SIE Managed Products

An income fund would likely invest in all of the following securities EXCEPT: A. Debentures B. Treasury STRIPS C. Preferred Stock D. High Yield Bonds

B. Treasury STRIPS Income funds invest primarily in bonds and preferred stocks for a high level of current income. Common stocks are not typically a choice for investment because the dividend yields are comparatively low. Treasury STRIPS would not be chosen as an investment because they only pay interest at maturity - they are zero-coupon Treasury obligations (that have been "stripped" of coupons). There is no current income from these securities.

The custodian bank usually performs all of the following functions EXCEPT: A. sending dividends and capital gains distributions to shareholders B. selecting the investment manager C. preparing and mailing proxies to shareholders D. holding the portfolio of investments in safekeeping

B. selecting the investment manager

The sponsor of a mutual fund is also known as the: A. Bank B. Manager C. Custodian D. Underwriter

D. Underwriter

An investor wishes to buy mutual fund shares that provide him with income and capital gains potential. Based on this information, the appropriate recommendation is a: A. balanced fund B. hedge fund C. sector fund D. dual purpose fund

The best answer is A. A balanced fund is a type of fund that allocates assets among different types of securities - maintaining a "balance" of equities and fixed income securities. It provides both income and capital gains potential. A dual purpose fund issues 2 classes of shares - either income shares or capital shares. After choosing the class of share to invest in, the customer either has an income fund or a growth fund, but not a balance of both.

The primary function of the investment adviser* is to: A. manage the fund B. set the investment objective for the fund C. safekeep the assets of the fund D. prepare the financial statements of the fund

A. manage the fund *Investment Adviser aka Fund Manager

An income fund would likely invest in which of the following securities? I Common stocks II Preferred stocks III Debentures IV Income bonds A. I and II only B. III and IV only C. II and III only D. I and IV only

C. II and III only Income funds invest primarily in bonds and preferred stocks for a high level of current income. Common stocks are not typically a choice for investment because the dividend yields are comparatively low. Income bonds would not be chosen as an investment because they only pay interest if the corporation has enough income; otherwise no payment is made.

Index ETFs are: I passively managed II actively managed III negotiable IV redeemable A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Almost all ETFs are based on a benchmark index. They mirror the composition of the index, so they are "passively" managed and have low management fees. An actively managed fund is one where the investment adviser chooses which securities to buy and sell. Active management comes with higher management fees. There are only a very few actively managed ETFs - almost all are passively managed. They trade like any other stock and are not redeemable.

A mutual fund discloses the following in its prospectus: Class A: As shown in the table below, the initial sales charge paid when purchasing Class A shares may be reduced or eliminated for larger purchases. Any applicable sales charge is paid directly out of the investment and reduces the investment amount. Investment / Sales Charges as a Percentage of Offering Price / Net Amount Invested $0 - $24,999 / 4.00% / 4.17% $25,000 - $49,999 / 3.00% / 3.09% $50,000 - $74,999 / 2.00% / 2.04% $75,000 - $174,999 / 1.00% / 1.01% $175,000 - $249,999 / .50% / .50% To receive the reduced sales charge on Class A shares, investments may be aggregated by the client and immediate family members (spouse and children under age 21). In addition, trust accounts, single participant retirement accounts, and solely controlled business accounts established by the client can be aggregated to qualify for the breakpoint. Class B: Class B shares have no initial sales charge. However, a contingent deferred sales charge may be applied to any client redemptions that occur within the first 5 years of purchase, as shown in the table below: Redemption After Holding For: / Contingent Deferred Sales Charge 1 year / 5% 2 years / 4% 3 years / 3% 4 years / 2% 5 years / 1% After 6 years, B shares convert to A shares A customer has $100,000 to invest in the mutual fund shown in the exhibit window, but will need to start redeeming shares in 3 years to pay for her child's college tuition. You should inform the customer that: A. Class A shares are the best investment choice B. Class B shares are the best investment choice C. mutual fund shares are not an appropriate investment for a customer with a short investment time horizon because of the uncertainty of investment return D. mutual fund shares are not an appropriate investment for a customer with a short investment time horizon because of penalties imposed for early withdrawals from the fund

The best answer is A. Because this customer has $100,000 to invest, she qualifies for a 1% sales charge on the Class A shares. If she purchased Class B shares, there would be no up-front sales charge, but since she needs to start liquidating shares in 3 years to pay for college expenses, the redemption fees on the Class B shares would be more than the 1-time up-front sales charge on the Class A shares.

Which term BEST describes an ETF? A. Stock B. Mutual Fund C. Derivative D. Bond

The best answer is A. ETF stands for Exchange Traded Funds. These are fund shares that trade like any other stock. They are not mutual fund shares because they cannot be redeemed at any time with the sponsor. Rather, they are negotiable securities.

A customer asks the following; "One of my neighbors was talking about his investment in an ETF (Exchange Traded Fund) and said that it is "low cost." Is this true?" The registered representative should respond that: A. the expense ratios of most ETFs are lower than those for comparable index mutual funds B. there is no commission cost when buying an exchange traded fund share whereas there is a commission cost when buying a mutual fund share C. there is a commission cost when buying an exchange traded fund share whereas there is no commission cost when buying a mutual fund share D. there is an opportunity cost relative to the expected potential investment return when buying an exchange traded index fund as compared to buying an actively traded mutual fund

The best answer is A. ETFs have been increasing in popularity as compared to traditional mutual funds because of their low cost (low expense ratios). However, when buying or selling an exchange traded fund, there is a commission cost; whereas when buying or redeeming a mutual fund there is no charge if the fund is "no-load" or there can be a sales charge.

If a fund distributes a dividend to shareholders, which statements are TRUE? I The dividend is taxable if it is taken as a check II The dividend is not taxable if it is taken as a check III The dividend is taxable if it is automatically reinvested in the fund IV The dividend is not taxable if it is automatically reinvested in the fund A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Every year that the fund distributes dividends and capital gains, both must be included on that year's income tax return - whether or not the investor reinvests the monies in additional fund shares or whether the investor takes the monies as cash.

A customer places an order to buy mutual fund shares directly from the fund wholesaler rather than to purchase the shares through a broker-dealer. Under FINRA rules, which of the following statements are TRUE? I The wholesaler must be a registered FINRA member II The wholesaler does not need to be a registered FINRA member III The customer must pay the Public Offering Price as described in the prospectus IV The customer may receive a discount from the Public Offering Price since this is a direct purchase A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Fund wholesalers must be FINRA members. Each is a broker-dealer, called the "fund distributor." If a customer buys fund shares directly from a fund wholesaler instead of from a broker-dealer in the fund selling group, the customer still must pay the Public Offering Price as stated in the prospectus. Discounts to the public other than those detailed in the fund prospectus are prohibited.

Net Asset Value per share for a mutual fund can be expected to decrease if which of the following occur(s)? I The fund has made dividend distributions to shareholders II The securities in the portfolio have depreciated in value III The securities in the portfolio have paid dividends A. I and II only B. II and III only C. I and III only D. I, II, III

The best answer is A. If a fund distributes a dividend to shareholders, the Fund shares are reduced by the value of the distribution. If the securities in the fund portfolio pay dividends, these are received by the Fund. The receipt of these monies into the Fund increases NAV per share. However, because the shares were reduced by the exchange for the dividend where they were traded on the ex date, the net effect of the dividend receipt to the fund is "0" (tricky, huh!). Depreciating securities in the Fund portfolio will also decrease NAV per share.

