UNIT #14: Types and Characteristics of Pooled Investments
Why would you suggest a client invest in international mutual funds or ETFs? Diversification Tax benefits Avoids having to pick individual stocks Greater regulatory controls A) I and III B) II and III C) I and IV D) I, II, III, and IV
A) 1 & 3 *An international mutual fund (or ETF) invests in the securities of companies that are not domiciled in the United States. Therefore, we have the benefit of added diversification. These pooled investment vehicles offer investors the specific benefit (whether foreign or domestic) of not having to worry about individual stock selection—the professional managers do that. There are no specific tax benefits to investing through the fund rather than directly and, in most cases, the regulatory controls in other countries do not offer the same degree of investor protection as those of the United States.
A client wishing to invest $10,000 in a tax-exempt unit investment trust would be acquiring A) units B) participation interests C) shares D) bonds
A) Units *Unlike mutual funds in which the purchaser acquires shares, in a unit investment trust, the acquisition is of trust units.
Asset-based sales charges will generally be lowest when holding A) Class C shares B) Class B shares C) Class A shares D) Class T shares
C) Class A *Class A shares have a front-end load, but a low- or no asset-based sales charge. Class B and C shares don't have a front-end load, but do have a higher asset-based sales charge. Class T shares always have a 12b-1 charge.
Compared to traditional investments, hedge funds and private equity are most likely to be more A) transparent. B) liquid. C) leveraged. D) leveraged and transparent.
C) Leveraged *Alternative investments tend to use more leverage and are typically less liquid and less transparent than traditional investments.
Under the Investment Company Act of 1940, which of the following are considered management companies? 1. Open-end companies 2. Closed-end companies 3. Unit investment trusts 4. Face-amount certificate companies A) I and III B) III and IV C) II and IV D) I and II
D) 1 & 2 *Management companies are subclassified into open-end companies (mutual funds) and closed-end companies. Unit investment trusts are a type of investment company that is not managed, as are face-amount certificate companies.
A mutual fund must redeem its tendered shares within how many days after receiving a request for their redemption? A) 10 days. B) 5 days C) 3 days D) 7 days
D) 7 Days *The 7-day redemption rule is required by the Investment Company Act of 1940.
Starflier Mutual Fund, regulated under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with approval of A) the fund's investment adviser B) a majority of the board of directors C) none of these; no need for approval D) a majority of the outstanding shares
D) a majority of the outstanding shares *Changes in investment policy require a vote of the majority of outstanding shares for approval.
A new customer has a $35,000 CD maturing in 2 weeks. With the objective of maximizing his income on capital invested, he wishes to invest the proceeds in a mutual fund. Which of the following types of funds should be recommended? A) A sector fund B) A venture capital fund C) A growth fund D) An income fund
D) An income fund *An income fund is just what the name implies; it invests for income (receipt of interest and/or dividends) that it can then distribute to investors in the form of dividends.
Hedge funds are issued by A) limited partnerships B) portfolio advisers C) Administrators D) investment companies
A) Limited Partnerships *Almost all hedge funds are issued as limited partnerships with the investment adviser (portfolio manager) having an investment in the fund.
Which of the following statements concerning hedge funds are TRUE? 1. Purchasers of hedge funds are generally required to be accredited investors. 2. Short sales by the fund are not allowed. 3. It is not uncommon for there to be a lock-up period that may last for as long one year or even longer. 4. It would be unusual for the fund managers to have an ownership interest in the fund. A) I and III B) II and IV C) I and IV D) II and III
A) 1 & 3 *Purchasers of hedge funds are usually required to be accredited investors. Hedge funds often have high liquidity risk due to the lock-up provision, which can restrict an investor's ability to liquidate the position. An advantage of hedge funds is their ability to sell securities short during bear markets, adopt risky arbitrage strategies, and otherwise take direct steps to maximize returns in both up and down markets. In almost all cases, the fund managers have a significant ownership position in the fund, or as the phrase goes, they have "skin in the game."
An investor invests $25,000 into the KAPCO Balanced fund. It would be unlikely for this investor to be required to pay a CDSC when redeeming A) Class A shares B) Class C shares C) Class B shares D) any shares, regardless of Class
A) Class A Shares *Class B shares are known for their back-end load. Class C shares usually only have one for 1 year; but, if the investor redeems within that period, there will be a CDSC. Class A shares do not carry a back-end load, except under conditions that are beyond the scope of this exam.
The Investment Company Act of 1940 requires certain types of investment companies to compute their net asset value on a regular basis. Excluded from that requirement are A) face-amount certificate companies. B) open-end management investment companies. C) closed-end management investment companies. D) unit investment trusts.
A) Face-amount certificate companies *The two investment companies offering redeemable securities, open-end funds, and UITs, must compute their NAV on a daily basis. Closed-end funds can do it daily; many compute every Friday. The concept of NAV makes no sense with a FACC.
When reading the prospectus for a fund, you notice that it states that the fund may make portfolio purchases on margin, take short positions, and use arbitrage techniques. This is most likely what type of fund? A) Hedge B) Exchange traded C) Index D) Closed end
A) Hedge *Margin trading and selling short are techniques commonly found in hedge funds, rather than in open-end or closed-end management funds or ETFs. Because hedge funds are considered private funds, exempt from registration, the offering document is called the private placement memorandum.
