SIE Unit 4 Qbank

ACE, an open-end investment company, operates under the conduit, or pipeline, tax theory. Last year, it distributed 91% of all net investment income as a dividend to shareholders. Therefore, which of the following statements is true? A) ACE paid taxes on 9% of its net investment income last year. B) ACE paid no taxes last year because it qualified as a regulated investment company under IRC Subchapter M. C) ACE paid taxes on 9% of its net investment income and capital gains last year. D) ACE paid taxes on 91% of its net investment income last year.

ACE paid taxes on 9% of its net investment income last year. ACE pays taxes on any portion of income it does not distribute, as long as it distributes at least 90%; ACE paid taxes on 9%.

Which of the following issues only common stock? A) An open-end management investment company B) A face-amount certificate company C) An equity unit investment trust D) A closed-end management investment company

An open-end management investment company

Which of these investment companies trade in the secondary market? A) Unit investment trusts B) Open end funds C) Closed end funds D) Face amount certificates

Closed end funds Another name for closed end funds is publicly traded funds because they trade in the market like stock of other companies. The other three investment companies listed here are purchased and redeemed through the issuer (a primary market transaction).

Which of the following would be included in a mutual fund's list of expenses? 1) Shareholder records and service 2) Investment advisor's fee 3) Broker-dealer sales charges 4) Underwriter's sales loads

I and II Costs to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The costs paid in the form of sales charges (loads) to an underwriter or broker-dealers selling mutual funds to the public may never be treated as an expense to the fund. They are expenses to the investor.

Which of the following are the most likely to make monthly or quarterly payments for the life the investor? 1) Fixed annuity 2) Unit investment trust (UIT) 3) Mutual fund 4) Variable annuity

I and IV Both a fixed and variable annuity is an insurance contract designed to provide retirement income. The term annuity refers to a stream of payments guaranteed for a certain period including the life of the annuitant. In the case of a variable annuity, the actual amount to be paid out may or may not be guaranteed, but the stream of payments itself is. Because an annuity can provide an income for life, the contract has a mortality guarantee. Mutual funds and UITs have no such guarantee.

Which type of shares allow the investor to buy and sell the shares at NAV and have a 12b-1 fee of 0.25% or less? A) Class B shares B) Class C shares C) No load D) Class A shares

No load No load funds have no sales charge and are limited to a 12b-1 fee of 0.25% annually. Class C shares charge a level load built into the expense ratio, usually as a 12b-1 fee. Class B shares have back-end loads that reduce over time (Contingent deferred sales charge, or CDSC). Class A shares charge an upfront load.

A company has just conducted a stock offering, by prospectus, through an investment banker. The proceeds of the offering are used to purchase a portfolio of securities. The stock, now in the hands of the public, is freely traded in the secondary market, and the portfolio is managed to generate maximum profit according to a specific investment objective. The company must be A) a mutual fund. B) a closed-end company. C) a fixed UIT. D) a nonfixed UIT.

a closed-end company.

An investor has entered into a contract to pay an investment company a specific sum of money in exchange for the company's agreement to pay the investor a specific (larger) sum of money on a specific date in the future. The investment company must be A) a face-amount certificate company. B) a mutual fund. C) a unit investment trust. D) a closed-end investment company.

a face-amount certificate company. A face-amount certificate company offers the investor a certificate with a face amount on it. The investor buys it for a discount from the face amount, with the agreement being that the company will pay the investor the face amount on a specific date in the future.

If the portfolio of a variable annuity separate account is directly and actively managed by the insurance company, the separate account must be registered as A) a closed-end management investment company. B) a face-amount certificate company. C) an open-end management investment company. D) an equity unit investment trust.

an open-end management investment company. If managed by the insurance company's own investment advisor, a separate account must register as an open-end company. If it is managed by a third party, it must register as a unit investment trust.

Which of the following are true regarding mutual fund sales charges? 1) They are used to defray fund expenses, such as operating costs and salaries. 2) They are set by the fund's transfer agent. 3) They are not an expense to the fund, but to the investor. 4) They are used to compensate the fund's underwriter and sales representatives.