A customer is considering the purchase of $80,000 of ABC Income Fund and intends to use the money 3 years from now to purchase a new boat. The fund offers the following share classes: Class A shares: 5% initial sales charge No 12b-1 fees Breakpoint Schedule: $0 - $10,000 5% sales charge $10,001 - $30,000 3% sales charge $30,001 - $50,000 2% sales charge $50,001 - $100,000 1% sales charge Class B shares: No initial sales charge .40% annual 12b-1 fee CDSC if the customer redeems within the following time periods: Redeem within Year 1: 5% redemption fee Redeem within Year 2: 4% redemption fee Redeem within Year 3: 3% redemption fee Redeem within Year 4: 2% redemption fee Redeem within Year 5: 1% redemption fee Redeem after Year 5: 0% redemption fee Class C shares: No initial sales charge .75% annual 12b-1 fee No CDSC The best recommendation for this customer is: A. purchase Class A shares B. purchase Class B shares C. purchase Class C shares D. divide the purchase equally into $40,000 each for Class B and Class C shares

The best answer is A. If this customer invested $80,000 in Class A shares, he pays a 1% sales charge and no annual 12b-1 fees for the 3 year investment time horizon. If the customer invested $80,000 in Class B shares, there is no up-front sales charge; but because the customer will redeem after year 3, he will be hit with a 2% redemption fee on these shares. In addition, the customer must pay .40% in annual 12b-1 fees for 3 years. If the customer invested the $80,000 in Class C shares, then the customer must pay .75% annually in 12b-1 fees for 3 years, or 2.25% total. The lowest fee purchase is, therefore, Class A shares.

Which of the following statements are TRUE regarding management fees imposed by mutual funds? I Management fees are paid to the investment adviser of the fund II Management fees are paid to the individuals selling the fund III Management fees are deducted from fund gross investment income before any dividend distributions are made IV Management fees are not deducted from fund gross investment income A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Management fees imposed by mutual funds are based on a percentage of assets under management, and are an annual reduction of the fund's gross investment income. Thus, these are deducted by the fund to arrive at the net investment income available for distribution to shareholders.

Which statement is TRUE regarding money market funds? A. The Net Asset Value per share is constant at $1 B. The Net Asset Value per share is constant at $10 C. Net Asset Value per share varies with the performance of the portfolio D. Net Asset Value per share cannot be determined in a money market fund

The best answer is A. Money market funds are unusual in that the Net Asset Value per share is constant at $1.00. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each. For example, if an investor has 1,000 shares @ $1 ($1,000 total) in the fund, and the assets appreciate by 10%, then the customer will have 1,100 shares at $1 ($1,100 total).

Money market funds are usually: A. no load funds B. load funds C. closed end funds D. growth funds

The best answer is A. Money market funds are usually no load. Firms count these funds as short term holding vehicles for customer monies before a longer term investment is made, and attempt to attract these funds by not imposing a sales charge.

Which of the following customers is allowed a breakpoint on mutual fund purchases? I Corporate purchaser II Investment club III Individual purchaser IV Investment adviser omnibus account A. I and III B. II and IV C. I, II, III D. I, II, III, IV

The best answer is A. People cannot "join together" to obtain a breakpoint on a mutual fund purchase. Therefore, investment clubs cannot group purchases for a breakpoint, nor can investment advisers group their customers' purchases. An individual or corporation making a purchase is considered to be "one" purchaser and qualifies for the breakpoint.

A sector fund is a mutual fund that: A. invests in securities found in one industry or geographic area B. allocates investment among common stocks, preferred stocks, and bonds of companies in various industries C. sells futures on market indices and uses short sales to limit risks of long positions D. invests solely in the common stocks of companies that exhibit faster than average gains in earnings

The best answer is A. The definition of a "sector fund" is one that invests in securities found in one industry or geographic area. For example, an "energy" fund or a country fund are "sector" funds.

Which statement is TRUE regarding the ex date for a mutual fund? A. The ex-date is set by the Board of Directors of the Fund B. The ex-date is set by FINRA C. The ex-date is 2 business days prior to the record date D. The ex-date is the day on which the Net Asset Value per share increases

The best answer is A. The ex-date for a mutual fund is set by the Board of Directors. On that date, the price of the shares is reduced for any distributions. The normal ex-date of 2 business days prior to record date does not apply because there is no trading of mutual fund shares (the ex-date for mutual funds is typically the day after the payable date)(and cannot be set by FINRA).

The expense ratio of a mutual fund is: A. Fund Operating Expenses / Total Net Assets B. Fund Operating Expenses / Annual Fund Sales C. Fund Operating Expenses / Fund Annual Net Income D. Fund Portfolio Expenses / Fund Annual Net Income

The best answer is A. The expense ratio of a mutual fund measures the proportion of investment return on assets that is consumed by expenses. The lower the ratio, the more "efficient" the fund is. The expense ratio is:

Which individuals can join together and qualify for a breakpoint on their aggregate purchases of mutual funds? A. Family members in the same household B. Members of an investment club C. Limited partners who form a partnership to make the purchase D. All of the above

The best answer is A. Unrelated investors cannot "join together" to aggregate their purchases and get the benefit of a breakpoint. However, mutual fund companies will aggregate purchases of immediate family members in the same household and give them the benefit of the breakpoint.

Which of the following terms are synonymous when talking about open-end funds? I Underwriter / Sponsor II Underwriter / Dealer III Public Offering Price / Ask Price IV Public Offering Price / Bid Price A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. When talking about mutual funds, the Fund Sponsor is the Fund Underwriter. Broker-dealers may join in a selling group to sell these funds, acting as agent only. Public Offering Price of a fund is the same as the fund's ask price.

An investment in an inverse ETF would be profitable in a: A. bull market B. bear market C. stable market D. volatile market

The best answer is B. An inverse ETF uses short selling to move in the opposite direction as compared to the overall market. Whereas a regular ETF is profitable in a bull market, an inverse ETF is profitable in a bear market.

"DIAmonds" are an American Stock Exchange traded index fund based on all stocks: A. rated "AA" or better B. in the Dow Jones Industrial Average C. of diamond mining companies D. that have outperformed the Dow Jones Industrial Average

The best answer is B. DIAmonds is the trade name for the "DIA" - Dow Jones Industrial Average Exchange Traded Fund. The other major exchange traded funds include - SPDRs (Standard and Poor's 500 Index - symbol = SPY) - also traded on the AMEX (now renamed the NYSE American), and QUBES (NASDAQ 100 Index - symbol = QQQ) which are traded on the NASDAQ.

A client sells $49,000 of various stocks and wishes to use the proceeds to buy a mutual fund that has breakpoints at $10,000 intervals. Which statement is TRUE? A. The customer must sign a letter of intent to reach the $50,000 breakpoint B. The customer should be informed that investing an additional $1,000 will provide the benefit of a breakpoint C. The customer should be informed that the sales charge earned by the representative will be lower if the breakpoint is reached D. No additional disclosures are required to be made to the customer

The best answer is B. If a customer is "close" to a breakpoint, it is a violation to not make the customer aware that putting in the additional funds to reach that level will result in a lower sales charge. If the disclosure is not made, the registered representative has committed a violation known as a "breakpoint sale."

Which of the following statements are TRUE about the Net Asset Value per share for a mutual fund? I The distribution of dividends to mutual fund shareholders affects the Net Asset Value per share II The distribution of dividends to mutual fund shareholders does not affect the Net Asset Value per share III The redemption of mutual fund shares affects the Net Asset Value per share IV The redemption of mutual fund shares does not affect the Net Asset Value per share A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. If a fund distributes a dividend to shareholders, the Fund shares are reduced by the value of the distribution on the ex date. Redemption of shares has no effect on Net Asset Value per share, because the redemption of each share occurs at the current Net Asset Value that day. The reduction in total net assets is exactly matched by a proportionate reduction in shares outstanding, so Net Asset Value per share is unchanged by the redemption.

CLOSED END BOND FUNDS Fund Net Asset Value / Stock Close / NAV Change Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to sell 100 shares of Acco Fund will receive: A. $813 B. $813 less a commission C. $832 D. $832 less a commission

The best answer is B. If closed-end fund shares are sold, the investor gets the current market price less a commission paid for executing the trade. The last price for Acco Fund is $8.13. An investor selling 100 shares receives $813 less a commission.

