Mutual Fund Purchase and Withdrawal Plan
After opening an account with a mutual fund, in which of the following minimum amounts may an investor generally make additional periodic investments?
An amount that varies from fund to fund. Minimum investment amounts differ from fund to fund, and a registered representative must refer to the prospectus for each fund.
An investor wishes to start a dollar cost averaging program by investing $100 per month. Which of the following would be the least appropriate investment vehicles for this plan?
Closed-end investment company. Exchange-traded fund. Closed-end investment company shares and exchange-traded funds trade like any other stock. Smaller investment levels involve high commission costs relative to the amount being invested. Also, there are no provisions for rights of accumulation and reinvestment of distributions.
Which of the following apply to the holder of a ten-year contractual plan 24 months after the initiation of his plan?
He owns unit trust shares. If he terminates his plan early, he will receive the NAV of the mutual fund shares. Contractual plan companies are unit investment trusts; thus, a contractual plan holder owns unit trust shares. Early termination of any contractual plan results in money paid out to the plan holder. The plan holder receives shares only if the plan completes. Contractual plans are no longer sold, but there are still plans in effect.
If a mutual fund offers a fixed-time withdrawal plan, all of the following statements are true EXCEPT:
In a fixed-time withdrawal plan, the end date of the a fixed number of shares is liquidated each month plan is fixed, but the individual payment amount is uncertain. An unspecified number of shares is liquidated each month based on the number of months left to distribute and the NAV of the investment. ($10,000 /120 months =.$83.33.)
Which of the following statements are characteristics of a contractual plan holder
Receives a plan certificate. Owns units in a trust. A contractual plan holder receives a certificate evidencing ownership of shares held in trust by the plan company. The plan participant holds units in the trust, rather than specific mutual fund shares. Contractual plans are no longer sold, but many plans are still in effect.
Which of the following statements regarding a fixed-time withdrawal plan offered by a mutual fund are TRUE?
The amount received each month by the client may vary. No funds offer this type of withdrawal A fixed-time withdrawal plan of a mutual fund calls for an unpredictable amount to be paid out each month over a fixed period of time. By contrast, a fixed-dollar plan calls for a fixed amount to be paid out each month over an unpredictable period of time.
An investor put $400 a month into a contractual plan of a mutual fund for 12 months and wants to terminate the plan. If the fund used a 20% spread load the first year, and the current value of the account is $3,000, how much will the investor receive on termination of the plan?
The contractual plan has been sold under the provisions of the Investment Company Amendments Act of 1970. After 45 days, the investor will receive his account value only, or in this case, $3,000. Contractual plans are no longer sold, but many contracts are still in effect.
An investor has been investing $100 per month for the past three months. The purchase prices were $20, $25, and $10. What is average cost per share purchased?
The first purchase (at $20) acquired 5 shares ($100/$20), subsequent purchases acquired 4, and 10 shares respectively. That is a total of 19 shares with an outlay of $300. The result is an average cost per share of $15.79 ($300/19).
A contractual plan company is what type of investment company?
Unit investment trust A contractual plan company is a unit investment trust that purchases mutual fund shares for its customers on a contractual basis. Though contractual plans are no longer sold, there are still many such contracts in force.
Which of the following statements regarding dollar cost averaging is TRUE?
When the market fluctuates, it will result in a lower average cost per share than the average price per share. Dollar cost averaging is effective when the market price of securities is fluctuating and investors continue to invest a fixed amount of money every period. Under these circumstances, the average cost per share will be lower than the average price for shares over the same period.
Contractual plan companies are:
unit investment trusts. Contractual plans are no longer sold, but there are still contracts in effect. Contractual plan companies are registered as unit investment trusts and hold the shares of a mutual fund on behalf of the plan participants. Plan companies do not provide investment advice.
In a front-end load contractual plan in which $100 per month is to be invested over a ten-year period, what is the maximum sales charge that could be deducted from the first year's investment?
$600.00 The Investment Company Act of 1940 permits a 50% sales load on the amount invested in the first year. Your customer plans to invest $100 a month, or $1,200 the first year (50% of $1,200 is $600). Contractual plans are no longer sold, but there are still plans in effect.
If an investor starts to withdraw from a program that has $9,600 worth of funds, the first monthly payment of a ten-year self-liquidating program will be:
$80.00 The payment for the first month is determined by dividing the current balance by the total number of payments to be made, as follows: $9,600 / 120 payments = $80. Each month, the current balance would have to be recalculated to account for gains or losses in NAV and for payments that have been made. Then, the second month's payment would be determined by dividing the account total by 119, rather than 120.
Under the spread-load plan provision of the Investment Company Amendments Act of 1970, an investor may have no more than what percentage deducted from any one payment?
) 20% Contractual plans are no longer sold, but there are plans still in effect. Under the Investment Company Amendments Act of 1970, a spread-load plan may not take more than 20% of any single payment as sales charge.
Over the first four years, the average sales charge on a spread-load contractual plan can be no more than:
16% per year The Investment Company Amendments Act of 1970 state that a spread-load plan cannot take more than 20% of any plan payment as a sales charge and that the charges may not exceed an average of more than 16% during the first 4 years of the plan's investment. Contractual plans are no longer sold, but there are still plans in effect.
