Investment Companies
CLOSED END BOND FUNDS Fund Net Asset Value Stock Close NAV Change Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to buy 100 shares of Acme Fund will pay approximately:
-$1,025 plus a commission -Reason: Closed end funds are listed on an exchange and trade like any other stock. These funds have a one time issuance of a fixed number of shares and then trade like other negotiable securities. A customer who buys will pay the current market price plus a commission. The last price for Acme Fund is $10.25, so 100 shares will cost $1,025 plus a commission.
All of the following are Exchange Traded Funds EXCEPT:
-ADSs -Reason: SPDRs (Standard and Poor's 500 Index - symbol = SPY), DIAmonds (Dow Jones Industrial Average Index - symbol = DIA), QUBES (NASDAQ 100 Index - symbol = QQQ) ADS is an American Depositary Share - the means by which a foreign issuer offers its securities in the United States.
Which of the following can be distributed by an REIT to its shareholders?
-Dividends -Capital Gains
A "SPDR" is a(n):
-ETF -Reason: The "SPDR" is the Standard and Poor's Depositary Receipt, one of the first index-ETFs. It is based on the composition of the Standard and Poor's 500 Index. An ADR is an American Depositary Receipt. This is the vehicle for trading foreign stocks in the U.S. An ARS is an Auction Rate Security and a VRDO is a Variable Rate Demand Obligation.
Which statements are true regarding ETFs (Exchange Traded Funds)?
-ETFs are available on broad-based stock indexes -ETFs are available on narrow-based stock indexes -ETFs are available on international stock indexes -ETFs are available on bond indexes
When comparing an Exchange Traded Index Fund to an index mutual fund, the customer should be made aware that:
-ETFs can be bought at the current market price at any time during normal trading hours -mutual Funds are bought based on that day's closing market price
What is the main objective of investing in Equity REITs?
-Income and growth
All of the following securities can be sold by BOTH an individual holding a Series 7 General Securities License and an individual holding a Series 6 Investment Companies / Variable Annuities registered representative's license EXCEPT:
-Real Estate Investment Trusts
Which of the following statements are TRUE regarding closed end investment companies?
-Shares are issued in a one-time offering -Shares trade on an exchange or over-the-counter
In order to recommend a variable annuity to a customer, which statements are TRUE?
-The customer must be informed, in general terms, of the material features of the product -The representative must believe that the customer would benefit from the product's features -The representative must believe that the variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy, are suitable -The representative must sign a statement that all required representations and determinations were completed
If a fund distributes a dividend to shareholders, which statements are TRUE?
-The dividend is taxable if it is taken as a check -The dividend is taxable if it is automatically reinvested in the fund
Which of the following statements are TRUE regarding a mutual fund that is considered to be "efficient"?
-The fund has a low expense ratio -The fund has a relatively low level of operating expenses
An investor buys $10,000 of a "regulated" mutual fund investing solely in municipal securities. Which statement is TRUE regarding the Federal tax treatment of the interest income?
-The investor has no tax liability on distributions received, and the investment company has no tax liability on retained income
Which statements is/are TRUE regarding closed end investment companies?
-The portfolio of investments is managed -The initial offering of shares is made under a prospectus -Shares trade in the secondary market at prevailing market prices
A customer switches from a growth fund to an income fund within the same "family of funds". Which statement is TRUE?
-The sale results in a "taxable event" on which tax on any gain is due, and the purchase establishes a new cost basis
Which statements are TRUE regarding Real Estate Investment Trusts?
-To be regulated under Subchapter M, 90% of Net Investment Income must be distributed to shareholders -Equity REIT income is derived from the difference between net rental income and interest paid on loans
Which of the following statements are TRUE about REITs?
-To qualify under Subchapter M, at least 90% of Net Investment Income must be distributed to shareholders -To qualify under Subchapter M, at least 75% of the assets must be in real estate
Which of the following statements are TRUE about variable annuities?
-To sell variable annuities, salespersons must be registered with the Financial Industry Regulatory Authority -To sell variable annuities, salespersons must be registered with the State Insurance Commission
A customer redeems a mutual fund. The customer must be paid the money from the fund company within how many business days?