When an investor places an order to sell a mutual fund, the investor receives the: A. market price at that moment B. NAV at that day's close C. NAV at the next day's open D. a negotiated price

The best answer is B. Mutual fund shares do not trade. They are redeemable with the sponsor. An order to sell is filled at that day's closing NAV (Net Asset Value).

Mutual funds must send their financial statements to shareholders: A. annually B. semi-annually C. quarterly D. monthly

The best answer is B. Mutual funds send their financial statements to shareholders semi-annually.

All of the following would reduce the Net Asset Value per share of a mutual fund EXCEPT: A. asset depreciation B. asset appreciation C. capital gains distribution D. dividend distribution

The best answer is B. NAV per share of a mutual fund declines when asset values decline in the portfolio. When a fund pays either a dividend distribution or capital gains distribution, the NAV per share is reduced on the ex date to reflect the lower per share value. Of course, any person who elects to reinvest the distributions in more shares will have now hold more shares, each one worth less than before. But in aggregate, the investment value would not have changed.

A retired investor seeks safety of principal and current income. All of the following funds would be suitable recommendations EXCEPT: A. Government Bond Fund B. Special Situations Fund C. Money Market Fund D. Insured Corporate Bond Fund

The best answer is B. Of the choices given, the least safe investment is a Special Situations Fund. Such funds invest in companies in "special situations" such as bankruptcies, to reap capital gains if the company recovers.

A customer redeems 1,000 shares of XYZ Fund. The computed Net Asset Value per share is $14.75 and the Public Offering Price is $16.03. The fund has a 1/4% redemption fee. The customer will receive: A. $14,700 B. $14,713 C. $14,750 D. $16,120

The best answer is B. Redemption always takes place at Net Asset Value. NAV is $14.75 x 1,000 shares = $14,750 Gross Amount. However, the fund charges a redemption fee of 1/4%, so the investor gets 99.75% of $14,750 = $14,713.

SPDRs are based on the: A. Standard and Poor's 100 Index B. Standard and Poor's 500 Index C. Standard and Poor's 1000 Index D. Standard and Poor's 5000 Index

The best answer is B. SPDR is the acronym for the Standard and Poor's 500 Index Depository Receipt. This is an Exchange Traded Fund traded - an ETF.

"SPIDERS" trade on the: A. Pink Sheets B. American Stock Exchange C. Chicago Mercantile Exchange D. NASDAQ Stock Market

The best answer is B. SPIDERS is the trade name for the "SPDR" - Standard and Poor's 500 Index Exchange Traded Fund. SPDRs trade on the AMEX (now renamed the NYSE American), as do - DIAmonds (Dow Jones Industrial Average Index - symbol = DIA). QQQs (NASDAQ 100 Index) trade on the NASDAQ Stock Market.

The ex dividend date for mutual funds is set by: A. FINRA B. the Fund Board of Directors C. the shareholders of the Fund D. the SEC

The best answer is B. Since mutual funds do not trade, the Board of Directors sets the ex (reduction) date for fund distributions.

Which of the following statements are TRUE about the Investment Company Act of 1940's requirements for management companies? I At least 40% of the Board of Directors must be "non-interested" persons II At least 60% of the Board of Directors must be non-interested III To establish a fund, a minimum of $10,000 of Total Net Assets is required IV To establish a fund, a minimum of $100,000 of Total Net Assets is required A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. The Investment Company Act of 1940 requires that the minimum capital to start a fund is $100,000. It also requires that at least 40% of the Board of Directors be "non-interested parties" - that is, they are not affiliated with the sponsor, custodian, transfer agent, or firms in the selling group.

The expense ratio of a mutual fund is a measure of: A. profitability B. operating efficiency C. liquidity D. stability

The best answer is B. The expense ratio is: Expense Ration = Fund Operating Expenses / Total Net Assets The ratio really represents that portion of the fund's return on net assets that is eaten up by expenses. The lower the ratio, the greater the residual income for investors making the fund more efficient.

The front-end load on a mutual fund is best described as the: A. expense ratio B. cost of investing in a fund C. taxation of dividend distributions from investing in the fund D. taxation of capital gains from investing in the fund

The best answer is B. The front-end load cost of a mutual fund is the actual "cost" of investing in a fund. This is the sales charge. This charge is deducted from the gross dollars paid, with the net amount invested in the fund.

A customer has signed a Letter of Intent to complete a breakpoint for a $60,000 purchase of mutual fund shares. The customer has purchased $50,000, and the NAV of the position is currently $60,000. In order to complete the breakpoint, you should tell the customer to: A. do nothing - the breakpoint is completed B. sell $10,000 of the fund shares and use the proceeds to buy another $10,000 of the fund C. deposit another $10,000 to buy shares to complete the breakpoint D. donate $10,000 of the fund shares to a charity of the fund's choice to complete the breakpoint

The best answer is C. Asset appreciation does not count towards completing a breakpoint, so Choice A is a false and misleading statement. The client contractually agreed to buy $60,000 of fund shares (within 13 months) under a Letter of Intent to get a lower sales charge. If the customer does not deposit the full $60,000, then the sales charge is recomputed to a higher percentage, based on how much the customer actually purchased. So the customer must deposit another 120,000 to complete the breakpoint. If the customer were to take the capital gains distribution as cash and use that money to buy additional shares to complete the breakpoint, then the customer would have to pay a sales charge (which would be lower because the breakpoint is being completed). But the customer must understand that if the capital gains distribution were simply reinvested, that would occur at NAV and there would be no sales charge. Not completing the breakpoint and the resulting fractional bump-up in sales charge would be less costly to the customer than the sales charge that would be imposed on the additional purchase (usually - there can be exceptions here). Thus, Choice B is an inappropriate recommendation. Choice C is the right thing to do. The customer must deposit the remaining $10,000 to complete the breakpoint. Choice D is basically garbage.

The maximum annual 12b-1 fee permitted under FINRA rules is: A. .25% B. .50% C. .75% D. 1.00%

The best answer is C. 12b-1 fees are permitted under SEC Rule 12b-1. If a fund adopts a 12b-1 plan it may charge its existing shareholders for the cost of soliciting new investment to the fund. For example, if you see a television or web advertisement for a mutual fund, it is being paid for by 12b-1 fees. The "cost" of soliciting new investment also includes compensation to registered representatives selling the fund shares. The maximum annual 12b-1 fee is .75% of net assets per year under FINRA rules.

Which statements are TRUE under FINRA rules? I The maximum annual 12b-1 fee is .25% II The maximum annual 12b-1 fee is .75% III If a fund charges a 12b-1 fee, the maximum up front sales charge is limited to 7.25% IV If a fund charges a 12b-1 fee, the maximum up front sales charge is limited to 8.50% A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. 12b-1 fees are permitted under SEC Rule 12b-1. If a fund adopts a 12b-1 plan it may charge its existing shareholders for the cost of soliciting new investment to the fund. For example, if you see a television or web advertisement for a mutual fund, it is being paid for by 12b-1 fees. The "cost" of soliciting new investment also includes compensation to registered representatives selling the fund shares. The maximum annual 12b-1 fee is .75% of net assets per year under FINRA rules. If a fund imposes a 12b-1 fee, FINRA limits to maximum up-front sales charge to 7.25% instead of 8.50%.

In order to be regulated under Subchapter M of the IRS Code, at least how much of the Net Investment Income must be distributed to the mutual fund shareholders? A. 70% B. 80% C. 90% D. 100%

The best answer is C. A fund that distributes at least 90% of Net Investment Income to shareholders is "regulated" under Subchapter M of the Internal Revenue Code and pays no tax on the distributed amount.