3 & 4 Sales charges are not among the standard business expenses of a mutual fund and may not be considered part of them. They are intended to compensate the underwriter and broker-dealers and their sales representatives who sell the fund shares to the public, and are thus expenses to the investor, not to the fund.

Which of the following investment companies do not redeem their shares? A) Open end funds B) Unit investment trusts C) Closed end funds D) Face amount certificates

Closed end funds

Which of the following investment companies has an actively managed portfolio? A) Closed-end company B) Debt fixed unit investment trust (UIT) C) Equity fixed unit investment trust (UIT) D) Face-amount certificate company

Closed-end company The portfolios of both face-amount certificate companies and UITs are nonmanaged. The closest they come to management is when the securities to make up the portfolio are selected. After that, the portfolio does not change. Closed-end companies have an investment adviser who actively manages the portfolio, buying and selling securities.

Which of the following investment companies terminates business on a predetermined date? A) Hedge fund B) Fixed unit investment trust (UIT) C) Nonfixed unit investment trust (UIT) D) Mutual fund

Fixed unit investment trust (UIT) A fixed UIT typically has bonds in its portfolio that mature on a specific date. Before that date, the trust buys and redeems units of beneficial ownership in the portfolio. When the bonds mature and pay off, the trust distributes the remaining interest and principal to the current unit holders and dissolves.

Which is the most common way investors pay a mutual fund's sales charge?

Front-end load

Which of the following would have no effect on the NAV per share of a mutual fund share? A) Portfolio securities had to be sold for a big capital loss. B) The fund receives a dividend from one of the portfolio stocks. C) The fund pays its monthly operating expenses like utility bills. D) The portfolio's market value undergoes a large increase.

Portfolio securities had to be sold for a big capital loss. Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share.

Which of the following would have no effect on the NAV per share of a mutual fund share? A) The portfolio's market value undergoes a large increase. B) The fund receives a dividend from one of the portfolio stocks. C) Portfolio securities had to be sold for a big capital loss. D) The fund pays its monthly operating expenses like utility bills.

Portfolio securities had to be sold for a big capital loss. Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share.

All of the following actions would cause the NAV per share of a mutual fund to decrease except A) a large number of shareholders make withdrawals from the fund. B) the fund distributes capital gains. C) the fund distributes dividends. D) liabilities increase.

a large number of shareholders make withdrawals from the fund. When shareholders redeem shares the assets in the fund go down, but the number of shares also decrease proportionally, so the NAV per share is unchanged. In a similar way, when investors purchase shares the assets and the outstanding share increase proportionately, so the NAV remains unchanged. In the other responses the assets decrease with no proportional decrease in the number of shares, so NAV would decrease.

All of the following actions would cause the NAV per share of a mutual fund to decrease except A) a large number of shareholders make withdrawals from the fund. B) the fund distributes dividends. C) the fund distributes capital gains. D) liabilities increase.

a large number of shareholders make withdrawals from the fund. When shareholders redeem shares the assets in the fund go down, but the number of shares also decrease proportionally, so the NAV per share is unchanged. In a similar way, when investors purchase shares the assets and the outstanding share increase proportionately, so the NAV remains unchanged. In the other responses the assets decrease with no proportional decrease in the number of shares, so NAV would decrease.

If a fund sponsor allows an investor to move funds from one fund to another within its fund family, this is called A) a reinvestment right. B) an exchange privilege C) a right of accumulation. D) a 12b-1 waiver.

an exchange privilege This is an example of an exchange (or conversion) privilege.

If the portfolio of a variable annuity separate account is directly and actively managed by the insurance company, the separate account must be registered as A) an open-end management investment company. B) an equity unit investment trust. C) a closed-end management investment company. D) a face-amount certificate company.

an open-end management investment company. If managed by the insurance company's own investment advisor, a separate account must register as an open-end company. If it is managed by a third party, it must register as a unit investment trust.

