unit 4 quiz
Which class of shares use a CDSC as the main sales charge? A) Class B shares B) Class C shares C) No load D) Class A shares
a Class B shares have back-end loads that reduce over time (contingent deferred sales charge, or CDSC). Class A shares charge an upfront load, and class C shares charge a level load as part of the expense ratio. No load funds have no sales charge. LO 4.d
Class B mutual fund shares are also called A) back-end load shares. B) reverse load shares. C) deferred-load shares. D) CDSC shares.
A Class B mutual fund shares are bought with no sales charge at the time of purchase. The sales charge is paid instead at the time of redemption, or at the back end. Hence, they are known as back-end load shares. For this type of share, the sales charge percentage is reduced each year of ownership, typically becoming zero after five years. At this time, they convert to Class A shares. LO 4.d
A mutual fund has been in existence for 15 years. The prospectus must disclose the fund's performance A) over the last 1, 5, and 10 years. B) for each year over the last 10 years. C) broken out as an average over the last 10 years. D) over the last 1, 5, 10, 15, 20, and 25 years.
A The prospectus of a mutual fund must show the fund's performance over the last 10 years or the life of the fund, whichever is shorter. The data must be shown as the last year's performance, the performance over the last 5 years, and the performance over the last 10 years. With this fund, the 15-year performance need not be shown. LO 4.i
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) a rules violation. B) acceptable because the transaction is unsolicited. C) unsolicited trade are not allowed in mutual funds. D) acceptable in all situations.
A 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. LO 4.j
Under the Investment Company Act of 1940 all of these are examples of management companies except A) A Windmill Income UIT. B) A Windmill Income Fund, an exchange-listed:closed-end fund. C) An S&P 500 Index Trust ETF. D) A growth fund option for a VA.
A 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. LO 4.a
Which of these would not affect the NAV per share of a mutual fund share? A) The fund pays its monthly operating expenses like utility bills B) Portfolio securities that had to be sold for a big capital loss C) The portfolio's market value undergoes a large increase D) The fund receives a dividend from one of the portfolio stocks
B
A letter of intent may be backdated to include a prior purchase up to A) indefinitely. B) 90 days. C) 13 months. D) 6 months.
B 3 MONTHS AKA 90 DAYS
Which of these would not be included in a mutual fund's list of expenses? I)Shareholder records and service II)Investment adviser's fee III)Broker-dealer sales charges IV) Underwriter's sales loads A) I and II B) III and IV C) I and III D) II and IV
B 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. These are expenses to the investor. LO 4.h
Under the Investment Company Act of 1940, which of the following is not considered an investment company? A) Unit investment trust B) Hedge fund C) Separate account within a variable annuity D) Face-amount certificate company
B 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. LO 4.a
All of these are true regarding no-load shares except they A) are redeemed with no charges or fees of any kind. B) have sales charges associated with sales and redemptions. C) are sold by the fund with no sales charges or fees of any kind. D) offer more return-per-dollar invested versus load funds if investing results are the same.
B 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. LO 4.d
One characteristic of an open-end investment company that distinguishes it from a closed-end one is that A) there are a wide variety of objectives available for investors to select from. B) there is a continuous public offering. C) it may be either diversified or nondiversified. D) it may avoid taxation by distributing all of its net investment income to shareholders.
B The key difference between open-end investment companies and closed-end investment companies is the fact that new shares are continuously being offered for open-end companies. In the case of the closed-end, once the 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. LO 4.b
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.
B This is an example of an exchange (or conversion) privilege. LO 4.e
Which of these would cause a change in the net asset value of a mutual fund share? A) Securities in the portfolio are sold for a capital gain B) Many shares are redeemed C) The market value of the portfolio declines D) The fund takes a new position
C
Which of these would be unlawful regarding the use of a mutual fund prospectus? A) Sending a prospectus to someone who has shown no interest in the fund B) Leaving a typographical error in the text unmarked C) Calling an investor's attention to a section that may be interesting D) Failing to highlight a small section the customer has specifically asked about
C A prospectus for any security, not just for a mutual fund, may not be marked; highlighted; or otherwise altered in any way; nor may steps be taken to call an investor's attention to some passage or section that might be of special interest, even if the potential customer asked that it be done. LO 4.i
All of these are part of the expense ratio of a mutual fund except A) a 12b-1 fee. B) legal and accounting costs. C) CDSC. D) management fees.
