Mutual Funds

A customer who seeks to supplement his retirement income and has a high risk tolerance would likely find which of the following securities most suitable? A) Municipal GOs B) High-yield bond funds C) Investment-grade bond funds D) Treasury receipts

High-yield bond funds High-yield bonds yield more than investment-grade bonds. Because the client has a high risk tolerance, these bonds are more appropriate than investment-grade bonds with their lower yields. Unless something indicates a high tax bracket, the answer will not be municipal bonds, and Treasury receipts are low risk with no current income.

Maximum gift or gratuity that is _________.

$100 Normal Business activity

B Share class

(Back end load) CDSC - diminishes to 0% after 5-7 years. than it converts to A shares. Have higher operating expenses smaller investments, longer time frames.

A Share Class

(Front-end Load) Sales charge is paid for by the Investor 8.5% maximum sales load.

3 reasons to buy a mutual fund

1. Professional Management 2. Diversification(75-5-10) 3. Ease of Ownership

REIT

1. professional Management 2. Diversification 3. Ease of Ownership 4. 90% pass through

Letter of Intent

13 Months Can be backdated 90 days Based on dollars invested

An investment company registered under the Investment Company Act of 1940, whose specific purpose is to aid in the promotion and development of small businesses, is A) a business development company. B) a venture capital fund. C) a growth mutual fund. D) a private equity fund.

A) a business development company. Business development companies (BDCs) were created in 1980 by an act of Congress. Their purpose is aiding small businesses. As you can tell, they are appropriately named. Although private equity funds and venture capital funds may do that, neither of them are registered investment companies under the Investment Company Act of 1940.

When speaking to a customer about exchange-traded funds (ETFs), a registered representative could accurately state that these funds A) do not have the same potential tax consequences as mutual funds, such as making capital gains distributions annually. B) cannot be purchased using traditional limit or stop orders. C) can be purchased only by paying a sales charge added to the net asset value. D) cannot be bought on margin.

A) do not have the same potential tax consequences as mutual funds, such as making capital gains distributions annually. With ETFs, portfolio turnover rate is minimized because they do not have to buy and sell shares within their portfolio to accommodate shareholder purchases and redemptions. This can affect the potential tax consequences. While an ETF can make a capital gains distribution, they generally do not—unlike a mutual fund, which generally would make such distributions on an annual basis. ETFs can be traded like other exchange products using traditional stock trading techniques and are priced by supply and demand. Customers pay commissions, not sales charges.

The Investment Company Act of 1940 describes several different classifications of investment companies. Two of those are the unit investment trust (UIT) and the open-end management investment company. In general, when referring to an open-end company, the subject is a mutual fund. One respect in which a unit investment trust (UIT) differs from a mutual fund is that A) the portfolio is unmanaged. B) UITs do not compute net asset value (NAV). C) investors in mutual funds may redeem their ownership interests. D) the UIT requires initial capitalization of $1 million.

A) the portfolio is unmanaged. The most significant distinguishing characteristic of a UIT compared with other investment companies is the lack of ongoing portfolio management. Once the initial portfolio is assembled, it remains fixed until the termination date. As with other investment companies, the minimum initial capitalization is $100,000. UITs, just as mutual funds, offer redeemable securities, and both types of investment companies compute their NAV.

An investor reading the annual report of an investment company notices that among the company's expenses was the payment of interest on outstanding bonds. The company also paid dividends on preferred stock. This investment company is A) an exchange-traded fund. B) a closed-end management investment company. C) a balanced open-end mutual fund. D) a bond and preferred stock mutual fund.

B) a closed-end management investment company. It is the closed-end management investment company that is allowed to have bonds and preferred stock in its capitalization. Open-end investment companies (mutual funds and ETFs) can only issue one class of stock (common). Do not confuse an investment company's capitalization with the contents of its portfolio

In most cases, a mutual fund is structured as a corporation. Because of certain tax regulations, it is important for the fund to compute its net investment income. That computation is A) dividends minus interest received on portfolio securities, minus the operating expenses of the fund. B) interest plus dividends received on portfolio securities, minus the operating expenses of the fund. C) interest minus dividends received on portfolio securities, minus the operating expenses of the fund. D) interest plus dividends received on portfolio securities, plus realized capital gains, minus the operating expenses of the fund.

B) interest plus dividends received on portfolio securities, minus the operating expenses of the fund. The net investment income (NII) of a mutual fund is the gross investment income of the fund minus the fund's operating expenses. The gross investment income is the sum of the interest and dividends received on the holdings in the fund's portfolio. Subtracting the operating expenses results in the net investment income. In general, mutual funds will qualify as regulated investment companies and follow the pipeline or conduit theory. Doing so requires that a minimum of 90% of the NII be distributed to investors in the form of dividends. Any portion not distributed is taxable to the fund. Capital gains distributions are treated separately and also have a 90% distribution requirement.

Dollar cost averaging (DCA) will always result in a lower cost per share than the price paid per share except A) when the price for each purchase is decreasing. B) when the price for each purchase is the same. C) when the price for each purchase is fluctuating.. D) when the price for each purchase is increasing.

