Unit 14
Back-end load
A commission or sales fee that is charged when mutual fund shares or variable annuity contracts are redeemed. It declines annually, decreasing to zero over an extended holding period - up to 8 years - as described in the prospectus.
Face Amount Certificate
A contract between an investor and an issuer in which the issuer guarantees payment of a stated (or fixed) sum to the investor at some set date in the future. In return for this future payment, the investor agrees to pay the issuer a set amount of money either as a lump sum or in periodic installments. These are issued by the company itself, not traded on the secondary market.
Exchange Privilege (REMEMBER: an exchange is a taxable event; if the shares converted have increased in value, capital gains tax will be due.)
A feature offered by an open-end mutual fund that allows an investor to covert the value of shares held in one fund for those of an equal value in the same family. This is done at a NAV basis.
Hedge Fund
A fund that is generally organized as a private investment partnership or offshore investment corporation. It is usually composed of a wide array of global investments and employs speculative stratifies to maximize returns.
Front-end load
A mutual fund commission or sales fee that is charged at the time shares are purchased. This is added to the share's NAV when calculating the POP
NAV (minus redemption fees or deferred sales loads, if any)
A mutual fund redeems shares at ___________.
Country Fund
A mutual fund that concentrates their investments in the securities of companies domiciled in foreign countries.
Letter of Intent (LOI)
A person who plans to invest more money with the same mutual fund company may decrease overall sales charges by signing a _________________. This document informs the investment company that he intends to invest the additional funds necessary to reach the breakpoint within 13 months.
Close-ended
A pooled investment with a share price generally different from its net asset value (NAV) per share is most likely what kind of fund?
Rights of Accumulation
A privilege that permits an investor to aggregate shares owned in related accounts in some or all funds in the fund family for the purpose of reaching a break point discount. Has no time limit.
CDSC
A sales charge levied when in investors redeem shares (like from a mutual fund).
Face amount certificate company
A type of investment company where an investor makes periodic payments and at the end of a specified period, the company pays the investor the face amount of the security
Unit Investment Trust (UIT)
A type of investment company where investments are selected, not traded/managed. No management fee charged. Shares are redeemable.
100,000
According to the Investment Company Act of 1940, how much capital must a company have in order to offer itself to the public?
60
According to the Investment Company Act of 1940, no more than ___% of the board of directors can be made up of officers or employees if the investment company.
Specialized
Also known as a sector fund; This type of fund invests 25% or more of its assets in a particular region or industry.
leveraged, less, less
Alternative investments such as hedge funds and private equity tend to be more _______________ (financed by debt, as opposed to equity) compared to traditional investments, and are typically _________ (more/less) liquid and __________ (more/less) transparent.
5, 25
An affiliated person is defined as any person directly or indirectly owning ___% or more of the outstanding shares of an investment company. Also includes any officer, director, partner, etc. A person is considered to be a "control person" when owning or controlling more than ___% of the outstanding shares.
Anti-delusion
An investor owns a debenture convertible into 20 shares of the issuer's common stock. After a 2-for-1 stock split, the terms of the debenture provide for conversion into 40 shares. This is because the debenture has a(n) _______________ clause.
NAV (less redemption fee, in any)
An investor redeeming his shares will receive ___________.
12b-1 charges
Annual fees charged by mutual funds to pay for marketing and distribution costs. These are asset-based fees.
Front-end load
Breakpoints for quantity purchases are only available on shares that carry a _____________.
Class A
Breakpoints for quantity purchases are only available on shares that carry a front-end load...this would be...
Holding Company
Business entities which invest in other companies for the purpose of management control
Contingent Deferred Sales Charge (CDSC)
CDSC
Long-term capital gains
Capital gains distributions for mutual funds and REITs are taxed as _________________.
Class T
Class of mutual fund shares that always will have a 12b-1 charge.
Class I
Class of mutual fund shares that are only sold to institutional investors; Usually have lower fees and expenses.
Class R
Class of mutual fund shares that are sold only to participants in retirement plans such as 401(k); Have NO front-end or back-end load, but may have a 12b-1 fee.
Class C
Class of mutual fund shares that have "level loads". There is no sales charge to purchase (no front-end load), generally a 1% CDSC for one year (lower than Class B CDSCs), with continuous 12b-1 charges. These are cheaper for short-term investors, as they may become expensive in the long run with the continuous 12b-1 charges.
Class B
Class of mutual fund shares that have back-end loads that decline over time so the investors pay the charge at redemption.
Class A
Class of mutual fund shares that have front-end loads at the time if purchase. Generally have the lowest (if not zero) asset-based sales charges (12b-1).
