CH 7 Custom Exam
A mutual fund has a NAV of $58.23 and a POP of $62.55. The sales charge, when computed as a percentage of the offering price, is approximately: A. 6.9% B. 7.4% C. 7.0% D. 9.3%
A. 6.9% Sale charge = (POP-NAV) Sales charge as % of POP = (POP-NAV)/POP
In which of the following funds is the percentage that's invested in each of the various asset categories adjusted as financial markets change? A. An asset allocation fund B. An S&P Index fund C. A bond index fund D. A growth fund
A. An asset allocation fund Asset allocation funds hold diversified portfolios of stocks, bonds, and money-market instruments. The percentage of the portfolio invested in each of these categories is shifted by the fund manager from time to time, often according to computer models.
An investment company that is purchased in installments and that matures at a fixed-dollar amount is called a: A. Face-amount certificate company B. Unit investment trust C. Variable annuity contract D. Management company
A. Face-amount certificate company Face-amount certificate companies issue certificates of the installment type. The investor makes periodic payments and receives a fixed sum at the end of the period. Lump-sum payment certificates are also available.
The fund that would probably have the most price volatility is a(n): A. International equity fund B. Growth fund C. Income fund D. Municipal bond fund
A. International equity fund In general, bond funds are less volatile than equity funds. Within the equity category, the NAVs of growth and income bond funds are considerably less volatile than international equity funds whether corporate or municipal. International equity funds are not only vulnerable to market risk, but exchange and political risk as well.
Which of the following is an advantage of a unit investment trust as compared to a managed mutual fund? A. It usually has lower operating costs. B. Its securities are redeemable. C. The manager can adjust the portfolio when market conditions change. D. It is not registered with the SEC.
A. It usually has lower operating costs Since unit investment trusts (UITs) have fixed portfolios with no manager, they have no management fee. Therefore, UITs have lower operating costs than most mutual funds. Both UITs and mutual funds issue redeemable securities and are registered
An investor in a mutual fund: A. Owns the actual securities in the portfolio B. Owns shares which represent an interest in the portfolio C. Is considered a creditor of the portfolio D. Is considered a limited partner in the fund
A. Owns the actual securities in the portfolio
Which of the following is a benefit of investing in mutual funds? A. Professional management of investments B. Sales charges on deposits and withdrawals C. Guaranteed investment returns D. Management fees that are assessed annually
A. Professional management of investments Investing in mutual funds is a way for individuals to own a small amount of a large portfolio of securities. In addition, the fund's investment's will be selected and managed by a professional investment advisers. Securities offer variable, not guaranteed, rates of return. Both sales charges and management fees are paid by investors and ultimately reduce their rate of return.
When purchasing mutual fund shares, the ability to receive cumulative quantity discounts is referred to as: A. Rights of accumulation B. A breakpoint sale C. A letter of intent D. Dollar cost averaging
A. Rights of accumulation The rights of accumulation provision gives investors the ability to receive cumulative quantity discounts when purchasing additional mutual fund shares. Rather than using the original purchase price, the current market value of the investment plus any additional investments are used to determine the applicable sales charge. A letter of intent qualifies an investor for a discount that's made available through breakpoints without initially depositing the entire amount required.
You are reading the prospectus for the Adventurers Aggressive Growth Fund. Which of the following statements are you LEAST likely to encounter? A. The primary objective of the fund is income, with preservation of capital as a secondary objective. B. There is no guarantee that the fund will meet its objectives. C. The fund invests primarily in the stock of small-capitalization companies, some of which have a short or no operating history. D. The securities in which the fund invests may be very illiquid.
A. The primary objective of the fund is income, with preservation of capital as a secondary objective. Many of the stocks owned by an aggressive growth fund represent investments in small, relatively new companies. These companies rarely pay dividends, and such stocks tend to be very volatile. Therefore, income and preservation of capital are NOT objectives that one should expect from an aggressive growth fund.
The day-to-day business activities of a unit investment trust (UIT) are the responsibility of the: A. Trustee B. Board of directors C. Investment adviser D. Distributor
A. Trustee While mutual funds are often structured as corporations with a board of directors, a UIT is a trust. A trustee is responsible for overseeing the operation of a UIT. Since a UIT is not actively managed, it has no investment adviser.