-Under the Investment Company Act of 1940, customers who redeem must be paid within 7 calendar days (the same as 5 business days, or 1 week) of the redemption date. Note that most funds process redemptions much more quickly than this.
Which of the following statements are true about variable annuities?
-Variable annuities are considered to be securities regulated by the Investment Company Act of 1940 -Salesmen must register with both the SEC and the State Insurance Commission -Investment risk is carried by the purchaser of the annuity -Annuity payments may not be reduced because of increased expenses experienced by the insurance company
Real Estate Investment Trusts are not suitable as tax advantaged investments because they:
-are not allowed to pass operating losses to shareholders
Variable annuity contracts:
-have the purchaser bear the investment risk -are non-exempt securities
Exchange Traded Funds (ETFs) are:
-registered under the Investment Company Act of 1940 -open-end management companies
A customer, age 50, invests $50,000 in a variable annuity. The account has grown in value to $60,000 and at age 55, the customer takes a lump sum withdrawal of $15,000. Which statement is TRUE about the taxation of the withdrawal?
-$10,000 of the withdrawal is subject to regular income tax plus a 10% penalty tax; $5,000 of the withdrawal is not taxable
REITs can invest in which of the following?
-Government securities -Mortgages -Real estate
The exchange traded fund(s) based on indexes by industry sector or country are known as:
-I-Shares
Which of the following is an Exchange Traded Fund?
-SPDR
Which statement is TRUE regarding the relationship between Acco Fund's Net Asset Value and closing price?
-The closing price is lower than Net Asset value because sellers exceed buyers on the exchange floor
All of the following would reduce the Net Asset Value per share of a mutual fund EXCEPT:
-asset appreciation
Mutual funds that have an automatic reinvestment provision will typically reinvest:
-dividends at NAV -capital gains at NAV
Exchange traded funds can NOT be:
-redeemed with the sponsor
ETFs are:
-traded on exchanges
When comparing an ETN to an ETF, which statements are TRUE?
-ETNs have both credit risk and market risk -ETFs have only market risk
A 65-year old retired teacher living on a pension has $200,000 invested in 2 year certificates of deposit that are yielding 4%. $20,000 of the CDs are maturing and the customer wants to diversify into an investment that gives a higher return and a moderate level of risk. The best recommendation would be:
-Equity REITs
SPDR ("Spiders"), QQQ ("Qubes") and DIA ("DIAmonds") are acronyms for:
-Exchange Traded Funds
Which rollovers are permitted without tax due?
-Exchange of one variable annuity contract for another variable annuity contract -Exchange of a life insurance contract for a variable annuity contract -Exchange of a life insurance contract for another life insurance contract
Which statements are TRUE when comparing exchange traded index funds to index mutual funds?
-Expense ratios for exchange traded index funds are comparable to, or lower than, those for index mutual funds -Net asset values for exchange traded index funds are calculated continuously through the day; while net asset values for mutual funds are computed once each day
An individual wishes to receive a fixed amount monthly from her investment company. She should elect which type of withdrawal plan?
-Fixed dollar
Which of the following customers is NOT allowed a breakpoint on mutual fund purchases?
-Investment Club -Omnibus Account
All of the following are true about variable annuities EXCEPT:
-Investment risk is carried by the issuer of the annuity
An institutional hedge fund customer has invested $100 million with your brokerage firm in the Madison Family of Funds. Madison allows its shareholders to exchange shares of any fund within the family at no charge. NAV of each fund in the family is computed as of 4:00 PM ET. The fund processes orders received until 4:30 PM ET each day. A representative with an institutional hedge fund client notices that this customer has been placing daily orders at 4:15 PM to exchange fund shares within the family. Which statement is TRUE regarding this situation?
-It appears that the hedge fund customer is engaging in the prohibited practice of late trading of mutual fund shares
Which of the following statements are TRUE regarding the taxation of payments from variable annuities?