No load funds do not impose any of the following fees EXCEPT: A. Front end sales charge B. Redemption fee C. Management fee D. Contingent deferred sales charge

The best answer is C. A pure "no-load" fund does not impose sales charges of any kind to buy into the fund; nor to redeem shares. However, all mutual funds charge an annual management fee, which is an annual expense against the fund's investment income.

When comparing an ETN to an ETF, which statements are TRUE? I ETNs have both credit risk and market risk II ETFs have both credit and market risk III ETNs have only market risk IV ETFs have only market risk A. I and II only B. III and IV only C. I and IV only D. II and III only

The best answer is C. An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. It is listed and trades like a stock, so it has little marketability risk. Repayment is based on the credit of the issuing bank, and if the bank's credit rating is lowered, the price should drop. This is credit risk. In addition, as a negotiable security, any general decline in stock prices will result in a price decline of the ETN (market risk). ETFs (Exchange Traded Funds) have an NAV that is based on the value of the physical underlying securities. There is no credit risk here. If a single company held in the underlying stock portfolio has its credit rating lowered, this will have a minimal impact on the value of the overall portfolio. However, since these are negotiable securities, they do have market risk.

A customer has signed a Letter of Intent to buy at least $50,000 of a mutual fund in return for getting a lowered sales charge. The customer has already invested $40,000, and the customer notices on his account statement that the current NAV of the position is $52,000. The fund is going to make a distribution of the $12,000 capital gain. The registered representative recommends that the customer take the capital gain as cash and use the proceeds to buy shares of the fund to finish the breakpoint. This suggestion by the registered representative is inappropriate because it was not disclosed that: A. the breakpoint has already been completed by the asset appreciation in the account B. customers can only complete breakpoints with money that is not obtained from mutual fund share liquidations C. the capital gain would be automatically reinvested at NAV if not taken in cash while the purchase of the shares would occur at POP including a sales charge D. if the capital gain were automatically reinvested, there would be no tax due, but if the capital gain is taken in cash, it is taxable

The best answer is C. Asset appreciation does not complete a breakpoint for a client. The client contractually agreed to buy $50,000 of fund shares (within 13 months) under a Letter of Intent to get a lower sales charge. If the customer does not deposit the full $50,000, then the sales charge is recomputed to a higher percentage, based on how much the customer actually purchased. So the customer must deposit another $10,000 to complete the breakpoint. If the customer were to take the capital gains distribution as cash and use that money to buy additional shares to complete the breakpoint, then the customer would have to pay a sales charge (which would be lower because the breakpoint is being completed). But the customer must understand that if the capital gains distribution were simply reinvested, that would occur at NAV and there would be no sales charge. Not completing the breakpoint and the resulting fractional bump-up in sales charge would be less costly to the customer than the sales charge that would be imposed on the additional purchase (usually - there can be exceptions here). Regarding taxes, whether the capital gain is taken as cash or reinvested, it is taxable.

A customer has signed a Letter of Intent (LOI) to buy $100,000 of XYZZ Mutual Fund, reducing the sales charge from 4% to 2%. The customer has deposited $80,000 over the past 12 months. The position has a current NAV of $110,000. Which statement to the customer by a registered representative would be acceptable regarding completing the breakpoint? A. "You don't need to do anything because the fact that the net assets in the account exceed $100,000 completes your breakpoint" B. "You should redeem $20,000 of XYZZ and then take the proceeds to buy another $20,000 of XYZZ so the breakpoint is completed" C. "You can borrow $20,000 against your holding so that you can buy an additional $20,000 of XYZZ and complete the breakpoint" D. "You only need to deposit another $10,000 to buy XYZZ shares to complete the breakpoint because you are already $10,000 over the contractual breakpoint level"

The best answer is C. Asset appreciation does not count towards completing a breakpoint, so Choice A is a false and misleading statement. The client contractually agreed to buy $100,000 of fund shares (within 13 months) under a Letter of Intent to get a lower sales charge. If the customer does not deposit the full $100,000, then the sales charge is recomputed to a higher percentage, based on how much the customer actually purchased. So the customer must deposit another $20,000 to complete the breakpoint. If the customer were to take the capital gains distribution as cash and use that money to buy additional shares to complete the breakpoint, then the customer would have to pay a sales charge (which would be lower because the breakpoint is being completed). But the customer must understand that if the capital gains distribution were simply reinvested, that would occur at NAV and there would be no sales charge. Not completing the breakpoint and the resulting fractional bump-up in sales charge would be less costly to the customer than the sales charge that would be imposed on the additional purchase (usually - there can be exceptions here). Thus, Choice B is an inappropriate recommendation. To complete the breakpoint, the customer could use the mutual fund shares as collateral in a margin account and borrow against them. This would give the customer the funds to buys the additional shares, without the customer having to dig into his or her own pocket. Thus, Choice C is an appropriate statement. Choice D is a false statement - the customer must deposit $20,000 to complete the breakpoint - not $10,000.

CLOSED END BOND FUNDS Fund Net Asset Value / Stock Close / NAV Change Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 Which statement is TRUE regarding the relationship between Acco Fund's Net Asset Value and closing price? A. The closing price is lower than Net Asset Value because fund redemptions are exceeding purchases B. The closing price is lower than Net Asset Value because of the redemption fee charged to investors C. The closing price is lower than Net Asset value because sellers exceed buyers on the exchange floor D. The closing price is lower than the Net Asset Value because buyers exceed sellers on the exchange floor

The best answer is C. Closed-end funds can trade at a discount to Net Asset Value when investors become disenchanted with the fund. This will occur if the fund gives an inferior return. Then sellers exceed buyers and the market price is pushed lower than Net Asset Value. A similar thing happens to regular companies' stocks when they sell below book value.

An investor purchases 1,000 mutual fund shares with a Net Asset Value of $10 each, where the fund imposes a 5% contingent deferred sales charge if the shares are redeemed within the first year. The sales charge decreases by 1% for each year the investor remains invested in the fund. If the investor were to redeem his shares during the fourth year of holding the fund, based upon the NAV of $10, he or she will receive: A. $10,000 B. $9,900 C. $9,800 D. $9,700

The best answer is C. Deferred sales charges are imposed only if a customer redeems, with the amount of the sales charge typically being reduced the longer the investor remains in the fund. This investor is redeeming his $10,000 investment after holding it for 3 full years; therefore the fund is being redeemed during the 4th year. This means the Contingent Deferred Sales Charge is 2% (it is 5% if redeemed in year 1; 4% in year 2; 3% in year 3; 2% in year 4; 1% in year 5; 0 thereafter). If the investor redeems during year 4, he or she must pay the 2% deferred sales charge, and the investor will receive $10,000 x .98 = $9,800 upon redemption.

Exchange Traded Funds (ETFs) are: I registered under the Investment Company Act of 1940 as closed-end management companies II registered under the Investment Company Act of 1940 as open-end management companies III regulated by the SEC and FINRA IV regulated by FDIC and the Department of Treasury A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. ETFs are almost a "hybrid" type of investment company structure because they allow for the creation of additional shares, like an "open-end" fund; but they are listed and trade like a "closed-end" fund. Technically, most ETFs are structured as open-end investment companies, since they allow for the creation of additional shares in minimum "creation units" of $50,000 - $100,000. If the shares are trading in the market at a discount to NAV, institutional investors can buy new creation units and short the equivalent shares that compose the units, in an arbitrage trade. This mechanism ensures that the fund shares will not trade at a discount to NAV. Because new shares can be created, these are registered as open-end funds under the Investment Company Act of 1940. Since ETFs are securities, they are regulated by the SEC and FINRA.

