Series 65 Study Questions: CH 3

An investor who initially makes a small investment in a mutual fund may have the advantage of a lower sales charge on investments made over a 13-month period through

a letter of intent.

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 majority of the outstanding shares.

A review of the prospectus of an open-end investment company reveals that its portfolio consists entirely of negotiable CDs, Treasury bills, and commercial paper. This is probably

a money market fund.

When an agent is discussing possible discounts related to the purchase of mutual fund shares, she would be referring to

breakpoints.

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

buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and 0.75% 12b-1 fee.

The investment adviser under contract to a regulated, diversified, open-end investment company does not

change investment objectives that he believes are in the best interest of the investors.

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, the net asset value per share is closest to

$32.55. (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.)

Under the Investment Company Act of 1940, which of the following would be considered affiliated persons? 1. Persons who control, are controlled by, or share common control with the company 2. Any officer, director, or employee of the company 3. Persons who own or control 5% or more of the voting shares of the company

1, 2, & 3

Which of the following activities would have an effect on the NAV of a mutual fund?

1. Market appreciation of portfolio securities 2. Market decline in the value of portfolio securities

According to the Investment Company Act of 1940, all of the following statements are true except

12b-1 distribution charges must be approved semiannually by a majority vote of the outstanding shares and by the board of directors.

To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investments and must distribute at least what percentage of its taxable income to shareholders annually in the form of dividends?

90%

From the standpoint of diversification, which of the following would be considered the most conservative?

A balanced fund

Which of the following best describes a 12b-1 fee?

A fee charged by some mutual funds to cover sales and distribution expenses

If a client prefers mutual fund investments in companies that primarily generate capital appreciation to companies that pay a steady dividend, what type of mutual fund and associated investment objective would you recommend?

A growth fund

Which of the following individuals would be considered a noninterested person in a mutual fund?

A member of the board of directors who does not hold another position within the investment company

Which of the following statements regarding secondary trading in the private equity market is true?

A trade in a secondary market may be motivated by the desire for increased access to deals in the primary market.

Which of the following is not an advantage of investing in a mutual fund?

Absence of market and business risk

Which of the following is not included in the calculation of a mutual fund's NAV per share?

Accrued sales charges

Which of the following statements regarding an investment company's board of directors is not true?

An investment company's board of directors manages the portfolio on behalf of the investor shareholders.

Asset-based sales charges will generally be lowest when holding which of the following mutual fund share classes?

Class A shares

Why are country funds organized as closed-end funds?

Because it is often difficult to liquidate the foreign securities to get their value into the United States

A 45-year-old client has just received an inheritance and would like to invest $100,000 into a growth mutual fund offered by your firm. The client intends to use the money to supplement retirement. You should probably recommend the purchase of

Class A shares

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

Class A shares.

An individual wishing to invest $15,000 into a mutual fund with the intent of having it remain invested for at least 15 years should probably purchase

Class B shares with a 12b-1 fee of 0.75% and a six-year declining CDSC after which they convert to Class A shares.

What can you tell about these investment companies from the information below? Company A: NAV (12.34) Ask (12.85) Company B: NAV (15.45) Ask (14.90)

Company A can be either open-end or closed-end; Company B must be closed-end.

One of your clients wishes to invest in a fund of hedge funds. You could tell him which of the following?

Expenses for these funds tend to be higher than those for other funds.

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

ETFs offer tax benefits similar to a limited partnership.

Which of the following is the least suitable mutual fund transaction?

Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence

Which of the following types of mutual funds would be most likely to have capital appreciation as its stated objective?

Growth

Which of the following is not a characteristic of hedge funds?

Hedge funds offer managers high fixed fees.

Under the Investment Company Act of 1940, purchases by which of the following are eligible for the reduced sales charges applicable at the fund's stated breakpoints? I. A qualified retirement plan II. The combined purchases of a man and a custodial account for his daughter where his wife, not he, is the custodian III. Two friends who have pooled their money to make a large purchase IV. An investment club

I & II

Which of the following are the most common characteristics of a REIT? I. It is traded on an exchange or over the counter. II. It is professionally managed. III. It passes through both gains and losses to investors. IV. It is a type of limited partnership.

I & II

Which of the following securities trade on regulated stock exchanges with their prices being determined by supply and demand? I. Closed-end investment companies II. Exchange-traded funds III. Face-amount certificate companies IV. Mutual funds

I & II

Under the Investment Company Act of 1940, which of the following qualify for a discount in a mutual fund's sales charge? I. Mr. and Mrs. Jones each purchase $5,000 worth of shares; the fund offers a volume discount for a single purchase of $10,000. II. Neighbors Jan, Mickey, and Lee form an investment club; Jan places an order for $10,000 worth of shares to be held in their three names. The fund offers a volume discount for a $10,000 purchase. III. Allen is the vice president of a firm under contract to provide investment advice to a mutual fund. He buys shares of that fund.