Anti-delusion Clause
Clause built into convertible preferred stock or debentures to help shield investors from their investments potentially losing value due to a stock split.
Week
Closed-end funds calculate NAV once per _______.
Supply and demand
Closed-end investment company shares are priced based on ____________________. Thus, the market price of closed-end fund is independent of its NAV.
Offshore investment corporation
Corporation that is formed in a foreign country by offshore investors. Acts as a shell, shielding investors from the higher tax burden of their home country.
Forward Pricing Rule
Disregarding any potential redemption or CDSC fees, an investor tendering (redeeming) shares of an open-end investment company for redemption will receive the next computed NAV. This is known as the...
D
Disregarding any potential redemption or CDSC fees, an investor tendering shares of an open-end investment company for redemption will receive A) the next computed public offering price B) the last computed net asset value C) the next computed net asset value plus a portion of the sales load D) the next computed net asset value
Ordinary income
Dividends from REITs are taxed as _______________.
90
Equity ETFs are often organized as regulated open-end investment companies. Therefore, they must distribute at least ___% of their net investment income and capital gains. However, the method by which those capital gains are realized by the ETF is different than that f a mutual fund. In almost all cases, it results in lower taxable gains distributions.
Exchange Privilege
Families of funds offer ___________________, the opportunity to exchange shares from one fund to another at NAV, so it is generally considered unfair business practice to move a client to another fund and potentially incur a new sales charge.
Leveraged
Financed by debt as opposed to equity
Prospectus
For all mutual funds (including a money market mutual fund), all purchasers must receive a copy of the _________________.
Less (remember, because only closed-end funds are dependent on supply and demand, which means that their market price can fall below NAV. Open-end funds will always have POP equal to NAV or more than NAV if they have sales charges)
For an open-end fund, the NAV CANNOT be _______________ (more/less) than the ask price (POP).
Performance
Hedge fund managers are compensated largely by ________________ (assets under management/performance).
Partnership, general partner, limited partners
Hedge funds are usually structured as a ________________, with the investment manager acting as the __________________ and the investors as the _________________.
High
Hedge funds generally require relatively _______ (high/low) minimum initial investments.
expenses/average annual net assets
How do you calculate a mutual fund's expense ratio?
(Total assets - total liabilities)/# shares outstanding
How do you calculate the NAV per share of a mutual fund?
NAV per share + sales charges
How do you calculate the POP of a mutual fund?
Lump sum investment, letter of intent
How does an investor qualify for breakpoint discounts?
Annually
How often do 12b-1 fees need to be approved by a vote of the board of directors and of the directors who are not interested persons (outside directors)?
Equity, mortgage (debt)
Hybrid REITs contain features of both ________ REITs and _______ REITs in that they own properties as well as make loans on others.
Increase (because they have cash to invest in higher-yielding bonds, increasing the fund's overall interest income)
If general interest rates increase, the interest income of an open-end bond fund whose sales exceed redemptions (they are receiving cash) will _____________ (increase/derease).
Investment objective
In a prospectus, a brief statement about the general goal of the mutual fund. It is the investment advisor's job to try to meet achieve this.
Majority of outstanding shares
In order to make changes to a mutual fund's investment objective, who must approve?
90
In order to qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least what percent of its taxable income to shareholders annually in the form of dividends?
Breakpoint
In the context of purchasing shares in a mutual fund, what is the term for the point at which the dollar amount of shares being purchased qualifies the investor for a lower sales charge.
Private equity
Investments and ownership in companies that are not publicly traded (includes venture capital).
Face amount certificate company, unit investment trust, management company
List the 3 types of investment companies.
1
Management contracts for investment companies must be renewed every ___ year(s) (after the initial 2-year contract).
100,000
Most often, Class B shares of funds do not accept orders over $___________. This is because at that level, the reduced front-end load available on the Class A shares due to reaching a break-point, combined with the lower (or lack of) 12b-1 charge and no redemption charge (CDSC), makes them a better deal than the Class B shares.
Short stock
Mutual funds are generally prohibited by the Investment Company Act of 1940 from taking _____________ positions.
Face amount certificate companies, management investment companies (open and closed-end), unit investment trusts (UITs)
Name the 3 types of investment companies listed in the Investment Company Act of 1940.
60
No investment advisory contract between an investment company and an outside advisor can be entered into that does not provide for termination with no more than ___ days notice in writing.
Management Investment Company
One of the 3 types of investment companies listed in the Investment Company Act of 1940. Actively manages a securities portfolio to achieve a stated investment objective. These are either closed-end or open-end. A mutual fund would be an open-end investment company. Most familiar type of company. REMEMBER: this type of company does NOT include holding companies.
