Packaged Products: Overview
The term "mutual fund" is the common name for a(n): A open end management company B closed end management company C fixed unit investment trust D participating unit investment trust
The best answer is A. A mutual fund portfolio is managed by an investment adviser and the fund continuously issues and redeems its common shares - so it is an "open end" management company.
An open-end management company is a: A mutual fund B publicly traded fund C fixed unit investment trust D real estate investment trust
The best answer is A. A mutual fund portfolio is managed by an investment adviser and the fund continuously issues and redeems its common shares - so it is an "open- end" management company.
Which of the following can be purchased on margin? A Mutual Funds B Initial public offerings of Closed End Funds C Closed End Funds trading on the NYSE D New issues of stock
The best answer is C. New issues are not marginable. Every issue of a mutual fund (open-end management company) share is a "new issue" as is the original offering of a closed-end fund. Both are made with a prospectus. However, once closed-end fund shares trade in the market, they are marginable like any other listed stock. Review
Which of the following MUST be a closed end fund? A Net Asset Value = $10 / Purchase Price = $9.50 B Net Asset Value = $10 / Purchase Price = $10 C Net Asset Value = $10 / Purchase Price = $10.50 D The fund is issued and redeemed at end-of-day
The best answer is A. A closed end fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed end fund share is purchased at the prevailing market price plus a commission. This contrasts to mutual fund (open end management company) shares that are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load." Thus, the minimum price for a mutual fund is Net Asset value(if the fund is no-load) ; while the only type of fund that can trade for less than Net Asset Value is a closed end fund.
The principal difference between an open end management company and a closed end management company is: A capitalization B management C investment objective D expense ratio
The best answer is A. Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund's stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange where they trade. Therefore, open-end and closed-end funds are capitalized differently. The expense ratio of a fund measures of the "cost" of running the fund, and applies to both open and closed end funds (the largest component of the cost of running either type of fund is the annual management fee).
An open end fund has a Net Asset Value of $10 per share. The minimum price at which a share can be purchased is: A $10 B $10 plus a commission C the market price D the market price plus a commission
The best answer is A. Mutual fund (open-end management company) shares are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load." For a "no load" fund, the customer would simply pay Net Asset Value - this is the minimum price for an open-end fund. This contrasts to a closed end fund, where the fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed-end fund share is purchased at the prevailing market price plus a commission.
Which of the following terms apply to publicly traded fund shares? A Negotiable with a one-time stock issuance B Redeemable with a one-time stock issuance C Negotiable with a continuous stock issuance D Redeemable with a continuous stock issuance
The best answer is A. Publicly traded fund shares (closed-end funds) represent an undivided interest in a portfolio of securities that is managed to meet an investment objective. A publicly traded fund has a 1-time stock issuance and then "closes" its books to new investment and then lists its stock on an exchange. The stock then trades like any other common stock (negotiable), except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is "closed-end" - that is, closed to new investment.
Publicly traded fund shares are: A Negotiable and Managed B Redeemable and Managed C Negotiable and Non-Managed D Redeemable and Non-Managed
The best answer is A. Publicly traded fund shares represent an undivided interest in a portfolio of securities that is managed to meet an investment objective. A publicly traded fund has a 1-time stock issuance and then "closes" its books to new investment and then lists its stock on an exchange. The stock then trades like any other common stock (negotiable), except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is negotiable it trades in the market like any other stock.
What is the Net Asset Value per share of a mutual fund? A Assets - Liabilities / Outstanding Shares B Assets - Operating Expenses / Issued Shares C Assets - Management Fees / Outstanding Shares D Assets - Redemption Fees / Issued Shares
The best answer is A. The formula for Net Asset Value per share of a mutual fund is the market value of all fund investments (assets) minus any fund liabilities (for example, mutual funds can borrow from banks within limits, so any bank loans would be deducted). This gives Net Asset Value (NAV). Dividing NAV by the number of outstanding shares gives NAV per share.
Which statement is TRUE about variable annuities? A Variable annuities are fixed unit investment trusts B Variable annuities are participating unit investment trusts C Variable annuities are only regulated under state insurance law D Variable annuities are held in the insurance company general account.