All of the following would be included in the expense ratio of a fund except A) front-end or back-end load. B) salaries and administrative fees. C) portfolio management fee. D) 12b-1 fee.

front-end or back-end load The expense ratio includes ongoing operating expenses but not sales charges. A front- or back-end load is a sales charge.

Class C mutual fund shares are also known as

level-load shares.

open end investment companies

managed by the insurance company's own investment advisor new shares are continuously being offered and are unlimited in number mutual funds dont trade in the secondary market redeem shares

All of the following are identified as types of investment companies in the Investment Company Act of 1940 except unit investment trust. municipal bond pool. face-amount certificate company mutual fund.

municipal bond pool.

A variable annuity's investment return each month is based on A) the performance of the insurance company's general account. B) the performance of the separate account. C) the contracts stated guaranteed monthly return. D) the assumed interest rate stated in the contract.

the performance of the separate account. A key feature of the variable annuity is that the premium is invested into the insurance company's separate account rather than the general account. It is the performance of the separate account that provides the annuity's investment return each month. There are no guarantees as to the separate account performance or return each month.

At a shareholders' meeting, a mutual fund investor might be called upon to vote on any of the following except 1) changes in membership in the board of directors (BOD). 2) whether to sell a certain company's stock out of the portfolio. 3) approval of the investment adviser's contract. 4) changing to a new landscaper for the fund's headquarters.

1 & 4 Like other shareholders, mutual fund investors vote their shares on crucial corporate decisions, such as membership of the board, and approval or ratification of an investment adviser's contract. Which stocks to sell out of the portfolio is up the investment adviser. Day-to-day business decisions, such as those regarding contractors to employ, is up to those who report to the BOD.

Which of the following would cause a change in the net asset value (NAV) of a mutual fund share? (2 options) 1) Many shares are redeemed. 2) Securities in the portfolio are sold for a capital gain. 3) The fund pays a small dividend. 4) The market value of the portfolio declines.

3) The fund pays a small dividend. 4) The market value of the portfolio declines. Paying a dividend would reduce the net assets of the fund without reducing the number of shares outstanding, which would reduce the NAV per share. A decline in the market value of the portfolio would have the same effect. Sales and redemptions of shares change the net assets but also change the number of shares outstanding to the same degree, leaving the NAV per share unchanged. Selling securities for a capital gain simply replaces securities in the portfolio with an equivalent amount of cash, leaving the NAV unchanged.

The sales charge for Class A shares may not exceed A) 8.5% of the total investment. B) 8.5% of the NAV of the shares purchased. C) 6.25% of the NAV of the shares purchased. D) 6.25% of the total investment.

8.5% of the total investment.

Under the Investment Company Act of 1940 all of these are examples of management companies except A) A growth fund option for a VA. B) An S&P 500 Index Trust ETF. C) A Windmill Income UIT. D) A Windmill Income Fund, an exchange-listed:closed-end fund.

A Windmill Income UIT. Unit investment trusts are investment companies, but not management companies under the act. Closed-end funds, ETF's, and separate accounts are all types of management companies.

Regarding sales loads, management fees, and operating expenses for mutual funds, which of the following is true? A) All reduce investor returns because they reduce the amount of money available for the fund to invest. B) Sales loads increase investor returns because they are received by the fund increasing the amount they have to invest. C) Only management fees and operating expenses reduce investor returns by reducing the amount of money available for the fund to invest. D) All increase investor returns because each is received by the fund increasing the amount they have to invest.

All reduce investor returns because they reduce the amount of money available for the fund to invest. Sales loads go to the underwriters or broker-dealers selling the shares for the fund. Therefore, they are subtracted from the dollars invested and in that light reduce possible returns for investors. Management fees and operating expenses are ongoing costs to the fund and, therefore, reduce the dollars that can be invested, again reducing potential returns.

Under the Investment Company Act of 1940, which of the following is not considered an investment company? A) Separate account within a variable annuity B) Unit investment trust C) Face-amount certificate company D) Hedge fund

Hedge fund Investment companies include face-amount certificates, unit investment trusts, and management companies (both open- and closed-end). The separate account within a VA is a type of open-end management company. Hedge funds are organized as private investment companies (often limited partnerships), which are excluded under the definition of investment company under the Investment Company Act of 1940.