Which of the following statements regarding hedge funds is correct? A) Hedge funds are usually structured as a partnership. B) Hedge fund managers, like mutual fund managers, are compensated largely based on assets under management. C) Hedge funds are passively managed in an attempt to provide predictable returns for investors. D) Hedge funds are typically favored by inexperienced investors to hedge against losses they may experience as they gain investment savvy.
A) Hedge funds are usually structured as a partnership *Hedge funds are usually structured as a partnership with the general partner as investment manager and the investors as limited partners. Hedge funds are actively and aggressively managed, seeking superior returns and are best suited for wealthy, sophisticated investors. Under the typical 2% + 20% fee schedule, hedge fund managers are largely compensated for performance, not assets under management
When discussing the differences between purchasing a mutual fund and a hedge fund, the investor should be aware that A) hedge funds do not offer the transparency of mutual funds. B) hedge fund shares are generally listed on an exchange while mutual fund shares are not. C) managers of hedge funds are generally registered with the SEC while mutual fund managers are registered with the state(s). D) hedge funds only offer Class A shares while mutual funds offer many different classes.
A) Hedge funds do not offer the transparency of mutual funds *Because hedge funds are not registered with the SEC (or the states), there are limited disclosures - the transparency is not nearly what investors have with mutual funds. Mutual fund investment managers always register with the SEC and the same is true of most hedge fund managers, typically those with AUM of at least $150 million. Neither hedge funds nor mutual funds trade on listed exchanges and hedge funds do not have traditional share classes; they may offer a choice of different currencies, but that is totally different from the share classes of mutual funds.
Although investing in managed investment companies can provide many benefits, investors should be aware that disadvantages could include all of these EXCEPT A) limited liquidity B) poor management performance C) high expenses D) unpredictability of tax consequences
A) Limited liquidity *Open-end and closed-end are the 2 categories of managed investment companies. Liquidity is never a problem with open-end companies with the federal law requiring redemption at NAV within 7 days and, because almost all CEFs are traded on exchanges, they have a ready market as well. Management fees can be high and, because performance is due to the efforts of the portfolio managers, some just don't do very well. Finally, the investor has no say in when the fund elects to take gains or losses and that can have an impact on the investor's personal return.
The Investment Company Act of 1940 states that: A) open-end companies may issue common stock only B) it is unnecessary for the prospectus to disclose the management fee C) no more than 50% of the board of directors of an investment company may be officers or employees of the company or investment advisers to the company D) an investment company must have $5 million capital before its securities can be offered to the public
A) Open-end companies may issue common stock only. *Open-end companies may issue only common stock. The prospectus must state the management fee, and an investment company needs only $100,000 to offer itself to the public. In addition, no more than 60% of the board of directors can be made up of officers or employees of the company.
One of the most important definitions found in the Investment Company Act of 1940 is that of "investment company." Included in that definition are all of the following EXCEPT A) REITs B) unit investment trusts C) face-amount certificate companies D) management investment companies
A) REIT *Even though REITs (real estate investment trusts) share many of the same characteristics of investment companies, they are not included in the definition as found in the Investment Company Act of 1940.
One of the questions investors should ask when evaluating a mutual fund is about the tenure of the fund manager. This refers to A) the length of time the manager has managed the fund. B) the inability to discharge the manager. C) the fund's performance for the past 1, 5, and 10 years. D) the length of time the manager has been registered.
A) The length of time the manager has managed the fund *A fund manager's tenure refers to the length of time that person has managed the fund's portfolio. Unlike the academic term which generally means that the individual may not be terminated without just cause, management contracts for an investment company must be renewed each year (after the initial 2-year contract) so it is relatively easy to remove the manager.
Under the Investment Company Act of 1940, which of the following statements regarding the renewal provisions of an investment adviser's contract is NOT true? A) The renewal may be executed orally, provided it is done within 2 years of the initial contract. B) The renewal must state the adviser's compensation. C) The renewal must be approved by either majority vote of the board or majority vote of the outstanding shares, as well as majority vote of the noninterested members of the board. D) The contract must be terminable upon no more than 60 days' notice. Explanation
A) The renewal may be executed orally, provided it is done within 2 years of the initial contract. *When an investment company employs an outside investment advisory firm to manage its portfolio, the act requires a written contract setting forth the adviser's compensation. The contract is for 2 years initially and must be renewed annually thereafter. The contract must be initially approved by a majority vote of the outstanding shares and the noninterested members of the board of directors and annually renewed by either a majority vote of the board of directors or of the outstanding shares, as well as a majority vote of the noninterested members of the board. The contract must be terminable at any time, with a maximum of 60 days' notice and with no penalty, upon a majority vote of the board of directors or of the outstanding shares, and it must terminate automatically if assigned.
Which of the following least accurately describes hedge funds? A) They have a high degree of transparency. B) They require large entry-level investment amounts. C) Their investment style is generally aimed at producing returns in up or down markets. D) Many hedge funds can take short positions.