I & III

Which of the following are features of Class C mutual fund shares? I. Typically charge no front-end load II. Typically charge a front-end load III. Typically impose lower CDSCs than Class B shares for a shorter period IV. Typically convert to Class A shares after they are held for a defined period

I & III

Which of the following statements concerning hedge funds are true? I. Purchasers of hedge funds are generally required to be accredited investors. II. Short sales by the fund are not allowed. III. It is not uncommon for there to be a lock-up period that may last for as long one year or even longer. IV. It would be unusual for the fund managers to have an ownership interest in the fund.

I & III

Why would you suggest a client invest in international mutual funds or ETFs? I. Diversification II. Tax benefits III. Avoids having to pick individual stocks IV. Greater regulatory controls

I & III

With regard to taxation of distributions from a REIT, which of these are true? I. In the majority of cases, dividends are taxed as ordinary income. II. In the majority of cases, dividends are considered qualified for the lower tax rate. III. Capital gains distributions are treated as long-term capital gains. IV. Capital gains distributions are taxed as ordinary income.

I & III

To be in compliance with the Securities Act of 1933, the sale of which of the following securities would require delivery of a prospectus? I. Primary offering of a closed-end investment company registered under the Investment Company Act of 1940 II. Primary offering of 5-year U.S. Treasury notes sold to an individual investor III. Private placement sold under the provisions of Regulation D IV. Sale of shares of an open-end investment company whose first public offering was 23 years ago

I & IV

Under the Investment Company Act of 1940, which of the following are considered management companies? I. Open-end companies II. Closed-end companies III. Unit investment trusts IV. Face-amount certificate companies

I and II

Which of the following statements about closed-end investment companies are true? I. Investors in closed-end investment companies may trade only in full shares. II. Shares in closed-end investment companies may trade at more or less than the net asset value of the shares. III. A closed-end investment company offers a fixed number of shares and does not continually offer new shares in response to investor demand.

I, II, & III

Among the restrictions placed on open-end investment companies by the Investment Company Act of 1940 are I. mutual funds are only allowed to maintain joint accounts with other funds that are members of the same "family" of funds II. no public offering may commence unless the fund has at least $100,000 in net assets III. no registered investment company may own more than 3% of the voting shares of another registered investment company IV. shares of the fund will not have any margin loan value until the 30th day after purchase

II & III

If a customer's portfolio is heavily invested in common stock mutual funds, what is the customer's greatest risk?

Loss of principal

Which of the following investments is the most liquid?

Money market funds

Which of the following statements correctly expresses requirements under the Investment Company Act of 1940?

No investment advisory contract may be entered into that does not provide for termination with no more than 60 days' notice in writing.

The Investment Company Act of 1940 does which of the following?

Prescribes procedures for the establishment of investment companies

Nurturing growth of the enterprise would be the objective of which of the following types of investments?

Private fund

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

REITs.

Programs allowing for the direct pass-through of losses and income to investors include all of the following except

REITs.

A REIT is able to pass-through which of the following?

Taxable income from operations

Under the Investment Company Act of 1940, which of the following statements is true about an investment company that wishes to contract with an outside investment adviser to manage its portfolio?

The contract between the investment company and the investment adviser must be in writing.

An investor has been comparing several different mutual funds with the same objectives. When making the decision as to which fund to purchase, which of the following factors would be the most important?

The fund manager's tenure

Which of the following hedge fund characteristics is least accurate?

They are heavily regulated by capital market authorities.

Which of the following least accurately describes hedge funds?

They have a high degree of transparency.

It would be most accurate to refer to a 12b-1 charge as

a fee to cover distribution expenses.

Which of the following is likely to be characterized by no management fees and a portfolio consisting of municipal or corporate bonds?

Unit investment trust

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 closed-end fund.

The fee charged by some mutual fund companies if shares are redeemed within a specified time after being purchased is known as

a contingent-deferred sales charge.

An investor interested in obtaining the benefit of professional portfolio management has been tracking a particular investment company for the past several months. In so doing, it becomes obvious that the market price of the shares moves in direct relation to the computed NAV. This investor must be following

an open-end fund.

Among the provisions of the Investment Company Act of 1940 designed to protect the interests of investors is the provision that

any change in fundamental investment policy must be approved by stockholders

A mutual fund's expense ratio is found by dividing its expenses by its

average annual net assets.