Face Amount Certificate Company
One of the 3 types of investment companies listed in the Investment Company Act of 1940. Issues debt securities to its investors that are backed by a security interest on assets (similar to mortgage-back securities).
Unit Investment Trust (UIT)
One of the 3 types of investment companies listed in the Investment Company Act of 1940. This is an unmanaged portfolio in which the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the investment portfolio terminates.
Day
Open-end (mutual) funds calculate NAV once per _______.
Common stock (in fact, the Investment Company Act of 1940 states this)
Open-end companies may issue ONLY _____________.
Public Offering Price (POP)
POP
Ask price
Price at which an investor can buy
Bid price
Price at which an investor can sell
Tenure
Refers to the amount of time a fund manager has managed the fund. An investor should ask this when evaluating a mutual fund.
Redemption fees (CDSC is charged on NAV)
Regarding open-end investment companies, which sales charge depends on NAV?
Semiannual, annual
Section 30(d) of the Investment Company Act of 1940 requires ____________ reports from the fund to its shareholders and _____________ filing with the SEC.
Senior securities
Securities that have a preferential claim over common stock on a company's earnings and in the case of liquidation. Generally, preferred stock and bonds.
Semiannually, annually
Setion 30(d) of the Investment company Act of 1940 requires reports from funds to its shareholders how often? and filing with the SEC?
13
Signing a Letter of Intent (LOI) informs the investment company that you intend to invest the additional funds necessary to reach the breakpoint within _____ months.
T
T/F: A mutual fund is required by law to redeem its shares if requested by a shareholder.
Public Offering Price (POP)
The amount paid by a purchaser of a primary offering
Contingent Deferred Sales Charge (CDSC)
The fee charged by some mutual fund companies if shares are redeemed within a specified time period after being purchased. These fees are designed to encourage investors to leave their money in the funds for longer; And typically the longer the investor owns the shares, the fee starts to decrease.
Prospectus
The following information is required to be disclosed in a company's _________________: -The business of the issuer -Financial info of the issuer -Risk factors -Information about securities offered -Significant security holders -Info about the management of the company and their compensation -The use of proceeds from the offering -Management fees -Method of distribution
Net Asset Value
The market price for a share of a mutual fund.
Closed-end
The only type of investment company that trades shares at a premium or discount to NAV per share.
Breakpoint sale
The prohibited practice of attempting to make higher commissions by selling investment company shares in a dollar amount just below the point at which the sales charge is reduced. Registered personnel should indicate to the investor the amount they could save at the breakpoint.
Breakpoints
The schedule of quantity purchase discounts a mutual fund offers.
Closed-end fund
Type of investment company that has a fixed number of shares offered through an IPO. No new shares are created after that. However, you can trade these shares with other investors on the secondary market.
Open-end fund
Type of investment company that offers unlimited shares at NAV. Think of mutual funds. NOTE: You always buy shares from this type of fund from the fund company, NEVER on the secondary market.
2, annually
Under the Investment Company Act of 1940, a contract between an investment company and an outside advisor must be in writing and may not be unilaterally assigned to another advisor. The initial contract may be for ___ year(s), but it is subject to re-approval __________ by a majority vote of the outstanding shares or the board of directors, as well as a majority of the directors who are considered to be non-interested parties.
3
Under the Investment Company Act of 1940, investment companies are prohibited from owning more than ___% of another investment company's shares.
Secondary market
Units of UITs are sold in the ________________.
Investment policy, track record, portfolio, sales load
What 4 things should be researched when assessing a fund?
3
What is the limit (%) on investment by an investment company in another investment company's shares
8.5
What is the maximum sales charge (%) for a mutual fund?
60
When an investment company employs an outside investment advisory firm to manage its portfolio, the Investment Company Act of 1940, requires a written contract establishing the advisor's compensation. The contract must be terminable ay any time, with a maximum of ___ days' notice. Renewal of an investment advisor's contract must be approved by either majority vote of the board or majority vote of the outstanding share, AS WELL as majority vote of the non-interested members of the board.
Net redemptions
When redemptions of a mutual fund exceed new purchases, the fund suffers from __________________.
Class c
Which mutual fund shares class generally has a 1% CDSC that is eliminated once the shares have been held more than 1 year?
Closed-end management investment company
Which of the 3 types of investment companies registered under the Investment Company Act of 1940 is legally permitted to include senior securities in its capital structure?
Any person (married couples, parents and their minor children, corporations. NOT investment clubs or associations formed for the purpose of investing)
Who is qualified for breakpoint discounts?