The best answer is B. A variable annuity is a participating unit investment trust. The trust is an "umbrella vehicle" used to collect payments from annuity contract holders. The trust invests the funds in one type of security only - shares of management companies. These are held in a "separate" investment account; and the performance of the securities in the separate account determines the amount of the annuity to be received. Because the investor bears the "investment risk" in this product, these are non-exempt securities that must be registered under the Securities Act of 1933 and sold with a prospectus; and are defined as an investment company type that is regulated under the Investment Company Act of 1940.
Which statement is TRUE when comparing types of management companies? A Open-end funds are publicly traded funds B Open-end funds are mutual funds C Closed-end funds have no management D Closed-end funds are not publicly traded funds since these are closed to the general public Review
The best answer is B. Management companies are either open-end or closed-end. Either has an investment manager, managing the fund based on a stated investment objective. An open-end management company is a mutual fund. Mutual funds (open-end funds) are "open" to new investment. Shares are issued and redeemed at the end of the day and do not "trade." A closed-end management company is "closed" to new investment. It has a 1-time share offering under a prospectus, and then the shares are listed and trade like any other stock.
A closed-end management company is a: A mutual fund B publicly traded fund C fixed unit investment trust D participating unit investment trus
The best answer is B. A publicly traded fund has a 1 time stock issuance; closes its books to new investment and then lists its stock on an exchange. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is a "closed-end" fund - that is, closed to new investment.
The term "publicly traded fund" is the common name for a(n): A open end management company B closed end management company C fixed unit investment trust D participating unit investment trust
The best answer is B. A publicly traded fund has a 1 time stock issuance; closes its books to new investment and then lists its stock on an exchange. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is a "closed-end" fund - that is, closed to new investment.
Which of the following investment company securities is NOT redeemable? A Open end fund shares B Closed end fund shares C Fixed unit investment trusts D Participating unit investment trusts
The best answer is B. Closed-end fund shares are not redeemable - they are listed on an exchange and trade like any other security. Open-end fund shares are redeemable with the fund itself and do not trade. Unit trust interests are also "redeemable" securities, in the sense that the trust sponsor makes a market in trust units, and will buy them back from the purchaser. There is no "trading" of trust units, however. Review
All of the following terms apply to mutual fund shares EXCEPT: A continuously issued B tradeable C redeemable D non-negotiable
The best answer is B. Mutual fund shares do not trade; they are non-negotiable. The shares are redeemed by the fund at Net Asset Value. The fund continuously issues and redeems its shares.
All of the following investment company securities are redeemable EXCEPT: A Open end fund shares B Fixed unit investment trusts C Closed end fund shares D Participating unit investment trusts
The best answer is C. Closed-end fund shares are not redeemable - they are listed on an exchange and trade like any other security. Open-end fund shares (mutual funds) are redeemable with the fund itself and do not trade. Unit trust interests are also "redeemable" securities, because the trust sponsor makes a market in trust units, and will buy them back from the purchaser. Then the trust sponsor will resell that "slightly used" trust unit to someone else. There is no "trading" of trust units, however.
Which of the following is a redeemable security? A Corporate debenture B Closed-end fund C Open-end fund D Ginnie-Mae pass through certificates
The best answer is C. Open end funds are mutual funds. These are redeemable securities which do not trade. Closed end funds have a one time stock issuance and then are publicly traded. These are negotiable securities. They cannot be redeemed with the issuer. To "cash out," an investor simply sells them in the market like any other security. Corporate debentures and Ginnie-Maes are negotiable - they trade in the market.
What is defined as an investment company? A Private equity fund B REIT C UIT D DPP
The best answer is C. A UIT is a Unit Investment Trust. This is a type of investment company defined under the 1940 Act. The Investment Company Act of 1940 also defines management companies and face amount certificate companies as investment companies. A private equity fund is a limited partnership private placement investment. A REIT is a Real Estate Investment Trust - it is not an investment company because it is not investing in securities. A DPP is a Direct Participation Program - these are tax-sheltered limited partnership investments. Review
All of the following are defined as investment companies under the Investment Company Act of 1940 EXCEPT: A Management Company B Unit Investment Trust C Hedge Fund D Face Amount Certificate Company
The best answer is C. A hedge fund is not defined under the Investment Company Act of 1940 as an "investment company" since these products are generally sold as private placements to accredited investors. The defined types of investment companies under the 1940 Act are: face amount certificate companies; unit investment trusts; and management companies.