C The Contingent Deferred Sales Charge (CDSC) is charged against the proceeds of a sale of the fund's shares, not against the fund's assets. LO 4.h
A mutual fund's public offering price is $10.50. An investor who wishes to invest $1,000.00 in the fund is able to purchase A) 95 shares with $2.50 left. B) Partial shares are not allowed. C) 95.238 shares. D) 96 and owe $8.00.
C WISHES TO INVEST/POP
The investment return of a variable annuity comes from A) the assumed rate stated in the policy documents. B) computing the excess of the premiums received over the mortality experience. C) the insurance company's general account. D) the performance of the selected subaccounts within a separate account.
D A key feature of the variable annuity is that most of the premium is invested into the insurance company's separate account rather than the general account. Within the separate account, a number of subaccounts may be selected, depending on the investor's objectives. It is the performance of these subaccounts that provides the annuity's investment return. LO 4.c
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 no taxes last year because it qualified as a regulated investment company under IRC Subchapter M. B) ACE paid taxes on 91% of its net investment income last year. C) ACE paid taxes on 9% of its net investment income and capital gains last year. D) ACE paid taxes on 9% of its net investment income last year.
D 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%. LO 4.k
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) balance of the separate account. B) age of the annuitant. C) gender of the annuitant. D) historic inflation rate.
D Insurance companies do not consider inflation when making this calculation. The components are GAAPI: gender, age, account balance, payout option, and interest rate (AIR). LO 4.c
An investor can take advantage of intraday price changes due to normal market forces when investing in which of these? I)Closed-end funds ii)Exchange-traded funds iii)Hedge funds iv)Open-end funds
I AND II
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? The fund must pay taxes on the undistributed 15% of net investment income. The fund must pay taxes on 100% of the net investment income. The shareholder pays no tax if the income is reinvested. The shareholder must pay taxes if the income is received in cash or reinvested. A) II and III B) II and IV C) I and III D) I and IV
B 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? The fund must pay taxes on the undistributed 15% of net investment income. The fund must pay taxes on 100% of the net investment income. The shareholder pays no tax if the income is reinvested. The shareholder must pay taxes if the income is received in cash or reinvested.
Advantages to the investor offered by investment companies include ability to invest small amounts in many different securities. special securities prices available only to investment companies. elimination of market risk through pooling of investments. increased purchasing power in the marketplace. A) I and IV B) II and III C) II and IV D) I and III
a Investors who can only invest relatively small amounts of money can nevertheless purchase interest in many different securities through investment companies. By the same token, they also gain access to increased purchasing power by pooling their investments with others. LO 4.a
All of the following describe mutual funds except A) shares may be sold either on an exchange or over the counter (OTC). B) various withdrawal plans may be offered for redemption of shares. C) the portfolio is professionally managed. D) funds simplify tax calculations for investors by supplying Form 1099.
a Mutual fund shares are redeemable securities. Hence, they do not trade in the secondary market either on exchanges or OTC. Instead, they may be purchased and redeemed only through the mutual fund company itself. LO 4.a
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) All increase investor returns because each is received by the fund increasing the amount they have to invest. D) Only management fees and operating expenses reduce investor returns by reducing the amount of money available for the fund to invest.
a 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. LO 4.d
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 pays its monthly operating expenses like utility bills. C) The fund receives a dividend from one of the portfolio stocks. D) The portfolio's market value undergoes a large increase.
a 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.
Mutual funds that market directly to the public, using no underwriter and charging no sales charge, are called A) no-load funds. B) free-sale funds. C) charge-free funds. D) loaded funds.
a Some funds distribute their own shares without using an underwriter and, hence, have no need to levy a sales charge. Because sales charges are also called sales loads, such funds are known as no-load funds. LO 4.d
Short-term purchases and sales of a mutual fund to take advantage of price fluctuation is known as A) market timing. B) price-spotting. C) time spotting. D) front running.
a 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. LO 4.d
All of the following must be on the cover page or beginning of the summary prospectus of a mutual fund except A) the name of the investment advisor. B) the fund share class or classes ticker symbols. C) the website where a full prospectus may be downloaded. D) the share class or classes offered by the fund.
a The summary prospectus, as the name implies, contains the important information about a mutual fund in summary form. The cover page must contain a standardized listing of certain information, including the fund's name, share classes offered, ticker symbols, information on how to get a full prospectus, a warning that the information is in summary form, and other facts. There is no requirement that the name of the investment adviser be on the cover page of the summary prospectus. LO 4.i
Which class of shares use a CDSC as the main sales charge? A) No load B) Class B shares C) Class C shares D) Class A shares
b
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 closed-end investment company. B) a face-amount certificate company. C) a unit investment trust. D) a mutual fund.