-LIFO accounting is used to determine the taxation -The tax deferred amount above the basis come out first, followed by the original contribution
The provisions of the Investment Company Act of 1940 include: which of the following?
-Minimum initial fund capital of $100,000 -"Interested persons" on the Board of Directors cannot hold over 60% of the seats -Changing the fund's investment objective requires a majority vote of the shareholders
Which sources of REIT income are counted towards the 75% test required by Subchapter M?
-Net rental income -Interest income from mortgages -Real estate tax refunds
Which statements are TRUE under FINRA rules?
-The maximum 12b-1 fee is .75% -The 12b-1 fee is imposed annually as a charge against fund net assets -.75%
All of the following statements are true about variable annuities EXCEPT variable annuities:
-are sold without a sales charge
EITs receive preferential tax treatment based upon:
-distribution of income to shareholders
When comparing an Exchange Traded Fund to a Unit Investment Trust, the customer should be made aware that:
-the secondary market for UITs is limited while ETFs are actively traded
REITs may be organized as:
-trusts
Mutual funds must send their financial statements to shareholders:
-two times per year
An investor buys 100 shares of an open-end investment company with a 5% contingent deferred sales charge. The sales charge is reduced by 1% for every full year that the fund is held. The investor redeems the 100 shares at an NAV of $15 per share after holding them for 5 months. The investor will receive:
$15 (share) x .95 (.5%) = $14.25 $14.25 x 100 shares = $1,425
CLOSED END BOND FUNDS Fund Net Asset Value Stock Close NAV Change Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to sell 100 shares of Acme Fund will receive:
-$1,025 less a commission -Reason: If closed end fund shares are sold, the investor gets the current market price less a commission paid for executing the trade. The last price for Acme Fund is $10.25. An investor selling 100 shares receives $1,025 less a commission.
A mutual fund has the following breakpoint schedule: Purchase Amount Sales Charge $0 - $10,000 6% $10,001 - $25,000 5% $25,001 - $50,000 4% Which single purchase amount is a "breakpoint sale"?
-$24,001 -Reason: A "breakpoint sale" might sound like a good thing, but it is not! It is selling a mutual fund to a customer in an amount that does not give the customer the benefit of the breakpoint. If a customer wishes to invest $24,001 in this fund, he or she should be told that another $1,000 invested will result in a lowering of the sales charge. If the customer does not have the extra $1,000 right now, then a letter of intent should be signed for the additional $1,000 purchase, which gives the customer another 13 months to get the benefit of the breakpoint.
In order to be regulated under Subchapter M of the IRS Code, at least how much of the Net Investment Income must be distributed to the mutual fund shareholders?
-90% -Reason: A fund that distributes at least 90% of Net Investment Income to shareholders is "regulated" under Subchapter M of the Internal Revenue Code and pays no tax on the distributed amount.
Which of the following customers is allowed a breakpoint on mutual fund purchases?
-A corporate treasurer buying for investment
Which of the following statements are TRUE when describing the "build-up" in a variable annuity separate account during the accumulation phase?
-All interest, dividends, and capital gains from the securities in the account are automatically reinvested to buy more accumulation units -All interest, dividends, and capital gains from the securities in the account are tax deferred
A closed end fund's Net Asset Value is $8.50. The market price of the fund could be:
-All: $8.00, $8.50, $9.00, $9.50 -Reason: Because closed end funds trade like stocks, the fund's pricing is reflective of investor's sentiment towards the fund. The fund can trade at a discount to Net Asset Value when investors become disenchanted with the fund. This will occur if the fund gives an inferior return. Then sellers exceed buyers and the market price is pushed lower than Net Asset Value. When buyers exceed sellers, and the fund gives a superior return relative to the market rate of return for similar investments, the ask price is pushed higher. Thus, closed end funds can trade at NAV; below NAV; or above NAV
Which of the following would reduce the Net Asset Value per share of a mutual fund?
-Asset depreciation -Capital gains distribution -Dividend distribution
Which of the following statements are TRUE about the Investment Company Act of 1940's requirements for management companies?