B) when the price for each purchase is the same. There are two requirements for a dollar cost averaging program to work. The first is that the same amount must be invested at each specified interval. The second is that the price per transaction does not remain the same. If that is the case, then the average cost per share and average price paid per transaction are the same. The price needs to move for DCA to show a benefit.

Money market mutual funds are highly recommended for those who A) are accumulating funds for retirement in 20 years. B) are aggressive investors looking for quick returns. C) have a specific need for funds within the next six months to a year. D) wish to save for college for their 10-year-old child.

C) have a specific need for funds within the next six months to a year. Money market mutual funds are like having cash in the bank. The returns are very low, but the safety and liquidity are very high. They are the perfect investment for parking money for the short term. Other than a small portion, perhaps 5%‒10% of the total portfolio, money market fund shares are generally not recommended for long-term investing. LO 8.g

Investors looking for preservation of capital will find money market mutual funds and bank-insured CDs to be appropriate vehicles. When comparing the two, it is important for a registered representative to point out that A) the redemption fees charged by money market mutual funds are comparable to the early withdrawal penalties on a CD. B) broker-dealers sell money market mutual funds, but not CDs. C) the bank CDs are insured by the FDIC while there is no assurance that the value of the money market fund will not lose money. D) money market funds are eligible IRA investments while bank-insured CDs are not.

C) the bank CDs are insured by the FDIC while there is no assurance that the value of the money market fund will not lose money. One of the key points that must be made when comparing a money market mutual fund investment to an insured bank CD is the FDIC insurance that applies only to the CD. Other than in very unusual (and not tested) circumstances would there be a redemption charge for a money market mutual fund; there generally is a penalty for early withdrawal from a CD. Many broker-dealers sell brokered CDs. These may or may not be FDIC insured and have other differences from those purchased directly from banks. They are issued by banks, with the broker-dealer serving as an intermediary. Both of these are eligible IRA investments.

All of the following are expenses to the operation of mutual funds except A) the custodian bank's charges. B) the fees paid to the fund's investment adviser. C) the compensation paid to the underwriter or distributor. D) the legal costs of SEC filings.

C) the compensation paid to the underwriter or distributor. The underwriters receive their compensation from the sales charges. Investors pay those charges rather than the fund itself.

An unmanaged portfolio is a characteristic of A) a single state municipal bond fund. B) a closed-end investment company. C) an open-end investment company. D) a unit investment trust.

D) a unit investment trust. The most significant distinguishing characteristic of a UIT compared with other investment companies is the lack of ongoing portfolio management. Once the initial portfolio is assembled, it remains fixed until the termination date. Closed-end and open-end companies are classified as management companies because of the ongoing portfolio management responsibilities. Unless something indicates to the contrary, when the exam refers to a fund, it is a mutual fund (open-end investment company)

There are risks inherent in any investment. One risk that index ETFs have that should be used to guide the investor's selection decision is A) regulatory risk. B) tax risk. C) market risk. D) tracking risk.

D) tracking risk. Any investment that attempts to track an index or other benchmark needs to be evaluated in terms of its tracking error. That is, how close does the performance of the portfolio, in our question the ETF, match up to that of the index? This tracking error or risk will, over the long run, cause the performance of ETFs tracking the same index to have differing results. Because the portfolios are essentially the same, the market risk of all ETFs tracking the same index will be the same. That should be true of the tax and regulatory concerns as well. All things being equal, an investor should want the ETF that has the least tracking error.

Closed end

DERP Declared date Ex-date- 1 bus day PRIOR to record date. set by UPC Record Date Payable date.

Open End

DREP Declared date Record date Ex-date - 1 bus. day after record date Payable date ALL SET BY THE BOD

DIE 90

Dividends + Interest - Expenses = NII 90% of NII distributed Regulated

POP =

NAV + Sales Charge

C share

No front-end load 12b-1 fee: Maxed at 75 basis points Shorter time horizons.

Truly no-load shares

No front-end or deferred sales charges Maximum .25% 12b-1 charge

Rights of accumulation

No time limit Growth counts

Open-End Mutual Fund

Primary Market Prospectus Required Must Redeem Shares at the next computation of NAV per share(once/bus. Day) - Forward Pricing Issues common stock only NO Secondary trading Price by formula(NAV + Sales Charge) 8 1/2% maximum sales charge Ed-date set by BOD(1 Bus. Day after record date)

Closed-End Fund

Secondary Market No prospectus after IPO Shares not redeemable. Shares sold in the secondary market Issues common stock, preferred, and/or bonds Secondary trading on exchange or OTC Price by supply and demand Commissions Ex-date set by the UPC(1 bus day before record date)

Max 270 days - money mkt fund

T-Bills Commercial Paper Bankers Acceptance Negotiable Jumbo CDs

When a mutual fund registers with the SEC under the Investment Company Act of 1940, it has the option to elect to be A) an ETF. B) open-end or unit investment trust. C) diversified or nondiversified. D) open-end or closed-end.

diversified or nondiversified. Mutual funds can be registered as diversified or nondiversified. The term mutual fund will always mean an open-end investment company. A closed-end company may be called a closed-end fund, but not a mutual fund. Although most ETFs are open-end investment companies, they are not mutual funds. LO 8.a