Under the IRC Subchapter M, if the WWF Fund only distributes 85% of its net investment income to its shareholders, then which of these is true? 1) The fund must pay taxes on the undistributed 15% of net investment income. 2) The fund must pay taxes on 100% of the net investment income. 3) The shareholder pays no tax if the income is reinvested. 4) The shareholder must pay taxes if the income is received in cash or reinvested.

II and IV To avoid triple taxation according to the IRC Subchapter M, an investment company must distribute at least 90% of its net investment income. Since WWF Fund only distributed 85% of its net investment income, it must pay taxes on 100% of the net investment income. Shareholders always pay taxes on taxable income whether received in cash or reinvested.

The Windmill Growth Fund has breakpoints at $10,000, $25,000, and $50,000. Your customer places an unsolicited purchase through you for $47,000. You place the trade as requested without question or comment. This action is A) acceptable because the transaction is unsolicited. B) acceptable in all situations. C) unsolicited trade are not allowed in mutual funds. D) a rules violation.

a rules violation. This trade, though unsolicited, would still require the representative to disclose the existence of the breakpoint. Unsolicited trades are allowed in mutual funds. The representative's duty is to disclose the existence of the breakpoint, failure to do so is a breakpoint sale.

Regarding open-end and closed-end investment companies, all of the following are true except A) both may avoid taxation by distributing all of their net investment income to shareholders. B) both may offer numerous investment objectives to select from. C) both offer an unlimited number of shares in a continuous public offering. D) both may be either diversified or nondiversified portfolios.

both offer an unlimited number of shares in a continuous public offering. The key difference between open-end investment companies and closed-ends is the fact that new shares are continuously being offered and are unlimited in number for open-end companies. In the case of the closed-end, the number of shares is fixed and once the initial public offering (IPO) is over, the only way to acquire shares is in the secondary market. Both types of funds may operate as regulated investment companies and avoid taxation, both may choose to be diversified or not, and both offer a wide variety of investment objectives.

closed end investment companies

have an investment adviser who actively manages the portfolio, buying and selling securities. the number of shares is fixed and once the initial public offering (IPO) is over, the only way to acquire shares is in the secondary market. publicly traded funds trade in the secondary market do not redeem shares

All of these are true regarding no-load shares except they A) offer more return-per-dollar invested versus load funds if investing results are the same. B) have fees associated with sales and redemptions. C) are redeemed with no charges or fees of any kind. D) are sold by the fund with no sales charges or fees of any kind.

have fees associated with sales and redemptions. No-load shares have expenses that are not considered sales charges. Some broker-dealers may charge fees for transactions, but these fees are not from the fund.

When a customer chooses to annuitize a variable annuity, all of these are factors the insurance company will use in calculating the initial payout amount except A) gender of the annuitant. B) balance of the separate account. C) age of the annuitant. D) historic inflation rate.

historic inflation rate. Insurance companies do not consider inflation when making this calculation. The components are GAAPI: gender, age, account balance, payout option, and interest rate (AIR).

Short-term purchases and sales of a mutual fund to take advantage of price fluctuation is known as A) market timing. B) front running. C) time spotting. D) price-spotting.

market timing The practice of market timing in mutual funds is not illegal but is rarely advantageous. Because many purchases and redemptions are involved over relatively short time periods, the sales charge lost each time the investor buys or redeems precludes making much in the way of profits. Most mutual funds in fact prohibit the practice.

Mutual fund shares are required to be priced at least

once per business day. Most funds are priced (calculate a new net asset value) at the close of the day, but the rule just requires that they be priced at least once per business day. They may perform this calculation more than once a day, but that is rare.

Mutual fund shares are required to be priced at least A) once per business day. B) hourly. C) each day at the opening of the market. D) continuously throughout the day.

once per business day. Most funds are priced (calculate a new net asset value) at the close of the day, but the rule just requires that they be priced at least once per business day. They may perform this calculation more than once a day, but that is rare.