Investment Companies Part 1
A fund seeks maximum capital appreciation through investment in stocks of companies providing innovative products in the medical sector, including pharmaceutical developers and medical equipment suppliers. This information describes which of the following mutual funds? A)ABC Capital Appreciation Fund. B)ABC Biotechnology Fund. C)LMN Growth & Income Fund. D)ABC Overseas Opportunities Fund.
B)ABC Biotechnology Fund. Sector funds invest in stocks of companies operating in specific industries or specific geographic sectors; a biotechnology fund is one example of sector funds.
Your customer, age 60, is retired and living at home with a fully paid-off mortgage. Her portfolio contains growth stocks and high-quality bonds, and she is a long-time investor and comfortable with moderate risk. Her objective is a moderate level of current income to supplement her corporate pension plan distributions and the earnings from her IRA. Which of the following mutual funds is the most suitable for this customer? A)XYZ Biotechnology Fund. B)ABC Equity Income Fund. C)LMN Stock Index Fund. D)QRS Capital Appreciation Fund.
B)ABC Equity Income Fund. An equity fund that aims to achieve both current income and growth of income best suits the objectives and investment profile of the client. A stock index fund does not offer the current income that the client requires. The capital appreciation and biotechnology funds not only fail to provide income; they are too risky for this retired person.
Individuals licensed as Series 6 representatives: A)may not deal in closed-end funds. B)deal in closed-end funds in the primary market only. C)deal in closed-end funds in the secondary market only. D)deal in closed-end funds without restrictions.
B)deal in closed-end funds in the primary market only. As with open-end funds, the primary market for closed-end funds involves the initial offering of investment company shares sold with a prospectus. Once the offering is closed to new buyers and the shares trade in the secondary market, limited securities representatives may no longer deal in them.
The XYZ Growth Fund has an NAV of $19. Its sales charge, calculated by the usual industry method, is 5%. What is the public offering price of a single share? A)$18.05 B)$19.95 C)$20.00 D)$21.02
C)$20.00 Public offering price is equal to NAV divided by (1 − sales charge). Thus, $19 / .95 = $20.00.
Your customer is interested in a fund that follows a buy-and-hold style of investing. He also insists on the lowest fees and expenses possible. Which of these funds might you recommend? A)Option income. B)Aggressive growth. C)Index. D)Asset allocation.
C)Index. A manager of an index fund would use a buy-and-hold style. As the composition of the index changes through stock distributions or recapitalizations, the fund manager would buy or sell the issues to keep them in proportion to their position in the index before the distribution or recapitalization. Because this does not happen often, fees and expenses would also tend to be low.
During a sales presentation on a mutual fund, the investor asks how the expense ratio is calculated. Which of the following statements may the representative make to the customer? A)It includes sales charges paid to the underwriter. B)It is computed taking into account the management fee only. C)The management fee is included in the computation. D)It is computed taking into account taxes only.
C)The management fee is included in the computation. The expense ratio includes the expenses of operating the fund compared to fund assets; expenses include management fees, administrative fees, brokerage fees, and taxes. The underwriter may never be an expense to the fund.
An open-end investment company that does not distribute at least 90% of its net income: A)is unable to retain all or part of its realized capital gains. B)does not require a restricted type of management. C)is liable for federal taxes on its net investment income. D)continues to qualify as a registered investment company based on interpretations of the IRS.
C)is liable for federal taxes on its net investment income. Investment companies that do not distribute at least 90% of their net investment income become liable for federal income taxes on all the net investment income. Shareholders would also be responsible for taxes on any distributions received. By distributing 90% of investment income, open-end companies can avoid double taxation.
An investor has been investing $100 per month for the past three months. The purchase prices were $20, $25, and $10. What is average cost per share purchased? A)$18.33 B)$5.45 C)$100 D)$15.79
D)$15.79 The first purchase (at $20) acquired 5 shares ($100/$20), subsequent purchases acquired 4, and 10 shares respectively. That is a total of 19 shares with an outlay of $300. The result is an average cost per share of $15.79 ($300/19).
A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund? A)$7.80. B)$8.57. C)$8.42. D)$8.30.
D)$8.30. The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge.
Which of the following companies would generally sell shares directly to the public? A)Face amount certificate company. B)Closed-end investment company. C)Unit investment trust. D)No-load mutual fund.
D)No-load mutual fund. No-load mutual funds sell directly to the public without using an underwriter or a sales force and without assessing a sales charge.