A customer canceling a contractual plan will have all of his sales charge refunded if he cancels the plan within:
45 days of the mailing of the notice by the custodian bank Under the Investment Company Amendments Act of 1970, a contractual plan holder must be allowed a full refund of sales charges if he returns his shares within 45 days of the mailing of the notice by the custodian bank (the free-look period). Contractual plans are no longer sold, but there are still plans in effect.
The maximum sales charge over the life of a contractual plan using mutual funds for its underlying investment is:
9% The maximum sales load permissible under either type of contractual plan (front-end load or spread-load) is 9% over the life of the plan. It should be noted that new contractual plans are no longer sold, though there are still such plans in force.
Regarding the Investment Company Amendments Act of 1970, what is the maximum sales charge that may be deducted over the life of a contractual plan?
9% Under a contractual plan arrangement, the maximum sales charge that may be deducted over the life of the plan is 9%. This holds for both 1940 and 1970 plans. Though contractual plans are no longer sold, many are still in force.
The maximum sales charge for a spread-load contractual plan is
9% over the life of the plan not more than 20% in any one given year For spread-load plans (from the amended Act of 1970), the maximum sales charge over the life of the plan is 9%, with no more than 20% levied in any one given year.
Which of the following withdrawal plans offered by the ABC Mutual Fund will pay the customer a fixed monthly payment?
A) Fixed-dollar withdrawal In a withdrawal plan, if one variable is fixed (such as fixed dollar), other aspects of the payment will vary. If a customer is receiving a fixed-dollar payment, the plan must be a fixed-dollar plan.
Two investors each have an open account in the ATF Mutual Fund, which charges a maximum sales charge of 8.5%. The first investor has decided to receive all distributions in cash, whereas the second investor is automatically reinvesting all distributions. How do their decisions affect their investments?
Cash distributions may reduce the first investor's proportionate interest in the fund. The second investor's reinvestments purchase additional shares at NAV rather than at the offering price. By electing to receive distributions in cash while others are purchasing shares through reinvestment, the first investor is lowering her proportionate interest in the fund. Cash purchases later would be at the POP, not the NAV, with no delay in payment of sales charges, and reinvested distributions are taxed just as cash distributions are.
An investor wishes to start a dollar cost averaging program by investing $100 per month. Which two of the following would be the least appropriate investment vehicles for this plan?
Closed-end investment company. Exchange traded fund. A commission is paid to purchase securities traded on an exchange. As a percentage of the amount invested, that commission can be quite steep on an investment as small as $100
Which of the following occurrences will result in the issuance of a Form 1099?
Dividends reinvested into a mutual fund Capital gains reinvested into a mutual fund Distributions from mutual funds are taxable events (whether reinvested or not) and are reported on IRS Form 1099.
If an investor has requested a withdrawal plan from his mutual fund and currently receives $600 per month, this is an example of what type of plan?
Fixed-dollar periodic withdrawal If the investor receives $600 a month, the withdrawal's dollar amount is fixed. Therefore, this must be a fixed-dollar plan.
Which of the following withdrawal plans would an investor select if she wanted to receive a fixed monthly payment from the investment company?
Fixed-dollar. A fixed-dollar plan is the only type of plan that fixes a definite dollar payment
A customer has a contractual plan. The customer's daughter is in college and needs money for expenses. The customer has been investing $150 per month into the contractual plan. What would you recommend she do to provide her daughter with expense money?
Give the daughter $100 per month and invest $50 per month instead of $150 per month into the contractual plan. The best choice is to reduce the contractual plan payments to $50 per month and give the daughter $100 per month. By doing so, the contractual plan remains intact, although the time necessary to accumulate the plan's stated investment is extended. By liquidating or withdrawing from the plan, the customer uses money that has been subject to heavy sales charges (50% or 20% loads). Clearly, using money reduced by heavy sales charges is not in the customer's best interest.
Which of the following would be a benefit to a customer investing in a contractual plan?
It is possible to invest relatively small dollar amounts each month. Contractual plans are no longer sold but, when in effect, are allowed monthly payments as low as $20 or even less. Most voluntary accumulation plans require much higher minimum investments
Which of the following statements regarding plan completion insurance for a contractual plan is TRUE?
It pays off the plan in a single payment if the plan holder dies Plan completion insurance in a mutual fund contractual plan is a life insurance policy. If the plan holder dies, the insurance company will pay a lump-sum amount to the plan custodian to pay off the remaining contractual plan payments. The fund shares then go to the planholder's beneficiary.
Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments?
Receiving cash distributions may reduce Customer A's proportional interest in the fund. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment, his proportional interest in the fund will decline. Automatic reinvestment is always at NAV.
A subscriber to a front-end load contractual plan is investing $100 a month for 10 years. What is the maximum sales charge that she will pay?
The maximum sales charge for any contractual plan is 9% over the life of the contract. $100 × 120 months = $12,000 × 9% = $1,080
If your customer is participating in a contractual plan, and 50% of the first year's payments are taken as a sales charge, what is the maximum allowable sales charge over the life of the plan?