A customer places an order to buy mutual fund shares directly from the fund wholesaler, and therefore does not use a broker-dealer included in the fund's selling group. Under FINRA rules, all of the following statements are true EXCEPT: A. the wholesaler must be a registered FINRA member B. the customer must pay the Public Offering Price as described in the prospectus C. the wholesaler can offer the customer a lower sales charge since no concession will be paid to a selling group member D. pricing of the fund shares must conform to the requirements of the Investment Company Act of 1940

The best answer is C. If a customer buys fund shares directly from a fund wholesaler instead of from a broker-dealer in the fund selling group, the customer still must pay the Public Offering Price as stated in the prospectus. The customer does not get any extra discount by going directly to the wholesaler. Fund wholesalers must be FINRA members. All fund shares must be priced in accordance with the rules written under the Investment Company Act of 1940 - for example, mutual fund shares must be "forward priced" under these rules.

A mutual fund sponsor has three different income funds, holding AAA rated debt securities with similar maturities. Assuming that the expense ratios for the funds are identical, arrange the funds in order of highest to lowest yield from investment income: I Government Bond Fund II Corporate Bond Fund III Municipal Bond Fund A. I, III, II B. II, III, I C. II, I, III D. III, I, II

The best answer is C. If the securities held in each of the bond funds have similar maturities and the funds have similar expense ratios, the remaining differences affecting yields are credit rating and tax status. Corporates are considered more risky than both governments and municipals, and are fully taxable, so their yield is the highest. Governments are less risky than municipals, but are taxable by the Federal government, so government yields are higher than municipal yields. The order from highest to lowest yield is: Corporates, Governments, Municipals.

A mutual fund sponsor has three different income funds, holding AAA rated debt securities with similar maturities. Assuming that the expense ratios for the funds are identical, which fund would have the lowest yield from investment income? A. Government Bond Fund B. Corporate Bond Fund C. Municipal Bond Fund D. Any of the above

The best answer is C. If the securities held in each of the bond funds have similar maturities and the funds have similar expense ratios, the remaining differences affecting yields are credit rating and tax status. Corporates are considered more risky than both governments and municipals, and are fully taxable, so their yield is the highest. Governments are less risky than municipals, but are taxable by the Federal government, so government yields are higher than municipal yields. The order from highest to lowest yield is: Corporates, Governments, Municipals.

The Value Line Index fund consists of: A. all issues traded on the New York Stock Exchange B. only issues rated in the top 2 ratings by the Value Line Investment Survey C. all companies included in the Value Line Investment Survey D. small capitalization issues not listed on the New York Stock Exchange

The best answer is C. Index funds attempt to "shadow" the performance of a designated index, such as the Standard and Poor's 500 index; or the Value Line Index. Such funds match their composition and weighting every day to match the designated index - thus, the Value Line Index Fund would include all stocks included in the Value Line Investment Survey, which is the basis of the index.

Which of the following statements are TRUE regarding a Standard and Poor's 500 Index fund? I The portfolio manager can decide to invest in any stock as long as it is included in the Standard and Poor's 500 Index II The portfolio manager must change the composition of the fund if the stocks included in the index are changed III The fund must weight its investments in the same manner as the Standard and Poor's 500 index is weighted IV The management fee for such a fund is typically lower than for an actively managed fund A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

The best answer is C. Index funds attempt to "shadow" the performance of a designated index, such as the Standard and Poor's 500 index; or the Value Line Index. Such funds match their composition and weighting every day to match the designated index. Because no research is done to select stocks for the fund, the management fees are lower than for actively managed funds. It is false that the portfolio manager can invest in any stock in the Standard and Poor's 500 index, since the fund must match the composition of the index as a whole.

A mutual fund that invests primarily in Treasury Bills and other short term debt obligations is a(n): A. income fund B. government securities fund C. money market fund D. growth fund

The best answer is C. Money market funds invest in short term money market instruments, such as Treasury Bills, commercial paper and banker's acceptances. An income fund invests in longer maturity bonds and preferred stocks which give higher yields than money market debt. A government securities fund invests in government securities only - T-Bills, T-Notes and T-Bonds.

Which statements are TRUE regarding money market funds? I Money market funds are typically sold with a sales charge II Money market funds are typically sold without a sales charge III Fund dividends are taxable, whether or not reinvested in additional shares IV Fund dividends are not taxable if reinvested in additional shares A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. Money market funds usually do not impose sales charges. Fund dividends are taxable, whether or not they are automatically reinvested in additional fund shares.

A customer has the following holdings in the ACME Fund Family: ACME Growth Fund: $225,000 ACME Balanced Fund: $120,000 ACME International Fund: $15,000 ACME Funds has the following breakpoint schedule: $0 - $50,000 5% $50,001 - $100,000 4% $100,001 - $250,000 3% $250,001 - $1,000,000 2% The customer wishes to buy another $60,000 of ACME Growth Fund. The sales charge that will be imposed is: A. 4% B. 3% C. 2% D. 0%

The best answer is C. Mutual fund breakpoints are applied to the entire "family" of funds offered by a sponsor. This customer has a total $360,000 investment in the ACME fund family. Another $60,000 purchase brings the customer's position up to $420,000; and the applicable breakpoint on the $60,000 purchase is 2% from the breakpoint schedule shown.

Mutual Funds: NAV Buy Chg ALPO Fund 9.51 10.39 +.02 AUDI Fund 6.82 7.45 +.04 A customer who buys 100 shares of ALPO Fund will pay: A. $951 B. $951 plus a commission C. $1,039 D. $1,039 plus a commission

The best answer is C. Mutual funds are bought at the "Ask" price that includes the sales charge. This is the Public Offering Price. The Ask price on ALPO Fund is $10.39 per share or $1,039 for 100 shares.

Which statements are TRUE about mutual fund "Class B" shares? I Class B shares impose a front-end sales charge II Class B shares impose a contingent deferred sales charge III Class B shares impose a 12b-1 fee IV Class B shares do not impose a 12b-1 fee A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. Mutual funds offer various share classes to investors. The investor can choose to buy the same fund either as a Class A, B, C, or D share. Class A shares typically charge an up-front sales charge, but have no, or very low, annual 12b-1 fees. Class B shares have no up-front sales charge; instead, they have a contingent deferred sales charge, and impose higher annual 12b-1 fees than A shares. Class C shares have a lower contingent deferred sales charge than B shares, but impose the highest 12b-1 fees. Class D shares are typically sold by investment advisers. There is no sales charge, but they impose annual 12b-1 fees and service fees.

At the market opening, a customer purchases 200 shares of an S&P 500 Inverse ETF (-1x) at $50 per share. At the end of that day, the S&P 500 Index declines by 10%. The next day, the index partially recovers and closes up 5%. What will be the market value of the 200 share position? A. $9,450 B. $9,500 C. $10,450 D. $10,500

The best answer is C. Since this ETF is "-1x," it is an inverse ETF that moves at the same rate (1x), but in the opposite direction (-), to the market. The customer starts with 200 shares at $50, or a $10,000 position. At the end of the first day, because the index falls by 10%, this position will rise by 10% to $11,000 value ($10,000 x 1.1). At the end of the second day, because the index goes up by 5%, the ETF value will decline by 5%. $11,000 x .95 = $10,450.

A customer has purchased $5,000 of a mutual fund. Over the past 5 years, the fund has appreciated to $22,000. At this point, the customer wants to buy another $5,000 of the fund. In the prospectus, the breakpoint schedule is: Purchase Amount Sales Charge $0 - $10,000 8 ½% >$10,000 - $20,000 7 ½% >$20,000 - $45,000 6 ½% >$45,000 - $65,000 5 ½% >$65,000 5 % On the $5,000 purchase, the customer will pay a sales charge of: A. 8 ½% B. 7 ½% C. 6 ½% D. 5 ½%

The best answer is C. Since this fund starts with the maximum sales charge of 8 ½%, it must offer rights of accumulation. Funds charging the maximum sales charge are required to do so under FINRA's Conduct Rules. To determine the breakpoint for the customer, the new purchase amount is added to the current value of the customer's holdings in the fund. $22,000 current value plus $5,000 purchase = $27,000 total holding after the new purchase. This places the customer between the 3rd tier ($20K - $45K), so the sales charge imposed on the $5,000 purchase is 6 ½%.