A) They have a high degree of transparency *Hedge funds are unregulated pooled investment vehicles with limited transparency. Because of the lack of transparency, they are generally only marketed to accredited investors. This is because they are considered too risky for the less financially-sophisticated investor. Minimum initial investment levels are usually high. Hedge funds can use sophisticated techniques such as short selling, leverage, and derivatives.
Why do some mutual funds offer Class A and Class B share options? A) To give investors the option of choosing how they wish to be charged for the purchase of their funds B) To differentiate between those shares sold directly from the fund's principal underwriter and those sold by broker-dealers C) Class A shares have lower management fees, while Class B shares have lower administrative costs D) To give investors the option of purchasing shares prior to or after 4:00 pm ET
A) To give investors the option of choosing how they wish to be charged for the purchase of their funds *Class A shares have a front-end load while Class B shares have a back-end load. The operating and administrative expenses are always higher on the Class B shares, but management fees are generally the same.
Which of the following investment vehicles provides for redemption by the issuer? A) Unit investment trust (UIT) B) Closed-end fund (CEF) C) Exchange-traded fund (ETF) D) Face amount certificate (FAC)
A) UIT *A UIT typically issues redeemable securities (or "units"), like a mutual fund, which means that the UIT will buy back an investor's "units," at the investor's request, at their approximate net asset value. ETFs and CEFs are traded in the secondary markets and investors sell their shares in the marketplace rather than redeeming them through the issuer. Face amount certificates are not redeemable - the investor's funds are returned when the debt is paid off.
"An investment company with a low expense ratio and a portfolio that doesn't change," is a description of A) a UIT B) an index fund C) a no-load fund D) an ETF
A) UIT *The key to this is that the portfolio does not change. Unit investment trusts (UITs) are characterized by a fixed portfolio; once put together, it remains until maturity of the bonds or liquidation of the equities. Index funds and ETFs do change their portfolios from time to time as the composition of the underlying index changes.
A high net worth client expresses an interest in adding a hedge fund to her portfolio and asks for your advice. Among the points you could make is that A) adding the hedge fund increases the portfolio's diversification B) she is probably not eligible to purchase a hedge fund C) she should limit her purchase to a hedge fund that is registered with the SEC D) hedge funds offer higher returns with less risk than similar investments
A) adding the hedge fund increases the portfolio's diversification *Diversification is increased by adding asset classes or, in this case, a sub-class. When we are told that she is a high net worth client, it means she meets the eligibility requirements for purchasing a hedge fund. Although many hedge fund advisers are registered with the SEC, the funds are not. Hedge funds carry a number of risks, so we can't refer to them as low-risk investments.
In order to qualify as a REIT, A) at least 75% of the assets must be invested in real-estate related assets, cash, and U.S. government securities. B) at least 90% of the assets must be invested in real-estate related assets. C) a mortgage REIT must have at least 75% of the assets in government-insured mortgages. D) at least 75% of the income must be paid out as dividends to investors.
A) at least 75% of the assets must be invested in real-estate related assets, cash, and U.S. government securities. *A REIT must be invested in real estate. By law, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. That 75% can also include cash and U.S. government securities. If it is a mortgage REIT, there is no specific requirement regarding government-insured mortgages. A REIT must distribute at least 90% of its income to investors, not 75%.
When comparing exchange-traded funds (ETFs) to mutual funds, a feature available in ETFs that is NOT found in the mutual funds would include the ability to A) be bought and sold at a profit the same day B) correlate to a specific index. C) reinvest dividend distributions D) represent an entire portfolio, or basket of securities.
A) be bought and sold at a profit the same day *Unlike mutual fund shares, ETF shares can be traded on an intra-day basis. Mutual funds are generally only priced once per day, after the market closes, but, with an ETF, you can buy and then sell an hour or two later at a profit. They are similar in that they both represent an entire portfolio or basket of securities and both can have portfolios correlated to a specific index. Dividend reinvestment is available on ETFs and mutual funds, although the process tends to be more efficient with the funds.
As defined in the Investment Company Act, investment companies include A) face-amount certificate companies, management companies, and unit investment trusts B) mutual funds, closed-end companies, and unit investment trusts C) open-end companies, closed-end companies, and unit investment trusts D) diversified companies, nondiversified companies, and face-amount certificate companies
A) face-amount certificate companies, management companies, and unit investment trusts *The act defines investment companies as being management companies, face-amount certificate companies, or unit investment trusts. Management companies are further categorized as being open-end or closed-end, diversified or nondiversified.
One way in which the method of capitalization of closed-end companies differs from that of open-end companies is that the closed-end company can A) issue more than 1 class of stock B) continuously offer additional shares C) permit reinvestment of dividends D) be listed on an exchange
A) issue more than 1 class of stock *Unlike open-end companies, which can only issue 1 class of stock (don't confuse this with different sales charge classes), closed-end companies can issue preferred stock. It is only the open-end company that continuously offers new shares, and both permit reinvestment of dividends. The fact that closed-end companies can be listed on an exchange is not a method of capitalization.