The maximum sales charge on a contractual plan, whether front-end load or spread load, is 9% over the life of the plan. Contractual plans are no longer sold, but many contracts are still in effect.
Under the Investment Company Amendments Act of 1970, what is the maximum sales load that may be deducted over the life of a mutual fund contractual plan that operates pursuant to Section 27(h) of the Act?
The maximum sales charge permissible on the total investments paid into a contractual plan is 9%, whether the plan is a 1940 plan or a 1970, Section 27(h), plan
The result of dollar cost averaging is to:
The result of dollar cost averaging is to obtain a lower average cost per share than the average price per share. This is accomplished by making regular investments of a fixed amount when prices are fluctuating.
Which of the following is NOT true of periodic payment plans?
They are most suitable for investors who plan to retire within the next 12 months. Accumulation plans and other periodic payment plans are specifically designed for the long-term investment of funds. Such plans are not suitable for an investor who will soon retire.
Which of the following statements describe contractual plans?
They do not obligate a planholder to complete the contracted number of payments. They include refund provisions. Contractual plan companies are a form of unit investment trust. A planholder is not required to complete his plan. If he elects to withdraw, he will receive at least the NAV of the shares the plan has purchased for him.
If your customer owns $24,000 worth of Acme Invest Fund shares and chooses to have the money forwarded to her using a ten-year fixed-time withdrawal, she will receive which of the following?
Variable number of dollars for a fixed amount of time. Under a fixed-time withdrawal plan, only the distribution's time period is fixed. The amount of money received varies each month.
A customer is considering entering into an accumulation plan with his mutual fund. He is worried about committing to sending in so much per month that he may have trouble meeting the obligation, but he doesn't wish to commit to so little per month that his account does not build rapidly enough to meet his investment objectives. The registered representative explains that accumulation plans:
are binding on the mutual fund. are not binding on the investor. An investor is not obligated to meet the terms of an accumulation plan, even if it is a contractual plan that he has signed. If he cannot send money in for some period, he need not. The plan is, however, binding on the fund. When the fund does receive a payment, it must use it to purchase the appropriate shares.
If a client invests the same amount of money into a mutual fund at regular intervals over a long period of time, the result is a lower
cost per share than the average price per share By investing a predetermined amount of money periodically for a long period of time, the investor uses the concept of dollar cost averaging. The result is a reduced cost per share compared to the average market price.
A formula timing plan that consists of periodic purchases of a fixed dollar amount of stock regardless of price is known as:
dollar cost averaging There is no such thing as share averaging. Constant dollar and constant ratio plans do not involve periodic purchase of securities. They involve buying and selling equity and debt securities to keep either a constant dollar or constant ratio between the two. Dollar cost averaging calls for the investor to make regular purchases over a long period.
Each of the following are characteristic of a mutual fund voluntary accumulation plan EXCEPT
obligatory purchase goal. A voluntary accumulation plan is just that-voluntary, not binding. The company may require that the initial investment meet a certain minimum dollar amount. It may also specify that any additions meet set minimums (e.g., $50). The plan may qualify for breakpoints based on the accumulated value.
One risk of a withdrawal plan is that the:
principal value fluctuates. Withdrawal plans have no guarantee of payment; the investor's account value is subject to market fluctuations. Thus, there is uncertainty as to the amount available or the time required to withdraw it
In a contractual plan with completion insurance, upon the death of the plan participant, the plan custodian will:
receive the insurance proceeds and complete the plan immediately, turning the fund shares over to the beneficiary. Plan completion insurance provides for funds payable to the plan custodian, who, in turn, completes the plan and turns the shares over to the plan's beneficiary
Dollar cost averaging results in a lower average cost per share than the average price per share paid, only if the share price during the investment period:
shows any fluctuation Under dollar cost averaging, any fluctuation in the share price, up, down or both, will result in a lower average cost per share than the average price per share paid.
Your customer wishes to enter into a withdrawal plan with his mutual fund. In view of his financial needs, you recommend a fixed-dollar plan. Your explanation of how the plan works could include all of the following statements EXCEPT:
the customer will know in advance precisely when his account will be exhausted Because fund shares change in value from day to day, a fixed-dollar plan requires that a different number of shares be liquidated each month to yield the same dollar amount to be sent to the customer. Thus, with a fixed-dollar plan, though the investor knows how much he will receive each month, he cannot know in advance precisely when his account will be exhausted.
An investor in a spread-load plan wishes to terminate the plan after investing $150 per month for 8 months. Assuming the maximum sales charge has been levied, the investor is entitled to a refund of:
the next computed net asset value multiplied by the number of shares in the account. Once a spread-load contractual plan has been in effect for more than 45 days after the mailing of the plan certificate, there is no refund of sales charges.
All of the following statements regarding mutual fund withdrawal plans are true EXCEPT
while in effect, such plans allow for small monthly purchases of additional shares When a mutual fund withdrawal plan has been started, purchases of additional shares are generally not allowed.
