy and sell, and the price is determined by supply and demand, not NAV. ETFs are generally more tax efficient than mutual funds and their expense ratios tend to be lower as well. Recently, a number of brokerage firms have begun offering commission-free trading for ETFs. That has not yet become the norm, so stick with our explanation until told otherwise (KAPLAN).

One of the potential effects of a mutual fund's portfolio manager having poor investment results might be a) failure to renew the bi-annual management contract b) net redemptions c) the redemption price of the fund shares dropping below their net asset value per share d) a restriction on the sale of new shares

b

Which of the following statements regarding a unit investment trust is NOT true? a) overall responsibility for the fund rests with the board of directors b) it invests according to stated objectives c) it charges no management fee d) it is considered an investment comany

A. A UIT has no board of directors, it has a board of trustees. It must follow stated objectives (as does any investment company) and does not charge a management fee because it is not a managed portfolio.

Among the characteristics of exchange-traded funds (ETFs), what distinguishes them from mutual funds is that a) their NAV is computed daily b) their portfolio may be designed to mimic an index c) they are registered with the SEC d) they are traded on listed exchanges

d

ABC is an FINRA broker-dealer. Among other functions, it serves as the principal underwriter of the XYZ Mutual Fund. Which of the following transactions of ABC would be prohibited? a) ABC tenders, from its investment account, 500 shares of XYZ Mutual Fund for redemption b) ABC purchases, for its investment account, 500 shares of XYZ mutual fund c) ABC purchases some securities directly from XYZ's portfolio d) All of these

c) It would be a violation of the Investment Company Act of 1940. Investing in the fund's shares would be permitted.

When shares of a closed-end investment company are purchased by an investor, the price paid is based upon: a) the NAV plus commission b) the net asset value c) the current asking price d) the current bid price

c. 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.

Which of the following is NOT included in the calculation of a mutual fund's NAV per share? a) accrued custodian bank fees b) closing values of portfolio assets c) accrued management fees d) accrued sales charges

d

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

c. A money market mutual fund has almost no price volatility, because the underlying portfolio consists of low-beta instruments, and the fund is deliberately managed for low beta

Barb wishes to invest in the KAPCO Growth Fund, an open-end investment company. She expects to hold the shares for at least 10 years. If she purchases KAPCO's class A shares, each of these would be a way for her to receive a reduction on the sales charge except: a) a single investment that reaches a breakpoint b) joining together with her sister to make a purchase at a breakpoint level c) signing a letter of intent d) benefiting from the right of accumulation

b. purchases may be combined with spouses and dependent children, but not any other family members. Three ways to reach a breakpoint are: 1) lump-sum purchase 2) using an LOI granting 13 months to reach the breakpoint 3) taking advantage of rights of accumulation (no time limit)

One way in which open-end investment companies differ from closed-end investment companies is that an open-end investment company's shares a) may be priced at a premium or discount relative to its net asset value b) are traded in the secondary markets rather than on an exchange c) outstanding will vary in number at any point in time d) are purchased and redeemed based on supply and demand

c. Open-end investment companies are capitalized with a continuous offering of new shares. As a result, the number of shares outstanding is constantly changing. It is the closed-end company, traded in the secondary markets, whose prices are based on supply and demand which causes them to be bought and sold at a premium or discount to the NAV

All of the following are true of REITs EXCEPT a) in most cases, their shares are publicly traded b) they must distribute at least 90% of their net taxable income for favorable tax treatment c) they must take equity or debt positions, never both d) they must invest at least 75% of their assets in real estate-related activities

c. Hybrid REITs take both equity and debt (mortgage) positions

A customer with an aggressive growth investment objective and short-term (6-12 months) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. you inform him that mutual funds investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family offers an aggressive growth fund that has a respectable track record, your recommendation should be to a) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and a 0.75% 12b-1 fee b) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee c) buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee d) decline the transaction because short-term trading of funds is not allowed

A. The Class C shares are the most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares. We don't need to know the CDSC for Class B shares, because the CDSC for redemptions in the first year would never be lower than the Class A front-end load