A hedge fund and a traditional mutual fund are similar in that A) their portfolio managers are required to adhere to the fund's stated objective B) both use long and short positions, swaps, and arbitrage C) both typically have low initial investment requirements D) both offer performance incentives to the fund manager
A) their portfolio managers are required to adhere to the fund's stated objective *Both hedge funds and mutual funds have stated objectives. It is expected by owners that the management with follow those objectives. Only the hedge fund always has performance incentives and only the mutual fund has a low initial investment requirement. Mutual funds are prohibited from selling short.
All of the following are characteristics of exchange-traded funds EXCEPT A) they are redeemable securities B) they are priced by supply and demand continuously during the trading day C) they are typically designed to track an index D) they generally have a lower expense ratio than comparable mutual funds
A) they are redeemable securities *Exchange-traded funds have many similarities to closed-end investment companies. They are traded based on supply and demand rather than redeemed and are typically designed to track a particular index, such as the S&P 500. In most cases, ETFs have lower operating expense ratios than mutual funds with similar objectives.
All of the following are true of REITs EXCEPT A) they must take equity or debt positions, never both B) in most cases, their shares are publicly traded C) they must distribute at least 90% of their net investment income for favorable tax treatment D) they must invest at least 75% of their assets in real estate-related activities
A) they must take equity or debt positions, never both *Hybrid REITs take both equity and debt (mortgage) positions. REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. Although there has been an increase in non-traded REITS in recent years, unless the question specified them, assume they are publicly traded.
All of the following would qualify as management companies EXCEPT 1. face-amount certificate companies 2. unit investment trusts 3. closed-end investment companies 4. open-end investment companies A) I and III B) I and II C) III and IV D) II and IV
B) 1 & 2 *As defined in the Investment Company Act of 1940, closed- and open-end funds are subclassifications of management companies (actively managed portfolios). Face-amount certificate companies and unit trusts are separate investment company classifications and do not have managed portfolios.
Potential investment company clients should be advised to investigate a fund by looking at which of the following? Investment policy Number of shares outstanding Custodian bank Portfolio A) II and III B) I and IV C) I and III D) II and IV
B) 1 & 4 *Investment policy, track record, portfolio, and sales load should all be researched when assessing a fund. The identity of the custodian bank for the fund, or number of shares outstanding, does not bear on its performance or suitability.
Which of the following statements regarding investment companies is not true? A) When investors redeem their open-end fund shares, they receive the net asset value (NAV) per share next computed after the redemption order was received. B) A management investment company can offer investors two ways of participating in the fund under management through the purchase of closed-end shares or, if the investor prefers, open-end redeemable shares. C) The Investment Company Act of 1940 classifies investment companies into 3 types: face-amount certificate companies, unit investment trusts, and management investment companies. D) When an open-end investment company, or mutual fund, registers its offering with the SEC, it does not specify the exact number of shares it intends to issue.
B) A management investment company can offer investors two ways of participating in the fund under management through the purchase of closed-end shares or, if the investor prefers, open-end redeemable shares. *A management investment company cannot offer investors two ways of participating in the fund under management. The fund must either be a closed-end fund with shares traded in the marketplace or an open-end fund with redeemable shares. The Investment Company Act of 1940 classifies investment companies into 3 types: FACs, UITs, and management investment companies. Redemption (or purchase) of open-end investment company shares is based on the forward pricing rule. Because the offering of open-end investment shares is continuous, it is impractical to specify the exact number that will be issued.
There are certain requirements for an investment to qualify as a REIT. Which of the following is not one of them? A) At least 75% of the REIT's annual gross income must be from real estate-related income such as rents from real property and interest on obligations secured by mortgages on real property. B) At least 75% of the REIT's taxable income must be paid out as dividends to investors. C) At least 75% of the assets must be invested in real-estate related assets, cash, and U.S. government securities. D) At least 90% of the REIT's taxable income must be paid out as dividends to investors.
B) At least 75% of the REIT's taxable income must be paid out as dividends to investors. *In order to qualify as a REIT, the REIT must distribute at least 90% of its taxable income, not 75%. At least 75% of the assets must be invested in real-estate related assets such as real property or mortgages. The same is true of the REIT's annual gross income.
Why are "country" funds organized as closed-end funds? A) Because redemption at net asset value within 7 days is assured B) Because it is often difficult to liquidate the foreign securities to get their value into the U.S. C) So that additional capital may easily be raised D) Because the United Nations Investment Act of 1952 requires that they all be closed-end
B) Because it is often difficult to liquidate the foreign securities to get their value into the U.S. *There are a number of funds that invest exclusively (or predominately) in the shares of companies domiciled (and traded) in a single country. Not all securities markets are as liquid as those in the United States, and many countries have currency restrictions limiting the amount of money that may be taken out of the country at any one time. Therefore, organizing as a mutual fund is not very practical. With no need to redeem shares, closed-end companies are the obvious solution. Please Note. In recent years, things have changed, and a majority of country funds today are now open-end companies (mutual funds). We are urging NASAA to remove or revise any questions that deal with "old" information and will update our questions (and LEM) when they do.