The essential difference between an open end fund and closed end fund is that a(n): A open-end fund is managed; while a closed-end fund is not managed B closed-end fund is managed; while an open-end fund is not managed C open-end fund has a different capital structure than a closed-end fund D open-end fund computes Net Asset Value daily; while a closed-end fund does not
The best answer is C. Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund's stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange where they trade. Therefore, open-end and closed-end funds are capitalized differently. Both open-end and closed-end funds compute Net Asset Value per share daily. Review
Mutual fund shares are: A Negotiable and Managed B Negotiable and Non-Managed C Redeemable and Managed D Redeemable and Non-Managed
The best answer is C. Mutual fund shares represent an undivided interest in a portfolio of securities that is managed to meet an investment objective. Mutual fund shares do not trade - they are not negotiable. The shares are issued by the fund when a purchase is made and are redeemed by the fund when the shares are sold. The fund continuously issues and redeems its shares. Review
What determines the purchase price of a share of a closed-end management company? A The Board of Directors of the company B The next computed NAV after the order is received C The current bid price in the market where the security trades D The supply and demand for the shares in the market Review
The best answer is D. Closed-end fund shares are listed and trade in the market like any other stock. They are negotiable securities and are not redeemable. Remember, it is open-end fund shares that are redeemable. When an order is placed to buy any share in the market, the customer pays the ask price. When a customer places an order to sell, the customer receives the bid (lower) price. Since this is an order to buy in the market, it is not filled at the bid - rather, it is filled at the ask price. So this becomes a economics question - what determines the price of anything in a marketplace - supply and demand!
All of the following statements about investment company securities are correct EXCEPT: A Open end fund shares are redeemable B Closed end fund shares are negotiable C Fixed unit investment trusts are redeemable D Participating unit investment trusts are negotiable
The best answer is D. Closed-end fund shares are not redeemable - they are listed on an exchange and trade like any other security. Therefore, they are negotiable securities. Open-end fund shares (mutual funds) are redeemable with the fund itself and do not trade. They are non-negotiable Unit trust interests are also "redeemable" securities, because the trust sponsor makes a market in trust units, and will buy them back from the purchaser. Then the trust sponsor will resell that "slightly used" trust unit to someone else. There is no "trading" of trust units, however. Participating UITs are the structure for variable annuity contracts. The trust is an "umbrella vehicle" used to collect payments from annuity contract holders. The trust invests the funds in one type of security only - shares of management companies. These are held in a "separate" investment account; and the performance of the securities in the separate account determines the amount of the annuity to be received. These are non-negotiable securities.
What is a characteristic of a Unit Investment Trust? A High portfolio turnover B Disclosure of the identity of the investment adviser C Board of directors overseeing investments D Securities that are redeemable with the sponsor
The best answer is D. Unit Investment Trusts (UITs) create a fixed portfolio, transfer it into a trust, and then sell units of the trust (typically $1,000 amounts) that are sold to investors. For that $1,000 investment, the client gets a piece of a diversified portfolio. Once the trust is created, the portfolio does not change. There is no investment adviser and no management fees. There is no Board of Directors (as is the case with a mutual fund) - rather there is a Board of Trustees. The true statement is that the securities are redeemable. There is no trading. The sponsor will buy back trust units from clients that wish to sell. These "slightly used" units are then resold to other investors by the sponsor.
A variable annuity is a: A face amount certificate company B management company C fixed unit investment trust D participating unit investment trust
The best answer is D. A variable annuity is a participating unit investment trust. The trust is an "umbrella vehicle" used to collect payments from annuity contract holders. The trust invests the funds in one type of security only - shares of management companies. These are held in a "separate" investment account; and the performance of the securities in the separate account determines the amount of the annuity to be received. Review
The term "negotiable" describes all of the following EXCEPT: A common stock B preferred stock C rights D mutual funds Review
The best answer is D. Common stock, preferred stock, ADRs, rights and warrants are all negotiable, meaning that they are traded in the public markets. Non-negotiable securities do not trade - rather they are purchased from the issuer and redeemed with the issuer. Mutual funds are redeemable securities. Review
