Module 7: Investment Companies Quiz 1
A mutual fund has a net asset value (NAV) of $14.20, a sales charge of 8%, and a 1% redemption fee. If an investor wants to redeem 500 shares of this fund, how much money would he receive?
$7,029. Don't forget the redemption fee. 500 shares x the net asset value (or bid price) of $14.20 = $7,100 less the 1% redemption fee ($71) = $7,029. The sales charge has nothing to do with this problem because you are already given the net asset value.
A mutual fund NAV is calculated to be $16 at the end of the day. The offer price for a minimal purchase is $17.39 with an 8% sales charge. A customer calls early in the day to make a purchase of $70,000 worth of the fund that day. The customer receives approximately how many shares? $50,000 - $75,000 @ 5%
4,157 shares. Since this is a quantity purchase, the investor receives the breakpoint discount. The breakpoint discount is represented by the sales charge of 5%, not the 8% sales charge for a minimal purchase. In this case, the $70,000 qualifies for a 5% sales charge. You can find the new offer price using the following formula and divide that offer price into the $70,000. POP = NAV + SALES CHARGE (DOLLARS) $ = $16 + (PERCENT) 100% = 95% + 5% 16 divided by .95 = 16.84 per share. $70,000 divided by 16.84 = 4,156.7, rounded to 4,157 shares. An easier and more accurate way to calculate the number of shares is to deduct the sales charge from the total purchase and then divide by the NAV since the sales charge has been paid. Remember 100% - 5% = 95%; $70,000 x 95% divided by $16 = 4156.25.
A mutual fund pays $0.30 in dividends and $0.75 in capital gains during the year. The offer (ask) price at the end of the year is $6.50. What is the current yield on this fund?
4.6%. You must remember that yield is calculated at a point in time, and it changes as the value of the shares change and as distributions change. In this case, what you get is the dividend and what you pay is the ask price. Do not consider the capital gain. We always use the dividend and the ask price. Then just do the division: $0.30 divided by $6.50 = 4.6%.
What kind of investment company makes no provision for future purchases or redemptions?
A closed-end management company. Closed-end investment companies issue stock only once. All the others issue shares and then redeem them from the investor. Open-end companies have a continuous offering, while face-amount certificate companies and unit investment trusts issue shares of stock that mature at a future date. Closed-end management company stock trades in the secondary market after being issued by the company.
A "sales breakpoint" of a mutual fund is:
A dollar amount for a purchase of a mutual fund where a volume sales charge discount is given. This level is represented in dollars, not the number of shares. A letter of intent can be obtained at any level, and can be backdated three months.
A mutual fund investor is concerned about the risk of her principal, but wants to generate income to supplement her income from Social Security and other investments. Which of the following investments would you suggest to the investor?
A government bond fund. Both the government bond and the high-yield bond funds would generate income. However, the first parameter is concerned about the risk of principal and the second is looking for income. If the first parameter is risk of principal, the best choice is a government bond fund. If the first parameter were looking for income and the second were risk of principal, the best answer would be the high-yield bond fund. If the question stated retirement, then the growth fund would be the best choice. If the question stated a particular industry, the sector fund would be best.
A money market mutual fund invests in all of the following, except: A. A non-negotiable certificate of deposit B. A banker's acceptance C. Commercial paper D. A repurchase agreement
A non-negotiable certificate of deposit. A mutual fund does not invest in non-negotiable CDs. Money market funds invest in negotiable CDs, which are very short-term (14 to 30 days), but not non-negotiable CDs. Non-negotiable CDs are long-term investments that may charge surrender fees for early withdrawal. Investment companies invest in commercial paper, banker's acceptances, and repurchase agreements, especially if the fund is a money market fund.
Which of the following statements is not true regarding sales breakpoints? A. Registered representatives are not required to inform customers about breakpoints, provided the customer receives a prospectus disclosing this information. B. Spouses investing together can qualify for breakpoints. C. Partnerships and investment clubs are not allowed to qualify for breakpoints. D. Registered representatives are required to inform customers of breakpoints even if a prospectus disclosing these is provided to the client.
Correct answer (false statement): Registered representatives are not required to inform customers about breakpoints, provided the customer receives a prospectus disclosing this information. Registered representatives are required to inform customers of breakpoints even if they receive a prospectus disclosing this information. Spouses investing together can qualify for breakpoints. Partnerships and investment clubs are not allowed to qualify for breakpoints.
An exchange-traded fund (ETF) is an investment company that invests in all the following, except: A. Shares of companies that mimic a major market index B. Shares of companies that are only in one country C. Shares of companies that have a certain market capitalization D. Shares of companies that are all on the stock exchanges and periodically change the investments
Correct answer (false statement): Shares of companies that are all on the stock exchanges and periodically change the investments. ETFs do not change their shares, unless there is a change in the index they are mimicking, or some other event would cause the change. Investment companies that buy and sell shares of companies are managed investment companies. ETFs are not managed.