An investor is considering purchasing an equity exchange-traded fund (ETF) to further diversify his portfolio. All of the following are reasons for him to purchase this investment EXCEPT A) lower taxable distributions than most mutual funds. B) ETFs offer tax benefits similar to a limited partnership. C) lower annual expenses than those of mutual funds. D) shares may be purchased and sold throughout the day.
B) ETFs offer tax benefits similar to a limited partnership *Equity ETFs are organized as regulated open-end investment companies or unit investment trusts, not as as limited partnerships. That means the tax benefit of the flow-through of operating income or loss does not apply. As regulated investment companies, they must distribute at least 90% of their net investment income and capital gains. However, the way in which capital gains occur is different resulting is fewer taxable distributions than is the case with a mutual fund. Expenses are generally lower as well, and ETFs trade during the day just like any stock.
Clients should be aware of the potential effects of volatility on their portfolios. Which of the following would most likely have the lowest volatility? A) A government bond fund B) A money market fund C) A balanced fund D) A large-cap fund
B) Money market fund *Money market funds traditionally maintain a stable net asset value resulting in no market volatility.
A pooled investment fund buys all the shares of a publicly-traded company. The fund takes the company private, reorganizes the company, and replaces its management team. Three years later, the fund exits the investment through an initial public offering of the company's shares. This pooled investment fund is best described as A) a leveraged ETF. B) a private equity fund. C) a venture capital fund. D) a hedge fund.
B) Private Equity Fund *A private equity fund or buyout fund is one that acquires entire public companies, takes them private, and reorganizes the companies to increase their value. A hedge fund will rarely get involved with reorganizing an existing company. Venture capital funds invest in start-up companies. Leveraged ETFs do not take part in the management of their investments.
In a mutual fund portfolio, you might find all of the following EXCEPT A) covered calls B) short stock C) junk bonds D) index options
B) Short Stock *A mutual fund is generally prohibited by the Investment Company Act of 1940 Act from taking short stock positions. There are exceptions to this rule, such as in the case of hedge funds. Index options are permissible if they are consistent with the fund's stated objectives. Junk bonds or high-yield bonds are permissible in those high-income funds that authorize such an investment. Some funds may use covered calls to generate income.
A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100, even though the customer has made no new investments. Which of the following statements is TRUE? A) Shares held in escrow will be liquidated at the appreciated value. B) The agent should remind the customer of the letter of intent that was signed 12 months ago. C) The letter of intent is considered fulfilled. D) The investment no longer qualifies for a breakpoint.
B) The agent should remind the customer of the letter of intent that was signed 12 months ago. *The letter of intent is not satisfied by the price appreciation of the shares. A letter of intent must be met with dollars invested within 13 months, so the customer needs to invest an additional $7,000 to fulfill the letter of intent. The agent should remind the customer of the intention to qualify for the reduced sales charge. The provisions of the LOI hold regardless of the price appreciation. Shares will not be liquidated until 13 months have lapsed.
The dollar amount of purchase at which sales charges are reduced in the purchase of open-end investment company shares is known as A) the leverage point B) the breakpoint C) the basis point D) the load point Explanation Large purchases of investment company shares receive reduced sales charges at given minimums of investment. These are known as breakpoints.
B) The breakpoint
Net asset value per share for a mutual fund can be expected to decrease if A) the issuers of securities in the portfolio have made dividend distributions B) the fund has made dividend distributions to shareholders C) the fund has experienced net redemptions of shares D) the securities in the portfolio have appreciated in value
B) The fund has made dividend distributions to shareholders *If dividends are distributed to shareholders, the fund's assets will decrease and value per share will fall accordingly. Appreciation of the portfolio and dividends paid to the portfolio will increase the value. If issuers have made distributions to the portfolio, the net asset value will increase. Net redemptions have no effect on the net asset value, because the money paid out is offset by a reduced number of shares outstanding.
All of the following statements are features of hedge funds EXCEPT A) they are generally organized as private investment partnerships or offshore investment corporations B) they generally have relatively low minimum initial investments C) they are usually composed of a wide array of global investments D) they frequently employ speculative strategies to maximize returns Explanation
B) They generally have relatively low minimum initial investments. *Hedge funds generally require high minimum investments ranging from $250,000 to $1 million. They are organized as either domestic partnerships or offshore investment corporations and employ highly speculative investment strategies to maximize returns. Hedge funds have become very global and typically feature diverse international investments such as swaps, currencies, commodities, warrants, and other derivatives.
If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as A) a closed-end company B) a unit investment trust C) a utilities fund D) a growth fund
B) UIT *A unit investment trust issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed, it is not traded.
All of the following statements regarding investment companies are correct except A) an exchange-traded fund is an investment that can be bought and sold throughout the trading day. B) an open-end investment company is categorized as open end because it is limited in the number of shares that are sold. C) a unit investment trust is a type of investment company whose units are redeemable at NAV by the trust's sponsor. D) a closed-end investment company is a type of company whose shares trade in the same manner as publicly-traded stocks in the secondary market.
B) an open-end investment company is categorized as open end because it is limited in the number of shares that are sold. *An investment company is categorized as open-end because it is not limited in the number of shares sold. ETFs and CEFs (closed-end funds) trade in the secondary markets like any stock. UITs are redeemable at NAV by the trust's sponsor.