The provisions of the Investment Company Act of 1940 include: which of the following? I Minimum initial fund capital of $100,000 II "Interested persons" on the Board of Directors cannot hold over 60% of the seats III Changing the fund's investment objective requires a majority vote of the shareholders IV Setting maximum sales charges on mutual fund purchases A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is C. The Investment Company Act of 1940 requires that the minimum capital to start a fund is $100,000; that no more than 60% of the Board of Directors be "interested parties" - that is, they are affiliated with the sponsor, custodian, transfer agent, or firms in the selling group; and that the fund have a stated investment objective that can only be changed by majority vote of the shareholders. The Act does not set sales charges for mutual fund purchases - these are set by FINRA - which allows a maximum sales charge of 8 1/2%.

The Class A shares have the following sales charge breakpoint schedule with no annual 12b-1 fees: Purchase Amount Sales Charge 0 - $10,000 6% $10,001 - $20,000 5% $20,001 - $30,000 4% $30,001 - $50,000 3% $50,000 - $100,000 2% $100,000 and over 1% A customer puts $25,000 in the Class A shares of the mutual fund shown in the exhibit window under a Letter of Intent that obligates the customer to complete a $30,001 purchase amount to qualify for a lower sales charge. Prior to making the additional $5,001 purchase, the assets in the fund appreciate to $31,000. The customer does not make the additional $5,001 investment in the fund. Which statement is TRUE? A. The customer will qualify for the lower sales charge based on the asset appreciation and is not required to make the additional $5,001 purchase B. The customer must make the additional $5,001 investment in the fund otherwise the customer will forfeit the amount invested because the contract was not completed C. The customer is not required to make the additional $5,001 investment but the sales charge will be recalculated based on the lower investment amount D. The customer is not required to make the additional $5,001 investment in this fund, but must invest another $5,001 in any other fund offered by the same sponsor

The best answer is C. The Letter Of Intent (LOI) provision operates separately from Rights of Accumulation and takes precedence over Rights of Accumulation. Because of this, the customer must deposit new money in the dollar amount required by the LOI to get the lowered sales charge. Since the customer has deposited $25,000 of the $30,001 required by the LOI already, the remaining $5,001 must be deposited to retain the reduced sales charge. If this is not done, the 3% sales charge used for the original share purchase calculation under the LOI will be recalculated using the 4% sales charge level, and the price charged per share will go up, resulting in the customer owning fewer shares.

A customer has $35,000 to invest in a mutual fund with a Net Asset Value per share of $9.42 and a Public Offering Price of $10.30. In the prospectus is the following breakpoint schedule: Purchase Amount Sales Charge $0 - $10,000 8 1/2 % $10,001 - $25,000 7 1/4 % $25,001 - over 6 1/2 % How many shares of the fund can the customer purchase? A. 3,315 B. 3,398 C. 3,474 D. 3,746

The best answer is C. The customer is purchasing enough ($35,000) to qualify for a 6 ½% sales charge. To compute the new lowered offering price, the formula is: POP = Net Asset Value/(100% - Sales Charge%) $9.42/(100% - 6.5%) = $9.42/.935 = $10.075 New Price The customer will pay $10.075 per share (rounded). A $35,000 investment will buy $35,000/$10.075 = 3,474 shares (rounded).

Which of the following funds MUST be closed end? A. NAV - $20.00 /Purchase Price - $20.00 B. NAV - $20.00 /Purchase Price - $20.50 C. NAV - $20.00 /Purchase Price - $19.50 D. NAV - $20.00 /Purchase Price - $20.25

The best answer is C. The minimum purchase price for an open-end (mutual) fund is net asset value. The fund cannot be sold for less than this amount. It may be sold for more with a sales charge not exceeding 8 1/2% of the offering price. Closed-end funds trade in the market. The market may value the fund at NAV, at a discount to NAV or at a premium to NAV. Therefore, the only fund that can sell at a discount to NAV is a closed-end fund.

Net Asset Value per share for a mutual fund can be expected to decrease if the: A. securities in the portfolio have appreciated in value B. securities in the portfolio have made dividend distributions C. fund has made dividend distributions to shareholders D. fund has experienced net redemptions of shares

The best answer is C. This is a tricky question. If a fund distributes a dividend to shareholders, an ex date is set by the Board of Directors of the Fund. On this date, the Fund's shares are reduced by the value of the distribution. If the securities in the fund portfolio pay dividends, these are received by the Fund. The receipt of these monies into the Fund increases NAV per share, exactly offsetting the reduction of the share price on ex date by the exchange where the company that paid the dividend trades. Thus, when securities in the portfolio pay a dividend, there is no effect on NAV. Appreciating securities in the Fund portfolio will also increase NAV per share. Redemption of shares should have no effect on NAV per share.

To impose the maximum sales charge, mutual funds must offer investors which of the following benefits? I Family of Funds II Breakpoints III Letter of Intent IV Rights of Accumulation A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

The best answer is C. To impose the maximum sales charge of 8 1/2%, FINRA requires funds to give investors specified breakpoints (lowered sales charges for large dollar purchases), a letter of intent option (once the letter is signed, the investor has 13 months to complete a breakpoint), and rights of accumulation (the investor's accumulated position counts towards completion of a breakpoint). There is no requirement for the sponsor to offer families of funds.

A mutual fund has a net asset value per share of $10.45. The maximum offering price per share is: A. $10.60 B. $10.95 C. $11.42 D. $11.50

The best answer is C. The maximum sales charge on a mutual fund is 8.5% under FINRA rules. The formula to find the offering price is: Net Asset Value / (100% - Sales Charge%) = $10.45/(100% - 8.5%) = $10.45/.915 =$11.42

A mutual fund has a Net Asset Value per share of $46.00 and the following breakpoint schedule. $0 - $50,000 5% $50,001 - $100,000 4% $100,001 - $250,000 3% $250,001 - $1,000,000 2% A customer has $300,000 to invest in the fund. The customer will pay what price per share? A. $46.00 B. $46.92 C. $46.94 D. $47.00

The best answer is C. This customer qualifies for a 2% sales charge. The formula to fund the offering price of a mutual fund is: POP = Net Asset Value/(100% - Sales Charge%) POP = $46.00 / (100% - 2%) = $46/.98 = $46.94 per share.

Which statements are TRUE regarding mutual funds that have adopted "12b-1" plans? I Mailings to existing shareholders of the fund are an acceptable "12b-1" expense II Mailings to existing shareholders of the fund are not an acceptable "12b-1" expense III Expense ratios for funds that have adopted 12b-1 plans can be expected to be lower than for similar funds without a 12b-1 fee IV Expense ratios for funds that have adopted 12b-1 plans can be expected to be higher than for similar funds without a 12b-1 fee A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. 12b-1 plans allow a mutual fund to charge, as an expense to the existing shareholders, the cost of advertising and soliciting for new customers (included are mailings). The theory behind such plans is that the advertising will attract more assets to the fund (more shareholders), and as the fund's size increases, the expense ratio (ratio of all fund expenses to total net assets) should decrease for all shareholders. These monies can only be used to solicit prospective shareholders - they cannot be used to solicit existing shareholders. For most funds which have adopted 12b-1 plans, expenses have risen faster and expense ratios have increased.

