ICA 1940- checkpoint

A) High-yield bond funds

A customer who seeks to supplement his retirement income and has a high risk tolerance would find which of the following securities most suitable? A) High-yield bond funds B) Investment-grade bond funds C) Treasury STRIPS D) Municipal GOs

A \ Explanation Foreign funds, which may also be called international funds, invest in common stocks of companies located outside the United States. LO 8.g

A fund seeks maximum capital appreciation by investing in common stocks of companies located outside the United States. The management selects well-established companies that are listed on their national stock exchanges and that have demonstrated high earnings potential. This information describes which of the following mutual funds? A) ATF Overseas Opportunities Fund B) ABC Stock Index Fund C) ATF Biotechnology Fund D) ATF Capital Appreciation Fund

B) ABC Capital Appreciation Small-Cap Fund

A sophisticated client has expressed an interest in becoming more aggressive with their investment strategy. Her current portfolio consists of the following : $50,000 cash $200,000 in retirement accounts $100,000 in various individual stocks in different industries $100,000 in a balance fund She is willing to invest $25,000 for a minimum of 7 to 10 years and accepts that the investment can and will fluctuate in value over time. Which of the following investments would be the most appropriate? A) DEF Asset Allocation Fund B) ABC Capital Appreciation Small-Cap Fund C) MNO High-Yield Bond Fund D) XYZ Value Equity Fund

D) No action would be taken Explanation One of the key distinctions of a UIT is its lack of management. Once the portfolio has been created, it is fixed until maturity, in the case of debt securities, or until some predetermined liquidation point, in the case of an equity trust. LO 8.a

A unit investment trust has 90% of its portfolio invested in high-grade bonds with an average maturity of almost 25 years. If the industry consensus was that long-term interest rates were about to increase sharply, which of the following actions would most likely be taken? A) Shorten the average maturity by moving into short-term bonds B) Ladder the maturities C) Liquidate the long-term bonds and begin to move into cash or cash equivalents D) No action would be taken

B) an inverse fund.

An exchange-traded fund whose strategy is to generate performance opposite that of the designated index is called A) a hedge fund. B) an inverse fund. C) an obverse fund. D) a leveraged fund.

B) Class C shares of the ABC Investment-Grade Bond Fund The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best, because the customer would pay no front-end sales charge and no CDSC after a short time, probably one year. He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the three years of his investment.

An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for three years from now. Meanwhile, he would like to generate some income on the money with as little risk and as little expense as possible. Which of the following recommendations is likely to be the most suitable for this customer? A) Class B shares of the ABC Investment-Grade Bond Fund B) Class C shares of the ABC Investment-Grade Bond Fund C) Class B shares of the XYZ Growth Fund D) Class A shares of the MNO High-Yield Bond Fund

B) I and III

In July, a customer invested $10,000 in the ABC Mutual Fund. In December of the same year, ABC announced a long-term capital gains distribution. In May of the next year, the customer decided to redeem his shares for a capital gain. How are both of the capital gains treated for tax purposes? The capital gain distribution is treated as long term. The capital gain from redemption is treated as long term. The capital gain from redemption is treated as short term. The capital gain distribution is treated as short term. A) I and II B) I and III C) II and IV D) III and IV Explanation

B) outstanding will vary in number at any point in time. Explanation Open-end investment companies are capitalized with a continuous offering of new shares. As a result, the number of shares outstanding is constantly changing. It is the closed-end company, traded in the secondary markets, whose share prices are based on supply and demand, which causes them to be bought or sold at a premium or discount to the NAV. LO 8.b

One way in which open-end investment companies differ from closed-end investment companies is that an open-end investment company's shares A) are traded in the secondary markets rather than on an exchange. B) outstanding will vary in number at any point in time. C) may be priced at a premium or discount relative to its net asset value. D) are purchased and redeemed based on supply and demand.

A 2 and 4 Explanation Closed-end funds may issue more than one class of security, including debt issues and preferred stock. Open-end funds may issue only one class of security: redeemable, voting common stock. They may not issue senior securities. LO 8.b

SEC regulations for securities issued by investment companies prohibit which of the following? Closed-end funds from issuing preferred stock Open-end funds from issuing preferred stock Closed-end funds from issuing bonds Open-end funds from issuing bonds A) II and IV B) I and III C) I and IV D) II and III

D) The manager's tenure is six months. Explanation Although one cannot predict the future from the past, when a portfolio manager has consistently been ranked at the top, it is not considered a major risk to bet on a winner. The problem here is that almost all of that performance was achieved under the direction of previous management. With only six months on the job, the new manager is untested and there is no way to know how the future performance will rank. You might see this referred to as tenure risk. Diversification is one of the benefits, not risks, of a mutual fund. In a growth fund, one does not expect a high dividend yield. LO 8.i

The performance of the XYZ Growth Fund has been in the top 1% of all funds in its category for the past 1-, 5-, and 10-year periods. Which of the following would be the biggest risk factor to an investor investing in this fund? A) Past performance is no assurance of future results B) A dividend yield of less than 2% C) Lack of diversification in the portfolio D) The manager's tenure is six months

B- buy buy Explanation Dollar cost averaging requires the investor to invest a fixed amount of money on a regular basis, regardless of whether the stock market is rising or falling. When this is done, more shares are purchased when the price per share is low and fewer when the price per share is high. In following this scheme, the investor's average cost per share is lower than the average price paid per transaction.

The practice of dollar cost averaging requires the investor to A) sell a security in a falling market and sell it in a rising market. B) buy a security in a falling market and buy it in a rising market. C) buy a security in a falling market and sell it in a rising market. D) sell a security in a falling market and buy it in a rising market.

A) The renewal may be executed orally, provided it is done within two years of the initial contract. Explanation 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 two 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. LO 8.j

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 two years of the initial contract. B) The contract must be terminable upon no more than 60 days' notice. 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.

D) I and IV

Under the conduit theory of taxation, which of the following statements are true? I.A fund is not taxed on earnings it distributes if it distributes at least 90% of its net investment income. II. Investors are not taxed on earnings they reinvest. III.A fund is only taxed on interest income. IV. Investors are taxed on earnings they receive in cash. A) I and II B) II and III C) III and IV D) I and IV

C) this exchange is considered a taxable event as of the date of the exchange.

You have a client who invested in the PQR Growth Fund 10 years ago and now, as retirement age approaches, asks you about using the exchange privilege to move into the PQR Balanced Fund. The client should know that A) the exchange qualifies for any breakpoint reduction. B) any tax consequences are deferred until the Balanced Fund shares are liquidated. C) this exchange is considered a taxable event as of the date of the exchange. D) the old shares are liquidated at NAV and the new shares are purchased at the POP.

A) nothing yet Explanation Mutual funds use forward pricing, so we never know what we'll be paying per share (if purchasing) or receiving per share (if redeeming) until the next calculated price. LO 8.c

Your client wishes to invest $50,000 into shares of the ACE Mutual Fund. This morning's financial news indicated that the POP for ACE was $10.86, while the NAV was $10 per share. The client's order is placed at 2:00 pm Eastern time. Based on this information, you could confirm to the client a purchase of A) nothing yet, as you must wait for the POP to be computed based on the day's close. B) 4,604.052 shares. C) more than 4,604.052 shares, but fewer than 5,000 shares. D) 5,000 shares.