By investing in a REIT, you are provided all of the following EXCEPT A) pass-through tax treatment of income B) pass-through tax treatment of operating losses C) diversification of real estate investment capital D) ownership of real property without management responsibilities
B) pass-through tax treatment of operating losses *REITs cannot pass through losses to investors. It is important to remember that they are not DPPs.
Under the Investment Company Act of 1940, which of the following statements regarding the renewal provisions of an investment adviser's contract is NOT true? A) The contract must be terminable upon no more than 60 days' notice. B) The renewal may be executed orally, provided it is done within 2 years of the initial contract. C) The renewal must be approved by either majority vote of the board or majority vote of the outstanding shares, as well as majority vote of the noninterested members of the board. D) The renewal must state the adviser's compensation.
B)The renewal may be executed orally, provided it is done within 2 years of the initial contract. *When an investment company employs an outside investment advisory firm to manage its portfolio, the act requires a written contract setting forth the adviser's compensation. The contract is for 2 years initially and must be renewed annually thereafter. The contract must be initially approved by a majority vote of the outstanding shares and the noninterested members of the board of directors and annually renewed by either a majority vote of the board of directors or of the outstanding shares, as well as a majority vote of the noninterested members of the board. The contract must be terminable at any time, with a maximum of 60 days' notice and with no penalty, upon a majority vote of the board of directors or of the outstanding shares, and it must terminate automatically if assigned.
If you were describing an investment that trades on an exchange with a price set by supply and demand, rather than its underlying value, it would be A) a hedge fund B) an open-end fund C) a closed-end fund D) a forward contract
C) Closed-end fund *The stock of closed-end investment management companies trades on exchanges and, like any other exchange security, is priced based on supply and demand. Although closed-end funds compute their NAV, market forces determine price.
When reading a research report about an investment company, you read that, in addition to common stock, the company also has a preferred stock issue outstanding. From this, you could conclude that this is A) a blended investment company B) a unit investment trust C) a closed-end investment company D) an open-end investment company
C) Closed-end investment company *The only investment company that can legally issue preferred stock is a closed-end investment company. Open-end companies can only issue 1 class of stock (common stock or its equivalent). UITs issue units and term blended investment company makes no sense here.
The fee charged by some mutual fund companies if shares are redeemed within a specified time after being purchased is known as A) a 12b-1 fee B) a forward pricing fee C) a contingent-deferred sales charge D) a breakpoint fee
C) Contingent differed sales charge *Some mutual funds impose contingent-deferred sales charges (CDSC) on investors who redeem their shares within a specified period after purchasing them. These fees are designed to encourage investors to leave their money in the fund for longer periods. Typically, the amount of the contingent-deferred sales charge decreases the longer the investor owns the shares.
Examples of private funds include A) hedge funds and private placements B) open-end and closed-end investment companies C) hedge funds and private equity funds D) ETNs and private equity funds
C) Hedge funds and private equity funds *Private funds, such as hedge funds and private equity funds, are excluded from the definition of investment company under the Investment Company Act of 1940. As a result, they do not register with the SEC as do open-end and closed-end companies. Although these are generally sold as private placements under Regulation D of the Securities Act of 1933, there are many private placements that are not private funds.
The Investment Company Act of 1940 does which of the following? A) Governs the issuance of new issues B) Sets rules for the registration of investment advisers C) Prescribes procedures for the establishment of investment companies D) Regulates the secondary market
C) Prescribes procedures for the establishment of investment companies *The Investment Company Act of 1940 requires all investment companies to register with the SEC as such and be regulated under the act. The companies are still subject to all the other applicable securities acts. However, the Investment Company Act of 1940 provides additional regulation to ensure that investors are fully informed and fairly treated by the management of investment companies.
If general interest rates increase, the interest income of a bond unit investment trust will probably: A) change as soon as the portfolio manager can take advantage of the higher rates now available in the marketplace B) decrease C) remain the same D) increase
C) Remain the same *Because the portfolio of a UIT is fixed, the income generated by that portfolio will not change. Remember, a UIT does not have a portfolio manager.
A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding and the current asking price of the shares is $36.38 per share, it would be correct to state that this investment company is A) selling at a discount. B) selling at NAV. C) selling at a premium. D) an open-end investment company.
C) Selling at a premium *When a closed-end investment company is selling at a price in excess of its net asset value, it is said to be selling at a premium. The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the net assets are the $100 million portfolio value minus the liabilities of $10 million for the unpaid securities plus the $5 million in accrued management fees. That leaves $85 million divided by the 2,611,437 shares outstanding, which is approximately $32.55. Once we know the NAV, it is clear that the price of $36.38 is a premium over the NAV. And, we know that this can't be an open-end investment company because if it was, the $3.83 sales charge represents 10.5% of the asking price, well in excess of the maximum 8.5% permitted.
All of the following characteristics are advantages of a REIT EXCEPT A) diversification B) liquidity C) tax deferral D) professional management
C) Tax Deferral *A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITs are traded on exchanges and OTC, which provides liquidity. The IRS does not permit tax deferrals on REIT investments. Please note: Over the past few years, there has been an enormous growth in non-traded REITs (they don't trade; there is no liquidity). However, there has been no feedback about that issue and, unless something in the question refers to a non-traded REIT, assume that all REITs are publicly traded either on the stock exchanges or OTC.