-At least 40% of the Board of Directors must be "non-interested" persons -To establish a fund, a minimum of $100,000 of Total Net Assets is required
Which of the following customers is allowed a breakpoint on mutual fund purchases?
-Corporate purchaser -Individual purchaser
When comparing an ETN to an ETF, which statement is FALSE?
-ETFs have credit risk
All of the following are permitted when selling mutual fund shares EXCEPT a:
-EXPECT:selling group member selling shares to the public at a discount from the Public Offering price True -sponsor selling shares to a selling group member at Net Asset Value -sponsor selling shares to the public at the Public Offering Price -sponsor selling shares to a selling group member at a discount from the Public Offering Price
Which statements are TRUE about Equity REITs?
-Equity REIT share prices and overall stock prices are negatively correlated -Equity REIT dividends paid to shareholders are taxed at regular income tax rates
The expense ratio of a mutual fund is:
-Fund Operating Expenses / Total Net Assets
Which of the following accounts among the same family members can be aggregated for the purpose of receiving a mutual fund breakpoint?
-Husband Individual Account -Husband IRA Account -Husband and Wife Joint Account -Husband as Custodian for a minor child
A customer invests $1,000 in a money market fund. If the fund's assets appreciate by 10%, the customer will have:
-Money market funds are unusual in that the Net Asset Value per share is constant at $1.00. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each. For example, if an investor has 1,000 shares @ $1 ($1,000 total) in the fund, and the assets appreciate by 10%, then the customer will have 1,100 shares at $1 ($1,100 total). -The Net Asset Value per share is constant at $1
Variable annuity contracts contain which of the following guarantees?
-Mortality Guarantee -Expense Guarantee
Which of the following statements are TRUE regarding mutual funds and the ex dates for mutual fund distributions?
-Mutual fund shares do not trade -The ex date for a mutual fund is set by the fund's Board of Directors
Which statements are TRUE?
-Mutual fund shares must be paid in full when purchased, but become marginable after being held for 30 days -ETF shares can be bought on 50% margin
Which statements are TRUE when comparing an index mutual fund to an index exchange traded fund?
-Mutual funds cannot be purchased on margin; exchange traded funds can be purchased on margin -Mutual funds cannot be sold short; exchange traded funds can be sold short
ETFs trade on all of the following markets EXCEPT:
-OTC -Reason: Exchange Traded Funds, as the name says, trade on stock exchanges. Most are AMEX listed, but there are ETFs on the NYSE and NASDAQ as well. The OTC market for equities is the OTCBB and the Pink OTC Market. These are markets for thinly traded illiquid securities.
An ETF that attempts to emulate the Standard and Poor's 500 Index employs what investment strategy?
-Passive asset management
All of the following statements are true about REITs EXCEPT
-REITs allow for flow through of gain and loss to the investor
All of the following statements are true about Real Estate Investment Trusts EXCEPT
-REITs are securities which are redeemable with the sponsor
Which statements are TRUE regarding mutual fund offerings?
-Selling group members cannot sell mutual fund shares for more than the Public Offering Price -Selling group members cannot discount mutual fund shares on their own
Which statements are TRUE regarding mutual funds?
-That day's closing price is the basis for fund purchase price computations -That day's closing price is the basis for fund redemption price computations
When recommending a contractual plan variable annuity, the registered representative should consider which of the following
-The ability of the customer to make periodic payments into the plan -The penalties imposed for early withdrawal from the plan -Whether the customer can handle declining benefit payments in retirement
Which of the following statements is (are) TRUE regarding variable annuity contracts?
-The contract holder loses control of the principal amount after annuitization
A customer puts $25,000 in the Class A shares of the mutual fund shown in the exhibit window under a Letter of Intent that obligates the customer to complete a $30,001 purchase amount to qualify for a lower sales charge. Prior to making the additional $5,001 purchase, the assets in the fund appreciate to $31,000. The customer does not make the additional $5,000 investment in the fund. Which statement is TRUE?
-The customer will qualify for the lower sales charge based on the asset appreciation and is not required to make the additional $5,001 purchase
Which statements are TRUE regarding a mutual fund "Letter of Intent"?