All of the following choices are defined as types of investment companies, EXCEPT: A. Variable annuities B. Unit investment trusts C. Management companies D. Face-amount certificate companies
A. Variable annuities There are three types of investment companies: (1) face-amount certificate companies, (2) unit investment trusts, and (3) management companies (i.e., open-end and closed-end funds). Variable annuities are insurance company products, not investment companies. However, the separate account of a variable annuity is considered an investment company product and must be registered.
In most cases, what's the maximum time an investor is given to meet a letter of intent on a mutual fund purchase? A. 24 months B. 13 months C. Six months D. Three months
B. 13 months Letters of intent may be offered as a way for investors to reduce the front-end sale charges on mutual fund share purchases. If an investor signs a letter of intent, he's committing to investing enough money over a 13-month period to meet a breakpoint. In exchange, the mutual fund will give the investor the breakpoint immediately (i.e., the sales charge is lowered). Letters of intent can also be backdated for up to 90 days, which allows the investor to use previous purchases to meet the breakpoint.
Jamie has inherited 500 shares of an investment company. She calls her broker to redeem the shares and is informed that the kind of investment company she owns makes no provision for future purchases or redemptions. What kind of investment company does she own? A. An open-end fund B. A closed-end fund C. A unit investment trust D. A face-amount certificate company
B. A closed-end fund A closed-end fund makes no provision for future purchases or redemptions from the issuing fund. Shares are bought and sold in the open market in the same manner as the common stock of corporations. All of the other types of funds listed do provide for future purchases to and redemptions from the fund.
Which investment company does NOT charge a management fee? A. An exchange-traded fund B. A unit investment trust C. A closed-end investment company D. An open-end investment company
B. A unit investment trust A unit investment trust does not charge a management fee. The portfolio is fixed and there is no investment adviser since unit investment trusts are supervised, not managed.
A client wants to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations is the most suitable for this client? A. A managed closed-end fund B. An S&P 500 Index mutual fund C. An S&P 500 Index exchange-traded fund D. An DJIA exchange-traded fund
B. An S&P 500 Index mutual fund Although all of these investments are suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method for an investor to accomplish this goal with $250 per month. The closed-end fund and ETFs are purchased on an exchange and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no-load). If the investor were to purchase a large dollar amount at one time, any of these funds may be appropriate.
The ability to reduce sales charges on mutual fund shares that are purchased through a front-end load is available to: A. Spouses who maintain separate accounts and who purchase shares in different fund families B. An individual who signs a letter of intent C. Immediate family members who live apart and independently purchase shares in the same fund family D. A trustee purchasing shares from the same fund family for different trust accounts.
B. An individual who signs a letter of intent Reduced sales charges, also referred to as breakpoints, are only available on fund shares that are purchased with front-end loads. The reduction can be achieved by signing a letter of intent or through rights of accumulation. However, they are only available when shares are purchased from the same fund family. In order for the reduction to apply to other family members, they must be immediate family members and dependent children. A trust can qualify for breakpoints, but not by consolidating the assets of multiple trusts.
An investment company that diversifies its portfolio with stocks, bonds, and money market instruments, but will always hold some of each, is called: A. Equity Income fund B. Balanced fund C. Growth fund D. Asset allocation fund
B. Balanced fund A balanced fund invests its portfolio among a variety of investment classes, such as equities, bonds, and "cash" (money-market investments). The fund manager might change the allocation based on market conditions, but they must always keep some of each.
Which of the following investments can be purchased on margin? A. OTC equities B. Closed-end fund shares C. Open-end fund shares D. Variable annuity units
B. Closed-end fund shares According to the FRB, shares that are listed on a national exchange (e.g., NYSE or Nasdaq) are marginable. Closed-end fund shares are listed on an exchange, traded in the secondary market, and are marginable. Remember, OTC equities are not listed on an exchange; instead, they trade through the OTCBB and OTC Pink Marketplace. (
A specialized or specialty fund invests in stocks that are primarily: A. In many industries B. In a particular industry or geographical area C. Traded in the OTC market D. Special situations
B. In a particular industry or geographical area
An increase in which of the following choices will cause an increase in the expense ratio for an investment company? A. Redemptions B. Management fees C. Net asset value D. Shareholders
B. Management fees The expense ratio depends on the fees that are charged against the net assets of the fund. The only fee listed in this question is the management fee.