b 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. LO 4.a
A mutual fund's public offering price is $15.23. An investor who wishes to invest $1,000 in the fund will purchase how many shares? A) 66 shares and be billed for an additional $5.18 B) 65.66 shares C) Must purchase some multiple of 100 shares D) 65 shares and receive $10.05 in change
b Explanation Mutual funds can issue fractional shares. This is an advantage for those who invest in mutual funds because they can think in terms of the dollars they want to invest rather than in the numbers of shares they want to purchase. Wanting to invest $1,000 at the current price of $15.23 allows 65.66 shares to be purchased ($1,000 ÷ $15.23 = 65.66 shares).
The violation of selling mutual fund shares just below the point where the customer would qualify for lower sales charges and not informing the customer that they may qualify for lower sales charges is called A) supporting. B) a breakpoint sale. C) capping. D) pegging.
b This is the definition of breakpoint sale, and it is a violation of sales practices. The others are forms of market manipulation and are beyond the scope of the SIE. References may be found in the glossary. LO 4.j
Benefits of mutual funds include all of the following except A) mutual funds are professionally managed. B) reinvested dividends are not taxed until withdrawal. C) mutual funds report distributions annually to investors. D) mutual funds can provide broad diversification inside a single fund.
b When dividends (or capital gains) are reinvested they are still taxed. All the other options are considered benefits of mutual funds. LO 4.k
Class A mutual fund shares are also known as A) fully loaded shares. B) up-front shares. C) front-end load shares. D) high-end load shares.
c Class A mutual fund shares have their sales charge paid at the time of purchase, or at the front end. Hence, they are known as front-end load shares. LO 4.d
If a prospectus is being used to close a mutual fund sale, it must be given to the investor A) within five business days of purchase. B) within three business days of purchase. C) before or during the sales presentation. D) always before the sales presentation begins.
c The mutual fund purchaser must receive a prospectus before or during any sales solicitation or presentation. Additionally, sales literature sent out to prospective customers is considered a sales solicitation and must therefore be accompanied by a prospectus. LO 4.i
Which of the following issues only common stock? A) A closed-end management investment company B) An equity unit investment trust C) A face-amount certificate company D) An open-end management investment company
d An open-end (mutual fund) management investment company may only issue redeemable common stock. A unit investment trust offers units of beneficial ownership. A closed-end management investment company may also issue bonds and preferred stock, while a face-amount certificate company offers a contract, as opposed to units or shares. LO 4.a
For which of the following investors would Class C shares be most suitable? A) A relatively inexperienced investor B) An investor who intends to leave the money in the fund for many years C) An investor interested in high-risk, high-potential return speculation D) An investor who intends to redeem the shares within a short time
d Because Class C shares have no sales charge levied at the time of purchase but rather levy a withdrawal from the customer's account every quarter, they would be most suitable for an investor intending to redeem the shares relatively soon. Mutual funds are not intended for the speculative investor, those who might trade in and out frequently, and no particular share class is especially suited to the inexperienced investor. LO 4.d
Which class of shares have a front end sales charge? A) No load B) Class B shares C) Class C shares D) Class A shares
d Class A shares have a front end load. Class B shares have a back-end load (CDSC). Class C share have a level load charged as part of the expense ratio. No load funds have no sales charges.
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 A shares B) Class C shares C) Class B shares D) No load
d 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. LO 4.d
Your client has $50,000 to invest. His objective is a lifetime monthly income that he can receive after he retires. Part of his customer profile stresses that he has had uncomfortable experiences in the past with the stock market and is not inclined to invest in anything that is subject to market fluctuations, opting for principal protection instead. Based on the client's profile, which of the following would be the best recommendation? A) Treasury bond fund B) Variable annuity C) Mutual fund portfolio consisting of blue-chip stocks D) Fixed annuity
d Though its stated return might not be as high as the other choices' potential returns, only a fixed annuity fits the objective and risk-averse traits of this client. VAs and blue-chip mutual fund portfolios are tied to stock market performance in some way and have risk characteristics that would not align regarding suitability for this client. A Treasury bond fund's value will fluctuate inversely to interest rates. LO 4.c