An investor calls and asks you about purchasing ETNs on the NYSE. You tell the investor all of the following, except: A. The purchase price is determined by trading on the exchange. B. The investor will pay the public offering price plus a sales charge. C. The backing for the ETN is the promise to pay a specific price on a date set by the issuer. D. The ETN will not pay any dividends or interest and will only pay a specific value at maturity.
Correct answer (false statement): The investor will pay the public offering price plus a sales charge. They do pay a specific offering price, but not with a sales charge; rather, a commission is paid. There is a public offering price, but it can change during the day, subject to trading. The ETNs are backed by a promise to pay by the issuing bank or broker/dealer. No dividends or interest is paid, only a specific value at maturity.
An investor calls you to ask about hedge funds. She is interested in learning about the main investments transacted in hedge funds. Which three of the following are hedge fund investments? I. Derivatives & options II. Collateral mortgage obligations III. ETFs IV. Investment companies
I, II, and III. Derivatives and options are the investments that are used the most for hedge funds. Derivatives (puts and calls) are used for protection and to take advantage of the market. Hedge funds also use both inverse and leveraged ETFs to hedge stock positions in the U.S. However, hedge funds do not invest in investment companies since the investors would have to pay the management fee twice.
An investor has $72,000 to invest in mutual funds. He decides to invest equal amounts in three mutual funds. The broker does not tell the customer that the three funds offer reduced sales charges on investments in excess of $25,000. Based upon the above information, which of the following is true? I. The investor has achieved diversification by buying three mutual funds and will probably make a profit. II. The broker has violated the "breakpoint sale" provision of FINRA as to a quantity discount on a large purchase. III. The broker has not violated FINRA Rules of Fair Practice because he followed the customer's instructions and purchased the three different mutual funds.
II only. By not telling the customer of the reduced sales charges, the broker has violated the breakpoint sale provision of FINRA. If he had told the customer, or the customer had signed a letter of intent and then proceeded to buy the three mutual funds, no violation would have occurred. The broker didn't tell of the breakpoint, so he violated the rules, even though he did follow the customer's instructions. We cannot tell whether the customer has achieved diversification or not, and there is no sure profit.
Which of the following statements about a closed-end investment company is correct?
Its shares are sold in the open market at their current offering price. This is the only statement that is true about closed-end investment companies. The other three statements are true of open-end companies: They can only offer one type of stock -- common; they continually offer new shares; and they redeem their own shares. A closed-end company does none of these.
You have an investor in his early 30s who has done some investing. Right now he has four months of income to live on and wants to put some of that to good use by investing. A friend told him about leveraged ETFs and how they can double or triple the investor's money. He asks you how he could enter into these investments. What do you tell him?
Leveraged ETFs are not suitable for him. Leveraged ETFs are for sophisticated investors who have extra money, not for someone with a small savings account. Regardless of what this investor wants to accomplish, these risky investments are not a quick fix to make big bucks. The investor could lose it all very quickly.
The board of directors of a mutual fund would like to change the fund's investment objectives. This could be done provided:
More than 50% of the voting shares held by stockholders vote for the change. (Remember -- if given a choice between shares and stockholders, the shares vote, not the people.) Changes in policy must always be voted upon, no matter what choices the holders are given. In addition, more than 50% must agree to the change for it take effect. Management cannot make changes without shareholder approval.
SPDR funds, an exchange-traded fund, is which of the following types of investment companies?
Open-end unit investment trust. All exchange-traded funds are either an open-end unit investment trust (UIT) or an open-end investment company. The SPDR funds are unit investment trusts, and thus are an open-end UIT. It could be called an open-end investment company, but the true name is open-end UIT. If the UIT were not an answer choice, the next best answer would be open-end investment company.
An investor tells his registered rep he has just received $60,000. He wants to add to his other investments, and wants to get into telecommunication since many new companies will become big in the future. He wants to invest in them for his retirement. Which of the following would you suggest to the investor?
Sector mutual fund. There are misleading statements in here that you have to ignore. The first parameter is investments in one sector of the economy -- telecommunications. Yes, he is looking for growth and yes, he is looking for retirement, but the first parameter mentioned is one type of investment. That means sector fund. The growth fund and the venture capital fund are sucker answers. There was no mention on income, so the high-yield fund is out.
The primary difference between an open-end and closed-end investment company is:
The capitalization. Open-end companies issue common stock only, while closed-end companies issue common and preferred stocks and bonds. They both determine net asset value by dividing assets by shares, and they invest in the same types of stocks and bonds.
Which of the following is responsible for the safekeeping of the securities owned by a mutual fund?
The custodian bank. Shares are not given to the holders of the fund, but are held in a bank. The sponsor is the fund itself and must issue the stock; the registrar and transfer agent are used in changing a name on shares of stock from one owner to another owner
The redemption price of a mutual fund is synonymous with:
The net asset value minus a redemption fee, if any. The redemption fee is subtracted from this price. The NAV is the same as the bid price, not the offering price.