Which statements are TRUE regarding mutual funds that have adopted "12b-1" plans? I Acceptance of the plan requires a majority vote of the outstanding shares; the Board of Directors; and the disinterested members of the Board II Discontinuance of the plan requires majority vote of the outstanding shares or the disinterested members of the Board III Mailings to prospective purchasers of the fund are an acceptable "12b-1" charge IV Expense ratios for funds that have adopted 12b-1 plans can be expected to be higher than for similar funds without 12b-1 fees A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is D. 12b-1 plans allow a mutual fund to charge, as an expense to the existing shareholders, the cost of advertising and soliciting for new customers. The theory behind such plans is that the advertising will attract more assets to the fund (more shareholders), and as the fund's size increases, the expense ratio (ratio of all fund expenses to total net assets) should decrease for all shareholders. The reality is that, for most funds which have adopted 12b-1 plans, expenses have risen faster (due to the selling expense costs charged to shareholders) than asset size, and expense ratios have increased. To adopt such a plan, majority vote of the outstanding shares; the Fund's Board of Directors; and the disinterested members of the Board is required. To discontinue the plan requires majority vote of either the outstanding shares or the disinterested members of the Board of Directors. Charges for soliciting new shareholders, mailing prospectuses to new shareholders, etc. are allowed 12b-1 charges.

A "breakpoint sale" is: I advising a customer to buy enough of a mutual fund to qualify for lowered sales charge shown in a breakpoint schedule II advising a customer to buy an amount of a mutual fund that is just below the minimum threshold needed to qualify for a lowered sales charge shown in a breakpoint schedule III permitted under FINRA rules IV a violation of FINRA rules A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. A "breakpoint sale" might sound like a good thing, but it is not! It is selling a mutual fund to a customer in an amount that does not give the customer the benefit of the breakpoint. This is a violation of FINRA rules.

A Special Situations Fund invests in: A. U.S. Government and Agency securities B. corporate bonds and preferred stock rated below investment grade C. a single industry or geographic area D. companies undergoing a takeover or bankruptcy

The best answer is D. A Special Situations Fund invests in companies in "special situations" such as bankruptcies or takeovers, to reap capital gains if the company recovers. Do not confuse a special situations fund with a specialty fund. A specialty fund is one that invests in one industry or geographic area.

A growth fund is a mutual fund that: A. invests in securities found in one industry or geographic area B. allocates investment among common stocks, preferred stocks, and bonds of companies in various industries C. sells futures on market indices and uses short sales to limit risks of long positions D. invests solely in the common stocks of companies that exhibit higher than average gains in earnings

The best answer is D. A growth fund is one that invests solely in the common stocks of companies that exhibit faster than average gains in earnings; which should be reflected in an increasing share price.

All of the following statements are true regarding a mutual fund "Letter of Intent" EXCEPT: A. the letter can cover a period of 13 months B. the letter can be backdated 90 days C. the extra shares purchased under the breakpoint are held in escrow until the letter is completed D. during the period covered by the letter, the customer cannot redeem his shares

The best answer is D. A letter of intent can cover a period of 13 months, inclusive of a 90 day "backdate." The extra shares purchased at the lower sales charge are held in escrow until the letter is completed. If the letter is not completed, the purchase price is recalculated to the higher sales charge and the customer does not get the extra shares. The customer can always redeem his shares.

A 200% Leveraged Dow Jones Industrial Average Index ETF would be expected to move: I up 50% in price when the DJIA moves up 100% II up 100% in price when the DJIA moves up 50% III down 50% in price when the DJIA moves down 100% IV down 100% in price when the DJIA moves down 50% A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. A leveraged ETF uses borrowing (margin) and options to magnify price movement as compared to the reference index. A 200% leveraged ETF can be expected to move 2 times as fast as the reference index, either up or down. A 300% leveraged ETF can be expected to move 3 times as fast as the reference index, either up or down

A closed end fund's Net Asset Value is $8.50. The market price of the fund could be: I $8.00 II $8.50 III $9.00 IV $9.50 A. II only B. I and II C. III and IV D. I, II, III, IV

The best answer is D. Because closed-end funds trade like stocks, the fund's pricing is reflective of investor's sentiment towards the fund. The fund can trade at a discount to Net Asset Value when investors become disenchanted with the fund. This will occur if the fund gives an inferior return. Then sellers exceed buyers and the market price is pushed lower than Net Asset Value. When buyers exceed sellers, and the fund gives a superior return relative to the market rate of return for similar investments, the ask price is pushed higher. Thus, closed-end funds can trade at NAV; below NAV; or above NAV.

Which statement is TRUE about closed end funds? A. Net Asset Value is the same as the market price B. Net Asset Value is higher than the market price C. Net Asset Value is lower than the market price D. Net Asset Value can be higher, lower, or the same as the market price

The best answer is D. Because closed-end funds trade like stocks, the fund's pricing is reflective of investor's sentiment towards the fund. The fund can trade at a discount to Net Asset Value when investors become disenchanted with the fund. This will occur if the fund gives an inferior return. Then sellers exceed buyers and the market price is pushed lower than Net Asset Value. When buyers exceed sellers, and the fund gives a superior return relative to the market rate of return for similar investments, the ask price is pushed higher. Thus, closed-end funds can trade at NAV; below NAV; or above NAV.

CLOSED END BOND FUNDS Fund Net Asset Value / Stock Close / NAV Change Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to buy 100 shares of Acme Fund will pay approximately: A. $990 B. $1,025 C. $990 plus a commission D. $1,025 plus a commission

The best answer is D. Closed-end funds are listed on an exchange and trade like any other stock. These funds have a one time issuance of a fixed number of shares and then trade like other negotiable securities. A customer who buys will pay the current market price plus a commission. The last price for Acme Fund is $10.25, so 100 shares will cost $1,025 plus a commission.

Which statement is FALSE about Exchange Traded Funds (ETFs)? A. ETFs are registered under the Investment Company Act of 1940 B. ETFs are typically structured as open-end management companies C. ETFs hold the underlying shares of companies included in a stock index D. ETFs permit individual investors to buy creation units

The best answer is D. ETFs are almost a "hybrid" type of investment company structure because they allow for the creation of additional shares, like an "open-end" fund; but they are listed and trade like a "closed-end" fund. Technically, most ETFs are structured as open-end investment companies, since they allow for the creation of additional shares in minimum "creation units" of $50,000 - $100,000. If the shares are trading in the market at a discount to NAV, institutional investors can buy new creation units and short the equivalent shares that compose the units, in an arbitrage trade. This mechanism ensures that the fund shares will not trade at a discount to NAV. Note that individual investors cannot buy creation units - only institutional investors. Because new shares can be created, these are registered as open-end funds under the Investment Company Act of 1940. Since ETFs are securities, they are regulated by the SEC and FINRA.

Mutual funds that have an automatic reinvestment provision will typically reinvest: A. only dividends at Net Asset Value B. only capital gains at Net Asset Value C. dividends at Net Asset Value and capital gains at the Public Offering Price D. dividends at Net Asset Value and capital gains at the Net Asset Value

The best answer is D. If a fund offers an automatic reinvestment provision, both dividend distributions and capital gains distributions are reinvested at Net Asset Value.

During a period of rising interest rates, which investment would be profitable? A. 2X (Leveraged) S&P 500 Index ETF B. Inverse (Short) S&P 500 Index ETF C. 2X (Leveraged) 20+ Year Treasury ETF D. Inverse (Short) 20+ Year Treasury ETF

The best answer is D. If market interest rates rise, both stock and bond prices are negatively impacted. However, fixed income security prices fall more than stock prices. Furthermore, the longer maturity and lower coupon issues fall the fastest as market interest rates rise. An inverse ETF, also called a short ETF, profits when prices drop. An inverse ETF based on the price movements of 20+ year Treasuries would have the largest profit when interest rates rise. This type of ETF has shorted 20+ year Treasuries in the hopes that prices will drop and the positions can be covered (bought back) for a profit. If market interest rates rise, this is exactly what should happen.

