Unit 10: Practice Exam 2 (Investment Company)

After a mutual fund's tenth year, performance statistics must show results for each of the following periods EXCEPT: A) 3 years. B) 5 years. C) 1 year. D) 10 years.

Your answer, 1 year., was incorrect. The correct answer was: 3 years. Mutual fund performance statistics must show results for 1, 5, and 10 years, or the life of the fund, whichever is shorter. Reference: 10.6.1 in the License Exam Manual.

According to the Investment Company Act of 1940, a diversified mutual fund may hold, at most, what percentage of a corporation's voting securities? A) 10%. B) 50%. C) 75%. D) 5%.

Your answer, 10%., was correct!. To be considered a diversified investment company, a mutual fund can own no more than 10% of a target company's voting securities. Additionally, no diversified investment company may invest more than 5% of its portfolio in a single company's securities.

A broker/dealer selling open-end investment company shares will be required to return its entire selling concession if the principal underwriter has to repurchase those shares from a customer within how many business days of trade date? A) 60. B) 7. C) 15. D) 30.

Your answer, 7., was correct!. Any concession earned by the member selling the shares must be returned to the principal underwriter of the fund if the shares are redeemed within 7 business days of purchase. Reference: 10.7.6.1 in the License Exam Manual.

*Which of the following funds would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection?* A) S&P 500 Index fund. B) A small-cap growth fund. C) An international index fund. D) A large-cap growth fund.

Your answer, A small-cap growth fund., was incorrect. The correct answer was: A large-cap growth fund. A large-cap growth fund is the most appropriate choice for a moderate-risk client because large capitalization stocks are generally less volatile than small-cap stocks and provide long-term capital growth. This is a more appropriate choice than the index fund because there is no stock selection there, only investing to parallel the index. Reference: 10.5.1.1.1 in the License Exam Manual.

If a couple has a long-term growth objective and is willing to accept a reasonable amount of risk, which of the following mutual funds is most suitable for them? A) Corporate bond fund. B) Money market fund. C) Common stock fund. D) Municipal bond fund.

Your answer, Common stock fund., was correct!. A common stock fund will help the couple meet their long-term growth objective. Reference: 10.5.1.1 in the License Exam Manual.

Your customer lists liquidity as an important investment objective. Which of the following would be least suitable to meet the liquidity requirement? A) Hedge funds B) Preferred stock mutual fund C) Money market fund D) A real estate investment trust (REIT)

Your answer, Hedge funds, was correct!. Of the choices listed, hedge funds would be the least liquid. Because they are unregulated they can require minimum holding periods during which time shareholders cannot make withdrawals. Mutual fund and money market fund shares can be readily redeemed and REITs are equity securities trading on exchanges and therefore considered liquid. Reference: 10.11 in the License Exam Manual.

Which of the following statements are TRUE concerning hedge funds? They may not be suitable for discretionary accounts where account holders are not familiar with the risks associated with them. They are conservatively managed using no advanced or aggressive investment strategies without regulatory approval first. They may charge both an annual fee and a fee based on the funds' profits. They are subject to the same rules as mutual funds. A) II and III B) I and III C) II and IV D) I and IV

Your answer, I and III, was correct!. Hedge funds utilize aggressive investment strategies and therefore might not be suitable for discretionary accounts where the customer may not be familiar or comfortable with the risks associated with the product. Because they are unregulated there are no limits to the fees they may charge. Reference: 10.11 in the License Exam Manual.

Which of the following statements are TRUE of mutual fund dividend distributions? The fund pays dividends from net investment income. A single taxpayer may exclude $100 worth of dividend income from taxes annually. An investor is liable for taxes on distributions, whether taken in cash or reinvested in the fund. An investor is not liable for taxes if he automatically reinvests distributions. A) I and II. B) II and IV. C) III and IV. D) I and III.

Your answer, I and III., was correct!. Mutual funds pay dividends from net investment income, and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash. Reference: 10.8.1.1 in the License Exam Manual.

Closed-end investment companies: continuously issue new shares. generally make a one-time public offering of shares. may issue debt securities. may not issue preferred stock. A) II and III. B) I and IV. C) II and IV. D) I and III.

Your answer, II and III., was correct!. Publicly traded, or closed-end, funds generally make a one- time offering of shares which then trade on the secondary market. Unlike mutual funds, they may issue both bonds and preferred stock. Reference: 10.1.1.3.1 in the License Exam Manual.

Exchange traded funds: pass on capital gains to investors annually. can be bought and sold throughout the trading day. have high expense ratios. have low expense ratios. A) I and IV. B) II and III. C) II and IV. D) I and III.