An investor signed a letter of intent to purchase $50,000 worth of Sky-High Mutual Fund. At the end of 13 months, he had only invested $48,000 in the fund. Which of the following is TRUE? A) There are no additional requirements; he will receive the breakpoint. B) He has 90 days to invest the additional $2,000 for the breakpoint. C) The fund will liquidate shares to meet the additional sales charge. D) He must sign a new letter for the $2,000 to receive the breakpoint.
C) The fund will liquidate shares to meet the additional sales charge *An investor has only 13 months to meet a letter of intent commitment. Once that period of time has elapsed, the investment company is entitled to a refund of the discount it had originally given the investor. This is accomplished by liquidating a sufficient number of shares to cover the additional sales charge to be imposed.
The term private fund would apply to all of the following EXCEPT A) a liquidity fund B) a hedge fund C) a unit investment trust D) a venture capital fund
C) UIT *Unit investment trusts are one of the types of investment companies defined in the Investment Company Act of 1940. They register with the SEC prior to offering their units to the public. The other choices are all types of private funds.
A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to A) buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee B) decline the transaction because short-term trading of funds is not allowed C) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee D) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee
C) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee *If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares. But, you ask, we don't know what the CDSC is for the Class B shares—it isn't given. It doesn't have to be because the CDSC for redemptions in the first year would never be lower than the Class A front-end load (4% in this question and certainly higher than the 1% on the Class C shares).
When an open-end management investment company computes its net asset value per share, each of the following occurrences would have an impact EXCEPT A) interest payments made on debt securities held in the fund's portfolio B) a drop in the value of equity securities held in the fund's portfolio C) a greater value of shares being redeemed than purchased D) a capital gains distribution
C) greater value of shares being redeemed than purchased *Because shares are purchased and redeemed at NAV, net redemptions (this case) or net purchases have no effect on the net asset value of the fund's shares. However, receipt of cash in the form of interest payments causes assets to increase, while falling equity prices leads to a decrease. Distributions of capital gains (or dividends) represents a payment of cash, thus decreasing the amount of assets on hand.
Open- and closed-end investment companies have all of the following in common EXCEPT A) they have stated investment objectives B) they compute their net asset values C) they trade their shares in the secondary market D) they actively manage their portfolios
C) they trade their shares in the secondary market *Open-end companies do not trade shares in the secondary market. However, both open-end and closed-end companies compute their net asset values, actively manage their portfolios, and have stated investment objectives.
Which of the following are features of Class C mutual fund shares? Typically charge no front-end load Typically charge a front-end load Typically impose lower CDSCs than Class B shares for a shorter period Typically convert to Class A shares after they are held for a defined period A) II and III B) I and IV C) I and III D) II and IV
C0 1 & 3 *Class C shares generally have the following features: no front-end sales charge, lower CDSCs than Class B shares for a shorter period, and no conversion to Class A shares regardless of how long they are held. Because of these features, Class C shares may be less expensive for investors with shorter investment horizons. They may be more expensive for investors who plan to hold their shares for a long time, because the level load never discontinues.
To be in compliance with the Securities Act of 1933, the sale of which of the following securities would require delivery of a prospectus? Primary offering of a closed-end investment company registered under the Investment Company Act of 1940 Primary offering of 5-year U.S. Treasury notes sold to an individual investor Private placement sold under the provisions of Regulation D Sale of shares of an open-end investment company whose first public offering was 23 years ago A) I and II B) III and IV C) II and III D) I and IV
D) 1 & 4 *Any primary offering, unless the security is exempt, requires timely delivery of a prospectus. Treasury notes and private placements are exempt.
When an agent is discussing possible discounts related to the purchase of mutual funds shares, she would be referring to A) 12b-1 fees B) the CDSC C) reinvesting distributions D) breakpoints
D) Breakpoints *Mutual funds that carry a load will have a schedule of reduced sales charges when reaching specified quantity levels known as breakpoints.
Which of the following mutual fund share classes generally has a 1% CDSC that is eliminated once the shares have been held more than 1 year? A) Class 1% B) Class A C) Class B D) Class C
D) Class C *It is the Class C shares that have no front-end load, but they do have a 1% CDSC for a period of 1 year.
When comparing mutual funds and ETFs, the disadvantages of investing in ETFs include which of the following? A) The ability to avoid tax consequences B) An expense ratio that is generally lower C) A price not set by supply and demand D) Commissions both when purchasing and liquidating shares
D) Commissions both when purchasing and liquidating shares *Because the shares of ETFs are traded like any other stock, commissions are paid both to buy and to sell, and the price is determined by supply and demand, not NAV. ETFs are generally more tax efficient than mutual funds and their expense ratios tend to be lower as well.
