Unit 8 Missed qs

An investor redeems 300 shares in ACE Fund. When the investor bought the shares at $12, the net asset value (NAV) was $11.08. If the current public offering price is $12.50, and the NAV is $11.80, the investor receives A)$3,540. B)$3,324. C)$3,600. D)$3,750.

A)$3,540. Explanation The key to this question is recognizing that the Ace Fund is a mutual fund rather than a closed-end fund. There are two clues. The first is the third word in the question, redeems. It is the open-end investment company (mutual fund) that redeems shares; there is no redemption with closed-end funds. The second clue is that the public offering price is stated. Only new issues have a POP. As a mutual fund, shares are redeemed at NAV. If the investor redeems 300 shares at an NAV of $11.80, he receives $3,540 (300 × $11.80).

An attractive investment for a customer with a very high risk tolerance might be a leveraged ETF. One your firm recommends is the QUID 3x leveraged ETF. You decide to track its performance for several days during a period of high market volatility. The starting date value is $50 per share. Day one ends with the specified index down 3%. Day two sees the index rise by 4%. One the third and final day, the index declines by 1%. The value of the QUID share is now A)$49.43 B)$50.00 C)$49.94 D)$50.06

A)$49.43 Explanation The 3x leverage will multiply the index movement by a factor of three. Should you receive a question like this, use the provided calculator as follows: $50 x 91% (3% drop x 3 = 9%) x 112% (4% up x 3 = 12%) x 97% (1% drop x 3 = 3%) and that rounds to $49.43.

In general, investors pay a commission to purchase and are charged a commission when selling which of the following investment companies? A)Closed-end management investment companies B)Open-end investment company Class A shares C)Open-end investment company Class B shares D)Unit investment trusts

A)Closed-end management investment companies Explanation Closed-end funds trade in the secondary markets just like any common stock. Therefore, there is generally a commission charged when purchasing and when selling. Open-end fund Class B shares have no load on the way in, but they will have a back-end load if redeemed before the CDSC period ends. Similarly, Class A shares have a front-end load (always referred to as a sales charge, never a commission) to purchase, but no charge when redeeming. UITs may have a load on the way in and/or may have a redemption charge, but those a not referred to as commissions.

Flag Mountain Floating Rate Capital, a business development company (BDC), has the majority of its assets invested in debt securities. Income distributions are made in the form of A)dividends. B)capital gains. C)interest. D)a return of capital.

A)dividends. Explanation Business development companies (BDCs) are closed-end investment companies registered under the Investment Company Act of 1940. In addition, they are regulated investment companies (RICs) under the Internal Revenue Code, meaning that BDCs must distribute at least 90% of their net investment income (NII) as dividends to shareholders. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

The public offering price for a mutual fund, as quoted in the financial press, reflects A)the maximum sales charge the fund distributor collects. B)the minimum sales charge the fund distributor collects. C)no sales charge because the offering price depends on the quantity purchased. D)the average sales charge for the preceding three months.

A)the maximum sales charge the fund distributor collects. Explanation The public offering price for a quoted mutual fund includes the maximum sales charge the fund distributor can assess.

All of the following activities in a customer's mutual fund account may be considered a violation of the Conduct Rules except A)short-term trading in mutual fund shares. B)granting discretionary authority to a new registered representative. C)switching Class A shares between fund families. D)excessive activity in the customer's account.

B)granting discretionary authority to a new registered representative. Explanation Mutual funds are considered a long-term investment. Thus, switching Class A shares of funds, short-term trading of funds, and excessive activity in a customer's account very likely indicate that the registered representative is churning. There is nothing unlawful about granting discretionary authority to a new registered representative.

A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund? A)$8.42 B)$8.57 C)$8.30 D)$7.80

C)$8.30 Explanation The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge. In this case, the NAV is $7.80 and we are told the sales load is $0.50. Adding the two numbers together equals the public offering price of $8.30. The underwriter's concession of $0.12 is part of the $0.50 as is the $0.15 administrative fee.

When reviewing a money market fund portfolio, one would not expect to find A)negotiable CDs. B)T-bills. C)T-bonds with less than one year to maturity. D)common stock.

D)common stock. Explanation Money market instruments are short-term, high-quality debt securities. This includes treasuries with less than one year to maturity and negotiable CDs. Because common stock is equity, it is not found in money market funds.

The main purpose of dividend reinvestment in a mutual fund accumulation plan is to A)protect against capital loss. B)avoid commissions or sales charges. C)avoid taxes. D)compound the growth of a mutual fund investment.

D)compound the growth of a mutual fund investment. Explanation Reinvesting dividends compounds the growth of the fund with periodic purchases of new shares. Taxes are due on dividends whether or not they are reinvested. Capital gains or losses will occur whether or not dividends are reinvested. The purchase of additional shares with reinvested dividends may increase the capital gain or loss in proportion to the dividends reinvested. Avoiding commissions or sales charges is not the main rationale for reinvesting dividends, even though sales charges are not applied to reinvested dividends.