A "breakpoint sale" is best defined as: A. The payment of compensation to a registered representative who has ceased to be employed by a member firm B. The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions C. The sale of investment company shares in anticipation of an impending distribution D. The sales amount in an IPO where institutional clients get a price discount
B. The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions A breakpoint sale is defined as the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity purchases. Breakpoint sales are generally effected in order to assess higher sales charges on transactions and they are a violation of FINRA rules.
Who keeps track of the shareholders of a mutual fund? A. The custodian bank B. The transfer agent C. The investment adviser D. The underwriter
B. The transfer agent The mutual fund's transfer agent is responsible for keeping track of all of the current owners of a mutual fund. Custodian banks provide for the safekeeping of the fund's securities and cash. The fund's portfolio is managed by the investment adviser.
In what way are mutual funds and REITs similar? A. Their securities are traded on an exchange. B. They are actively managed. C. Their securities are redeemable by the issuer. D. They offer flow through of losses.
B. They are actively managed. Mutual funds and REITs both have portfolios that are managed, with investments that are purchased and sold on a regular basis. REIT securities trade on exchanges, but mutual fund shares do not. Instead, mutual fund shares are redeemable by the issuer. Neither mutual funds nor REITs offer flow through of losses
XYZ Mutual Fund, an open-end investment company, has an NAV of $20 and a public offering price of $21.40. The prospectus states that the sales charge for purchases of fund shares of $25,000 through $49,999 is 4%. Approximately how many shares can the customer buy for $35,000? A. 1,600 shares B. 1,635 shares C. 1,680 shares D. 1,750 shares
C. 1,680 shares 1. Sales charge amount: $35,000 x 4% = $1400 2. $35,000-$1,400 = $33,600 3. $33,600/$20 NAV = 1,680 shares
Which of the following is a characteristic of closed-end funds? A. The issuers will redeem their shares B. They provide breakpoints for investors to reduce their sales charges C. Closed-end fund shares are bought and sold on an exchange D. Investors buy their shares at the POP and sell them at their NAV once per day
C. Closed-end fund shares are bought and sold on an exchange Closed-end fund shares are bought and sold in the secondary market. All of the other responses are characteristics of open-end funds (i.e., mutual funds).
All of the following statements are TRUE about closed-end investment companies, EXCEPT that the: A. Number of outstanding shares is constant B. Shares are sold at the current market price C. Shares may not sell below the current net asset value D. Shares may be listed on the NYSE
C. Shares may not sell below the current net asset value Closed-end investment companies are bought and sold in the same manner as common stocks. If a customer wants to sell a closed-end fund at the market, he would receive the current bid price (the market quote, not the net asset value). If a customer wants to buy a closed-end investment company at the market, he would buy it at the current offering (asked) price. The market price of the shares can be at, above, or below the net asset value. Closed-end investment companies have only one issue of shares. Once sold, no new shares are issued. The amount of outstanding shares remains constant. The shares may be listed on an exchange or may trade in the OTC market.
Which of the following stipulations is NOT included in a letter of intent? A. The maximum time limit for the letter of intent is 13 months. B. The letter of intent may be backdated for up to 90 days. C. The fund may stop redemptions during the duration of the letter of intent. D. The fund may place some of the initially purchased shares in an escrow account to protect against the failure to fulfill the letter of intent.
C. The fund may stop redemptions during the duration of the letter of intent. A letter of intent (LOI) has a maximum duration of 13 months and may be backdated for up to 90 days to include previous purchases. Also, to protect against the client's failure to fulfill the letter of intent, a certain amount of the initially purchased shares may be placed in an escrow account by the customer's broker-dealer. If the terms of the letter are not met, the shares in the escrow account will be liquidated and used to cover any additional sales charges that are due. The letter of intent will not contain a clause which stipulates that redemptions are prohibited during the 13-month period.