An investor owns $10,000 of shares in ABC bond fund. Due to a change in his financial situation, he wishes to exchange the bond fund shares for shares in ABC's aggressive growth fund. Which of the statements below correctly describes the tax consequences of this action? A)The exchange is not taxable. B)The exchange is taxable and the customer is also subject to a new sales charge on the aggressive growth fund shares. C)Ordinary income taxes are due on any appreciation realized on the bond fund shares. D)The exchange is considered a taxable event that must be recognized in the current year.
D)The exchange is considered a taxable event that must be recognized in the current year. The IRS considers this exchange to be a sale and repurchase. Any gain or loss on the bond fund shares must be recognized in the current year. Any share appreciation is classified as a capital gain and subject to taxation at capital gains rates. Because the exchange is made within the same family of funds, no new sales charge is applicable.
The open-end investment company share price quoted in the newspaper is the: A)underwriter's concession. B)confirmed price. C)dealer's price. D)bid price.
D)bid price. Newspaper quotes of mutual fund shares always show the net asset value (NAV), often referred to as the bid price.
As a new securities product, variable life insurance must be registered under: A)the Investment Advisers Act of 1940. B)the Securities Exchange Act of 1934. C)the Trust Indenture Act of 1939. D)the Securities Act of 1933.
D)the Securities Act of 1933. Because of the separate account, these contracts must be sold with a prospectus, and therefore be registered under the Securities Act of 1933.
Your father purchased $10,000 of ABC stock 10 years ago and purchased an additional $5,000 on April 1. On September 1, when the current market value of the stock is $25,000, your father passes away and you inherit the ABC stock. On November 1, you sell the stock for $30,000. What do you report on your tax return? A)$5,000 long-term capital gain B)$15,000 short-term capital gain C)$12,000 long-term capital gain and a $3,000 short-term capital gain D)$5,000 short-term capital gain
A)$5,000 long-term capital gain The holding period for stock inherited is always long-term, no matter when the stock was purchased. The cost basis of the stock is automatically stepped up to the current (fair) market value at the time of death. Therefore, the cost basis for the stock is $25,000 and when it is sold for $30,000 (two months later) it will result in a $5,000 long-term capital gain.
Your client, age 28 has just begun to consider investing outside of her employer's 401(k) plan. She's saved $25,000 to allocate toward some capital appreciation and some income. She prefers an investment with moderate risk and some downside protection if the stock market falls. With investing being new to her, she wants to note that she understands and is comfortable with moderate risk as stated, only. Given what has been conveyed, which of the following would be the most suitable? A)Balanced fund B)Equity income fund C)Equity index fund D)Specialized fund
A)Balanced fund A balanced fund which consists of both equities and debt instruments not only aligns with the growth objective, but also because of the debt instruments in the portfolio adds some downside protection against falls in market. An index fund and equity income fund are both subject to market risk should the market turn downward. Sector funds are considerably more aggressive and not suitable for an investor with moderate risk looking for some downside protection.
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 C shares with a 1% CDSC expiring in one year and .75 12b-1 fee. B)decline the transaction because short-term trading of funds is not allowed. C)buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee. D)buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee.
A)buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and .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.
When comparing mutual funds and ETFs, the disadvantages of investing in ETFs include which of the following? I-Commissions both when purchasing and liquidating shares. II-A price not set by supply and demand. III-The ability to avoid tax consequences. IV-The spread between the NAV and POP can be greater than 8.5% A)II and III B)I and IV C)II and IV D)I and III
B)I and IV 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.
Which of the following share classes typically have a higher expense ratio than Class A shares? I-No-load shares. II-Class B shares. III-Front-end load shares. IV-Class C shares. A)I and III. B)II and IV. C)II and III. D)I and IV.
B)II and IV. The expense ratio of no-load shares is comparable to that of Class A shares-that is, very low. Front-end load shares are Class A shares under a different name. Class B shares and Class C shares have the highest expense ratios. Class B shares do convert to Class A shares after the CDSC expires.
An investor purchases $10,000 of the Class B shares of the KAPCO Growth Fund. Two years later, the client redeems the shares. The redemption charge is a percent of the: A)greater of the NAV or purchase price. B)lesser of the NAV or purchase price. C)NAV at time of redemption. D)purchase price.
B)lesser of the NAV or purchase price. When faced with a CDSC on Class B shares, the charge is levied against the lesser of the current NAV or the original purchase price.
Before your customer buys shares of XYZ Invest Mutual Fund, shortly before the ex-dividend date, he should understand that: A)the ex-date is two business days before the record date. B)the price of the shares will decline on the ex-dividend date by the amount of the distribution. C)there is a great advantage to his purchasing the shares immediately so that he can receive the dividend. D)if he reinvests the dividend, he will not be liable for taxes on the dividend received.