-The letter can be backdated 90 days -The extra shares purchased under the breakpoint are held in escrow until the letter is completed
Which of the following statements are TRUE when describing a variable annuity separate account?
-The separate account is legally segregated from the insurance company's general account holdings -Variable annuity purchasers buy accumulation units in the separate account
A customer places an order to buy mutual fund shares directly from the fund wholesaler, and therefore does not use a broker-dealer included in the fund's selling group. Under FINRA rules, all of the following statements are true EXCEPT:
-The wholesaler can offer the customer a lower sales charge since no concession will be paid to a selling group member
A customer places an order to buy mutual fund shares directly from the fund wholesaler rather than to purchase the shares through a broker-dealer. Under FINRA rules, which of the following statements are TRUE?
-The wholesaler must be a registered FINRA member -The customer must pay the Public Offering Price as described in the prospectus
A 30-year old customer with a 30-year investment time horizon has received her first substantial year-end bonus of $30,000 from her job working at DEF Corporation and decides to invest the money in ABC Growth Fund. She informs you that things have been going well at work and she is likely to receive at least another $30,000 bonus at the end of next year that she will invest as well. You should inform the customer that:
-because of the fund's "letter of intent" feature, you will be able to offer her a 1% sales charge on Class A shares
All of the following statements are true about exchange traded index funds EXCEPT exchange traded index funds:
-can be traded at no commission cost to the customer
Shareholders in a management company have all of the following rights EXCEPT the right to:
-choose the broker who executes the portfolio transactions
The owner of a variable annuity has all of the following rights EXCEPT the right to vote:
-for distributing income and capital gains
During the accumulation phase of a variable annuity:
-funds cannot be distributed to unit holders -as interest, dividends, and capital gains are received, these must be reinvested in more accumulation units -payments can be made into the plan; but distributions may not be taken from the plan
A customer purchases a variable annuity contractual plan with plan completion insurance. This means that if the customer dies prior to completion of the contract, the:
-insurance company pays the custodian bank the balance due on the contract
Typically, the largest expense associated with running a mutual fund is (are) the:
-management fee
Typically, accumulation units of variable annuities represent an investment interest in underlying:
-mutual fund shares
A customer asks the following; "One of my neighbors was talking about his investment in an ETF (Exchange Traded Fund) and said that it is tax-efficient. Is this true?" The registered representative should respond that:
-mutual funds are obligated to distribute capital gains to their shareholders once a year, which are taxable; whereas exchange traded funds are not under this obligation, so capital gains taxation generally occurs when the shares are sold
A customer is considering the purchase of $60,000 of ABC Growth Fund, to pay for his 13 year old child's undergraduate college education starting when the child reaches age 18. The fund offers the following share classes:
-purchase Class A shares
A fund that distributes at least 90% of its Net Investment Income to shareholders is termed a(n):
-regulated fund -Reason: A fund that distributes at least 90% of Net Investment Income to shareholders is "regulated" under Subchapter M of the Internal Revenue Code and pays no tax on the distributed amount.
A variable annuity is a(n):
-security regulated under the Investment Company Act of 1940 -security that must be sold with a prospectus
The provisions of the Investment Company Act of 1940 include all of the following EXCEPT:
-setting maximum sales charges on mutual fund purchases
A customer wants to switch between 2 different mutual funds within the same "family". You should tell the customer that:
-taxes will be due if the fund shares that are sold have appreciated
Dollar cost averaging will result in a lower average per share price only if:
-the price of the stock fluctuates -a fixed dollar amount is invested periodically
A 200% Leveraged Inverse Dow Jones Industrial Average Index ETF would be expected to move:
-up 100% in price when the DJIA moves down 50% -down 100% in price when the DJIA moves up 50%
A customer redeems 1,000 shares of XYZ Fund. The computed Net Asset Value per share is $13 and the Public Offering Price is $13.68. The fund has a 1/2% redemption fee. The customer will receive?
13 (net) x 1000 (shares) = 13,000 13,000 x .995 (.5%) = 12,935