One of your advisory clients meets the financial requirements for investing in a hedge fund. Having read so much about their outstanding performance, he asks you to describe any negatives to adding one to his portfolio. You could respond that

expenses tend to run very high, diminishing the funds' performance.

A client is interested in purchasing a REIT and asks you what the differences are between a listed REIT and an unlisted REIT. You could respond that all of the following are differences except

fees and expenses.

A college endowment fund might consider investing a portion of its portfolio into hedge funds to obtain the benefit of

increased diversification.

The Investment Company Act of 1940 allows a majority vote of the outstanding shares of a registered investment company to authorize the fund to do all of the following except

invest in securities consistent with the fund's objectives.

All of the following are advantages of mutual fund investments except

investors retain personal control over the investments in the fund's portfolio.

All of the following are characteristics typical of a money market fund except

it has a high beta and is safest in periods of low market volatility.

All of the following statements regarding a closed-end investment company are true except

it may redeem its own shares.

When advising an investor on the purchase of mutual funds, the agent should instruct the client to compare open-end mutual funds with the same objective for all of the following except

liquidity

In accordance with the stated provisions of the Investment Company Act of 1940, renewal of an open-end management investment company's investment adviser's contract must be approved by

majority vote of the fund's board of directors or of the outstanding voting shares, as well as by majority vote of the noninterested members of the board.

A prospect has primary investment objectives of current income and safety of principal. During the initial public offering of a closed-end government bond fund, an agent explains to the prospect that the fund invests in U.S. government-backed bonds, which are very safe as to principal, and plans to make monthly distributions. Little could therefore go wrong. Taken as a whole, this representation is

misleading because closed-end fund shares are subject to market pricing.

The Alpha-Gamma Mutual Fund reports a large number of their investors liquidating shares of the fund, so much so that the dollar amount of liquidations exceeds the incoming cash for new purchases. This would lead to a condition known as

net redemptions.

Under adverse market conditions, it is not unusual for mutual fund investors who had been investing on a regular basis to cease or reduce their level of financial commitment. This can have the effect of

net redemptions.

The Investment Company Act of 1940 states that

open-end companies may issue common stock only.

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

place the order as instructed.

If general interest rates increase, the interest income of a bond unit investment trust will probably

remain the same.

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

selling at a premium.

Investment companies must send financial reports to shareholders

semiannually.

A customer wishes to invest $97,000 in the XYZ Growth Fund, which offers only Class A shares. If the fund has a breakpoint sales charge discount at the $100,000 investment level, the course of action least appropriate for an agent is to

simply place the order as instructed.

To be in compliance with the Investment Company Act of 1940, it is permissible for the portfolio manager of an open-end investment company to buy all of the following securities except

stock on margin.

A client investing $50,000 into the KAPCO Growth Fund would most likely be eligible for a breakpoint if purchasing

the Class A shares.

The dollar amount of purchase at which sales charges are reduced in the purchase of open-end investment company shares is known as

the breakpoint.

A registered investment company whose capitalization may include preferred stock and/or bonds is

the closed-end management investment company.

When shares of a closed-end investment company are purchased by an investor, the price paid is based upon

the current asking price.

In the context of purchasing shares in a mutual fund, the term breakpoint refers to the point at which

the dollar amount of shares being purchased qualifies the investor for a lower sales charge.

Net asset value per share for a mutual fund can be expected to decrease if

the fund has made dividend distributions to shareholders.

The most common form of investment vehicle for venture capital is

the limited partnership.

Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of the majority vote of

the outstanding shares and a majority of that portion of the board of directors that is considered noninterested members.

You have a client who originally invested $25,000 into the ABC Growth Fund. Over the past five years, there have been no distributions and the value of the shares is now $35,000. If the client should ask about exchanging the entire holding for shares of the ABC Income Fund, you would explain that

there is a long-term capital gain of $10,000.

All of the following statements are features of hedge funds except

they generally have relatively low minimum initial investments.

All of the following are characteristics of exchange-traded funds except

they may not be sold short.

A retiree contacts an agent to discuss investing his retirement savings of approximately $2.1 million; his investment objective is long-term growth. The representative and customer discuss the advantages and disadvantages of diversifying among five different mutual funds within two fund families, as opposed to purchasing just one fund. Consequently, the agent made the following purchase recommendations: I. XYZ Emerging Growth Class B $495,000 II. XYZ Research Class B $310,000 III. XYZ Investors Growth Stock Class B $495,000 IV. ABC Capital Enterprise Class B $495,000 V. ABC Capital Opportunity Class B $310,000 VI. Total $2,105,000 These recommendations are

unsuitable because Class A shares in either (or both) fund family could be purchased for a sales charge breakpoint discount at or near zero percent.

Equity investments made for the launch or early development of a business are known as

venture capital.