B)the price of the shares will decline on the ex-dividend date by the amount of the distribution. Share prices decline on the ex-dividend date by the amount of the dividend. Dividend distributions also cause a tax liability, so the purchase of shares right before an ex-dividend date is not a good idea.
Your client has asked about the automatic dividend reinvestment plan offered by the ABC Growth and Income Fund. In describing the differences between dividend reinvestment and receiving distributions in cash, which of the following statements are CORRECT? I-One benefit of dividend reinvestment is that distributions reinvested are tax deferred, whereas dividends received in cash are taxable in the year of receipt. II-The taxation of the dividend distribution is not affected by your choice to reinvest or receive the dividend in cash. III-Reinvestment of dividends tends to have a compounding effect, while taking the distributions in cash inhibits the opportunity for growth of capital. IV-Taking the dividends in cash actually creates more wealth because the reinvested dividends are subject to sales charges. A)I and IV. B)II and IV. C)II and III. D)I and III.
C)II and III. Dividends, whether received in cash or reinvested, are subject to current taxation. A major benefit of reinvesting is the compounding effect on your account, if the shares increase in value. Dividends and capital gains distributions are always reinvested at net asset value.
Your open-end investment company customer has decided to make automatic reinvestment of dividend and capital gains distributions. This choice will: I-defer taxation on these distributions. II-lower the proportionate ownership in the fund each time a distribution is made. III-not change the tax status of these distributions. IV-allow your customer to reinvest the distribution without paying a sales charge. A)I and IV. B)II and III. C)III and IV. D)I and II.
C)III and IV. Automatic reinvestment does not change the tax status; however, it allows the shareholder to invest his distributions without paying a sales charge.
The KPF Corporate Bond Fund received $10 million in interest last year and no dividends from the securities that make up its portfolio. It had $500,000 in expenses and distributed $9 million of income directly to shareholders. Which of the following words applies to this fund? A)Index B)Equity C)Regulated D)Growth
C)Regulated The KPF Fund distributed 90% or more of its net investment income to shareholders and thus did not have to pay tax on what it distributed. This makes it a regulated investment company under Subchapter M of the Internal Revenue Code.
If you invest in a front-end load mutual fund and choose automatic reinvestment, you should expect that: I-dividend distributions will be reinvested at net asset value. II-dividend distributions will be reinvested at the public offering price. III-capital gains distributions will be reinvested at net asset value. IV-capital gains distributions will be reinvested at the public offering price. A)I and IV. B)II and IV. C)II and III. D)I and III.
D)I and III. Mutual funds that offer automatic reinvestment of dividends and gains distributions must do so at net asset value.
Which of the following are among the objectives of a balanced fund? I-Tax advantages. II-Exploitation of special circumstances. III-Capital appreciation. IV-Income. A)I and IV. B)II and III. C)I and II. D)III and IV.
D)III and IV. Balanced funds, also known as hybrid funds, invest in stocks for appreciation and bonds for income. The relative proportion of each is adjusted by the fund manager.
What is the greatest risk to an investor in an asset allocation portfolio? A)Market fluctuation. B)Loss of purchasing power. C)Financial risk. D)Poor portfolio management.
D)Poor portfolio management. In an asset allocation portfolio, the investor is dependent on the fund manager's ability to allocate assets based on market performance. The manager has the authority to choose the percentage of assets that should be directed into stock, bonds, and/or cash, for the purpose of avoiding the other risks listed.
If an investor has received dividends and capital gains distributions on mutual fund shares she has held for four months, the investor will pay A)just long-term or short-term capital gains rates, depending on the length of time the customer has held the fund shares. B)ordinary income tax rates on the capital gains and dividends. C)no tax until she liquidates the shares. D)capital gains rates on capital gains distributions and ordinary income rates on dividends
D)capital gains rates on capital gains distributions and ordinary income rates on dividends Capital gains distributions are taxed as capital gains, with their holding status depending on how long the fund has held the securities, not how long the investor has held the mutual fund shares. Dividend distributions are taxed as ordinary income.
Some mutual funds that are in a family of funds managed by the same company offer an exchange privilege. This privilege gives a shareholder the right to: A)convert mutual fund shares to securities listed on the New York Stock Exchange. B)reinvest dividends and capital gains without a sales charge. C)switch shares to an investment company within the family of funds and defer the taxes on any capital gains due to the exchange. D)convert shares to a different mutual fund within the family of funds on a dollar-for-dollar basis.
D)convert shares to a different mutual fund within the family of funds on a dollar-for-dollar basis. The exchange privilege allows a shareholder to exchange shares from one fund for shares from another within a family of funds under the same management without paying an additional sales charge (dollar for dollar). The shareholder is liable for any tax on gains as a result of the redemption of his old shares.