A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has an net asset value (NAV) of $12 and an ask price of $12.50, and that the ABC Fund has an NAV of $11.50 and an ask price of $10.98. The customer should conclude that A) both are open-end funds B) ABC is an open-end fund and GEM is a closed-end fund C) ABC and GEM are both unit investment trusts D) GEM may be an open- or closed-end fund and ABC is a closed-end fund
D) GEM may be an open- or closed-end fund and ABC is a closed-end fund *The price for open-end funds is determined by adding the sales charge to the NAV. An open-end fund can never have an ask (or offering) price less than its NAV, therefore ABC cannot be an open-end fund.
Which of the following would be the most important reason for an investor interested in adding foreign stocks to his portfolio to do so by purchasing an international mutual fund? A) He could select a fund whose portfolio had the proper mix of foreign and domestic stocks to maximize his diversification. B) The voting rights granted to a mutual fund shareholder are much stronger than those to the holder of an ADR. C) Purchasing foreign stocks through a mutual fund saves on foreign taxation. D) He would have the benefit of the portfolio managers picking the stocks instead of having to rely on his own efforts.
D) He would have the benefit of the portfolio managers picking the stocks instead of having to rely on his own efforts. *There are two primary benefits to purchasing any mutual fund: professional management and diversification. However, an international fund has no domestic securities in the portfolio (that would be a global fund) so there would be no mix for diversification as indicated in that choice. There are no special tax breaks for investing in foreign securities via a mutual fund and the voting rights have nothing to do with the securities in the portfolio.
All of the following statements regarding a closed-end investment company are true EXCEPT A) it sells at the market price based on supply and demand B) it differs from a mutual fund C) it is a type of management company D) it may redeem its own shares
D) It may redeem its own shares *A closed-end investment company does not redeem its own shares. The term mutual fund refers to an open-end management investment company that issues redeemable shares.
One reason that a private equity fund may operate under the Section 3(c)(7) exemption of the Investment Company Act of 1940 is that A) greater liquidity would be assured B) investors would only need to be accredited rather than qualified C) registration would not be required of the investment adviser D) it would be able to have more than 100 investors
D) It would be able to have more than 100 investors *Private equity funds operate under two exemptions found in the Investment Company Act of 1940. The 3(c)(1) exemption limits the number of investors to 100 while no such limit applies to the 3(c)(7) exemption. Under the 3(c)(7) exemption, all investors must be qualified, a significantly higher standard than accredited. Investment advisers to private funds generally have to register and the selection of which exemption to use doesn't impact that. As private investments, liquidity is very limited.
A customer with no other mutual fund investments wishes to invest $47,000 in the XYZ Technology Fund. If the Class A shares are eligible for a breakpoint sales charge discount at the $50,000 investment level, the action least appropriate for an agent is to A) inform the customer that he can reduce his sales charge by combining purchases in other funds offered by XYZ group B) inform the customer that he can reduce his sales charge through a letter of intent C) inform the customer that he can reduce his sales charge by investing an additional $3,000 D) place the order as instructed
D) Place the order as instructed *If a customer intends to invest an amount just below a breakpoint threshold, he should be informed of the breakpoint discount, as well as the various methods by which he can receive it.
Pricing of a closed-end fund is determined by A) net asset value B) net asset value plus a commission C) net asset value plus a sales charge D) supply and demand for the shares
D) Supply and Demand for the shares *Shares of closed-end funds are traded in the secondary market where prices are determined by supply and demand. The NAV of a closed-end fund is computed and not determined by the market price or trading price. Closed-end funds do not have sales charges but do have commission charges added to the market price
Charles wishes to preserve his capital and generate income with moderate risk by investing in mutual funds. Which of the following mutual fund types would probably least meet these investment objectives? A) A balanced fund B) A bond fund C) An income fund D) Technology funds
D) Technology Funds *Technology mutual funds typically invest in high-risk, high-reward situations that are inappropriate for conservative investors. Balanced funds, income funds, and bond funds could be potential investments for conservative clients.
A client of yours comes to the office and shows you some sales literature from a mutual fund that has him very excited. According to the material, the fund's average annual return over the past 10 years has been in excess of 15% and it has achieved the highest rating from the major fund rating services. Before recommending this fund to your clients, the first thing you would probably check for in the fund's prospectus is A) the fund's expense ratio. B) the fund's objectives. C) the fund's sales charge. D) the portfolio manager's tenure.
D) The portfolio managers tenure *Because this client has been "sold" on past performance, you need to verify if the manager achieving those results is still on the job. That is the prime reason why the regulations require disclosure of the fund manager's tenure; it is important for investors to know if the current manager was the one who had the winning streak or if that manager just came on board. The other choices are something to look at, but in this instance, they take a back seat to checking on the manager's tenure. Sure, the expense ratio is important, but the past performance is after expenses so that has already been taken into consideration.
An investor is studying the prospectus received from the Abundant Returns Asset Allocation Fund. In a section titled Tenure, the discussion would be dealing with A) the length of time that asset allocations are maintained before changes are made B) the average period of time the investors remain in the fund C) the length of time that the fund has been in operation D) the number of years the portfolio manager has been managing the fund
D) the number of years the portfolio manager has been managing the fund *Tenure always refers to management tenure, the length of time the portfolio manager has been at the helm of the fund.