Which of the following accounts among the same family members can be aggregated for the purpose of receiving a mutual fund breakpoint? I Husband Individual Account II Husband IRA Account III Husband and Wife Joint Account IV Husband as Custodian for a minor child A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is D. Mutual fund breakpoints are generally calculated using all investments made within a family - that is, parents and their children. Also note that IRA accounts, Trust accounts and Custodian accounts for family members are also permitted to be aggregated to achieve breakpoints. Note, however, that groups of unrelated individuals cannot join together to get the benefit of a breakpoint.

Which statements are TRUE when comparing an index mutual fund to an index exchange traded fund? I Mutual funds can be purchased on margin; exchange traded funds cannot be purchased on margin II Mutual funds cannot be purchased on margin; exchange traded funds can be purchased on margin III Mutual funds can be sold short; exchange traded funds cannot be sold short IV Mutual funds cannot be sold short; exchange traded funds can be sold short A. I and III only B. I and IV only C. II and III only D. II and IV only

The best answer is D. Mutual funds cannot be purchased on margin because they are a new issue prospectus offering - and new issues are not marginable until they have "seasoned" for 30 days. Mutual funds cannot be sold short. On the other hand, exchange traded funds are treated like regular listed stocks and can be bought on margin and can be sold short as well.

All of the following are Exchange Traded Funds EXCEPT: A. DIAs B. SPDRs C. QQQs D. ADSs

The best answer is D. SPDRs (Standard and Poor's 500 Index - symbol = SPY), DIAmonds (Dow Jones Industrial Average Index - symbol = DIA), and QUBES (NASDAQ 100 Index - symbol = QQQ) all are exchange traded index funds. An ADS is an American Depositary Share - the means by which a foreign issuer offers its securities in the United States.

Shareholders in a management company have all of the following rights EXCEPT the right to vote: A. to change the investment objective of the fund B. for the investment adviser C. for the Board of Directors D. on the dividend distribution amount

The best answer is D. Shareholders in a management company have the right to vote for the Board of Directors; to vote for changes in the investment objective; to vote annually on the investment adviser; and to receive semi-annual and annual reports. The dividend distribution is not decided on by the investors of the fund - it is decided by the Board of Directors.

An investor in a "Ginnie Mae" mutual fund assumes which of the risks? I Prepayment Risk II Extension Risk III Fluctuation of Net Asset Value IV Reinvestment Risk A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV

The best answer is D. Since Ginnie Mae only issues mortgage backed pass-through certificates, in periods of declining interest rates, prepayment risk exists. Homeowners tend to prepay their "old" high rate mortgages when rates have declined by refinancing at the new lower rates. When these prepayments are reinvested by the fund, the monies earn lower current rates, so reinvestment risk is also present. Conversely, if interest rates rise, then homeowners tend not to move and the expected repayment rate falls. As this occurs, the life of the certificates lengthens beyond the expected life, and the certificate holder earns a lower than market return for a longer than expected time period. This is extension risk. As with any mutual fund (other than a money fund which has a constant $1 per share NAV), there is the risk that NAV can decline - which would occur if interest rates rise, forcing Ginnie Mae certificate values down.

At the market opening, a customer purchases 200 shares of an S&P 500 2X ETF at $50 per share. At the end of that day, the S&P 500 Index increases by 10%. The next day, the index declines by 5%. What will be the market value of the 200 share position? A. $10,000 B. $10,450 C. $10,500 D. $10,800

The best answer is D. Since this ETF is "2x," it is an ETF that moves in the same direction as the market, but it moves twice as fast The customer starts with 200 shares at $50, or a $10,000 position. At the end of the first day, because the index rises by 10%, this position will rise by 20% to $12,000 value ($10,000 x 1.2). At the end of the second day, because the index goes down by 5%, the ETF value will decline by 10%. $12,000 x .90 = $10,800.

Which of the following statements are TRUE regarding the Federal tax treatment of a "regulated" mutual fund investing solely in municipal securities? I Investors have a Federal tax liability on the interest income received from the fund II Investors have no Federal tax liability on the interest income received from the fund III The investment company has Federal tax liability on the undistributed income that it retains IV The investment company has no Federal tax liability on the undistributed income that it retains A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Since this mutual fund invests solely in municipal securities, there is no Federal tax liability on the interest income received (remember, the interest income from municipal securities is exempt from Federal income tax). Under the "conduit" theory, any payment distributed by the fund to shareholders retains the same character and is free from Federal income tax. Similarly, undistributed income retained by the fund would not be taxed, since it consists solely of tax free municipal interest income.

Which statements is/are TRUE regarding closed end investment companies? I The portfolio of investments is managed II The initial offering of shares is made under a prospectus III Shares trade in the secondary market at prevailing market prices A. I only B. III only C. II and III D. I, II, III

The best answer is D. The initial offering of closed-end investment company shares is made under a prospectus. Then the shares are listed on an exchange and trade like any other stock. The shares are not redeemable; they are negotiable. The portfolio of investments is managed by an investment adviser - remember, this is type of management company under the Investment Company Act of 1940.

Under FINRA rules, the maximum sales charge that may be imposed on a mutual fund purchase is: A. 5% of Net Asset Value B. 5% of the Public Offering Price C. 8 1/2% of Net Asset Value D. 8 1/2% of the Public Offering Price

The best answer is D. Under FINRA rules, the maximum sales charge that may be imposed by a mutual fund is 8 1/2% of the Public Offering Price. Note that in the real world, competition among funds has forced sales charges well below this maximum permitted level. Note that the maximum is a percentage of all dollars invested; it is not a percentage of Net Asset Value.

A customer switches from a growth fund to an income fund within the same "family of funds." Which statement is TRUE? A. No tax liability is incurred because this is treated as a "wash sale" B. No tax liability is incurred because this is treated as a "like kind exchange" of assets C. Tax must be paid on any amount by which the NAV of the new fund exceeds the old fund's NAV D. The sale results in a "taxable event" on which tax on any gain is due, and the purchase establishes a new cost basis

The best answer is D. When the shares of one fund are sold, unless the monies are reinvested in the same fund, (resulting in a non-taxable "like-kind" exchange), capital gains tax is due on the sale proceeds versus the cost basis in the shares. The purchase of the new (different) shares results in a new cost basis.

A no-load mutual fund: A. cannot charge a management fee and cannot charge a 12b-1 fee B. cannot charge a management fee, but can charge an annual 12b-1 fee limited to .25% C. can charge a management fee, but cannot charge a 12b-1 fee D. can charge a management fee and can charge an annual 12b-1 fee limited to .25%

The best answer is D. FINRA allows a mutual fund to call itself "no load" (as in no sales charge) as long as the maximum annual 12b-1 fee does not exceed .25%. Otherwise, the fund is subject to a FINRA maximum annual 12b-1 fee limitation of .75%. Note, in contrast, that if a fund wishes to advertise itself as a "pure no-load fund" then it cannot charge any 12b-1 fees. Finally, generally all mutual funds charge management fees.

A mutual fund has a computed Net Asset Value per share of $9.43 and a Public Offering Price of $10.30. The fund has a sales charge percentage of: A. 6 1/2% B. 7 1/2% C. 8 % D. 8 1/2%

The best answer is D. The formula for the sales charge percentage is: (A - B)/A = ($10.30 - $9.43) = $.87 $.87/$10.30 = 8 1/2%

The net asset value of a mutual fund is $15.00 and the ask price is $16.40. The fund has the following breakpoint schedule: Purchase Amount Sales Charge $0 - $10,000 8 1/2% $10,001 - $25,000 7 % $25,001 - over 6 1/4 % A customer wishes to invest $30,000 in the fund. How many shares can be purchased? A. 200 B. 1,385 C. 1,830 D. 1,875

The customer is purchasing enough of the fund to qualify for a 6.25% sales charge. To compute the new offering price with the reduced sales charge, the formula is: POP = Net Asset Value/(100% - Sales Charge%) $15.00/(100% - 6.25%%) = $15.00/.9375 = $16.00 New Price $30,000 purchase amount / $16.00 price per share = 1,875 shares purchased