If an investor enters a redemption order for shares of an open-end investment company, what price will she receive? A. The previous offering price of the shares B. The net asset value (NAV) of the shares on the previous day's close C. The net asset value (NAV) of the shares as computed after the order is received D. The offering price of the shares as computed after the order is received
C. The net asset value (NAV) of the shares as computed after the order is received Open-end investment companies are also referred to as mutual funds. Investors can redeem (i.e., sell) their mutual fund shares and receive the next calculated NAV of the shares. When shares are purchased, investors typically pay the next calculated NAV of the shares plus any applicable sales charge (which is referred to as the public offering price).
What is the primary function of the custodian bank of an investment company? A. To solicit new investments into the fund B. To manage the fund's portfolio C. To provide for the safekeeping of the fund's securities and cash D. To issue and redeem shares
C. To provide for the safekeeping of the fund's securities and cash Custodian banks provide for the safekeeping of the fund's securities and cash. The issuance and redemption of mutual fund shares is done by the transfer agent. The fund's portfolio is managed by the investment adviser.
According to current regulations, if a client redeems his mutual fund shares, the fund company must send the payment within: A. 3 days B. 5 days C. 10 days D. 7 days
D. 7 days
An individual who is considering the purchase of closed-end fund shares would pay: A. The closing NAV plus any applicable sales charge B. The next computed NAV plus any applicable sales charge C. The next computed NAV plus any applicable commission D. A market price as determined by the supply and demand for the shares
D. A market price as determined by the supply and demand for the shares Closed-end fund shares trade in the secondary market and their prices are determined by supply and demand for the shares. Although the shares have an NAV, it's only for comparative purposes.
Which of the following funds is the LEAST likely to provide income? A. A asset allocation fund B. A municipal bond fund C. A balanced fund D. A sector fund
D. A sector fund A sector fund invests in the securities of a specific industry or geographic location and typically does not have income as a primary objective. The other funds invest in securities that provide income.
All of the following are likely to be found in the portfolio of a money-market fund, EXCEPT: A, Bank certificates of deposit B. Treasury bills C. Treasury bonds that have a short time to maturity D. Common stock
D. Common stock For a money-market fund, the underlying securities are short-term debt securities. Therefore, common and preferred stock are not found in a money-market fund's portfolio.
The purchase price of a no-load fund is determined by the: A. Net asset value plus a commission B. Net asset value plus a sales charge C. Supply and demand for the fund D. Net asset value
D. Net asset value A no-load fund has no sales charge and the purchase price is equal to the fund's net asset value.
The fund that would probably have the least price volatility is a(n): A. International equity fund B. Growth fund C., Long-term municipal bond fund D. Short-term corporate bond fund
D. Short-term corporate bond fund In general, bond funds are less volatile than equity funds. Within the bond category, the NAVs of short-term bond funds are considerably less volatile than long-term bond funds whether corporate or municipal.
Which of the following is TRUE if a mutual fund investor chooses to implement a systematic withdrawal plan from the fund? A. The dividends and capital gains that are generated from the fund will be sufficient to make the payments. B. All payments will end on a specific date. C. The amount of each payment will remain the same. D. The withdrawals result in a reduction of capital.
D. The withdrawals result in a reduction of capital. The only true statement is that the plan results in the reduction of capital, since shares will need to eventually be redeemed to make payments. Systematic withdrawal plans provide an investor with regular payments. These payments can be structured as fixed-dollar, fixed-percentage, or fixed-time. The option chosen determines whether the payments will remain the same or whether they will cease on a specific date. Payments will first come from dividends and capital gains that are generated from the fund, but after those funds are no longer sufficient, shares will be redeemed to provide the payments
Which one of the following statements concerning money-market funds is TRUE? A. These funds will maintain a stable NAV of one dollar. B. These funds are typically invested in Treasury bonds. C. These funds are FDIC insured. D. These investments are liquid.
D. These investments are liquid. Money-market funds are investments in which investors park cash holdings to wait out dips in the market or to maintain a source of liquid funds. These mutual funds are not FDIC insured, and will not necessarily maintain a stable NAV. Rather than investing in long-term debt like T-bonds, money-market funds typically hold short-term investments (e.g., T-bills).