Your answer, II and III., was incorrect. The correct answer was: II and IV. Noted advantages of Exchange Traded Funds (ETFs) are that they have low operating costs and thus low expense ratio's and can be bought and sold throughout the trading day. Reference: 10.1.1.3.1 in the License Exam Manual.

If a customer transfers his holdings from one fund to another within the same family of funds, what are the tax consequences? A) No gain or loss is recognized until redemption. B) Gains are taxed and losses are deferred. C) On the transaction date, any gain or loss is recognized for tax purposes. D) Losses are deducted and gains are deferred.

Your answer, On the transaction date, any gain or loss is recognized for tax purposes., was correct!. An exchange is a taxable event. The cost basis of the shares in the original account must be compared to their redemption value. Any gain or loss is recognized in the year of the exchange. The exchange privilege allows the investor to avoid paying an additional sales charge. It does not allow the investor to avoid taxes. Reference: 10.8.1.6.3 in the License Exam Manual.

*The primary objective of a particular mutual fund is the payment of dividends, regardless of the market's current state. Capital growth is a secondary objective. Which of the following industry groups would be appropriate for the fund's portfolio?* A) Consumer appliances. B) Aerospace. C) Computer technology. D) Public utilities.

Your answer, Public utilities., was correct!. Utilities are defensive industries; they tend to pay dividends consistently. Reference: 10.5.1.1.2 in the License Exam Manual.

A customer of your broker/dealer is bullish on US equity securities across a broad spectrum of industries. He would like to participate in an anticipated upward movement of an equity stock index. Which of the following investments would you recommend as being closely related to the movement of equities in general? A) American depositary receipts (ADRs) B) Standard & Poor's depository receipts (SPDRs) C) Real Estate Investment Trusts (REITs) D) Variable rate demand obligations (VRDOs)

Your answer, Standard & Poor's depository receipts (SPDRs), was correct!. The spider (SPDR) is an index fund designed to replicate and track the performance of the S&P 500, a broad based equity index. Reference: 10.10.1 in the License Exam Manual.

A letter of intent for a mutual fund does NOT contain which of the following provisions? A) The fund can halt redemption during the period of time the letter of intent is in effect. B) The time limit is 13 months. C) The letter can be backdated 90 days to include a previous deposit. D) The fund will keep some of the initially issued shares in an escrow account to ensure payment of the full sales load.

Your answer, The fund can halt redemption during the period of time the letter of intent is in effect., was correct!. A letter of intent is not binding on the client in any way. Should the client decide to liquidate the account before completing the letter, the company will reduce the redemption by the amount of shares held in escrow. Reference: 10.7.5.1.1 in the License Exam Manual.

A registered representative (RR) has just explained to a customer that to purchase a particular security the customer would pay the asking price plus a commission, not a sales charge. The RR is speaking of: A) a mutual fund. B) a closed-end fund. C) all management company offerings. D) an open-end fund.

Your answer, a closed-end fund., was correct!. A closed-end or exchange-traded fund is purchased on an exchange or over the counter where buyers pay the ask price plus a commission. Open-end (mutual) funds are purchased at the POP, which includes a sales charge. Management company offerings include both open-end and closed-end funds. Reference: 10.7.4.1 in the License Exam Manual.

A customer of a registered representative is considering a hedge fund investment and asks what the lock-up period means? The registered representative correctly explains it is A) the minimum length of time the hedge fund portfolio manager intends to hold any single investment within the portfolio B) the length of time that is required to have the hedge fund registered with the SEC during which time the fund may not sell any shares C) a period of time during which the fund manager will not make any changes (purchases or sales) within the hedge fund portfolio D) a period of time during which liquidation of fund shares is prohibited by the fund, which means that there is an element of illiquidity to be considered

Your answer, a period of time during which liquidation of fund shares is prohibited by the fund, which means that there is an element of illiquidity to be considered, was correct!. Hedge funds generally employ a lock-up provision to ensure that capital invested by shareholders will remain with the fund long enough to ensure the manager's ability to implement the intended fund strategy and to begin to see the results of that strategy. There is no standard lock-up period, which can differ from fund to fund, and it should always be noted that during the lock-up period, the investment is essentially rendered illiquid.

According to investment company rules, open-end investment companies may NOT distribute long-term capital gains to their shareholders more frequently than: A) quarterly. B) annually. C) semiannually. D) monthly.

Your answer, annually., was correct!. Under the Act of 1940, investment companies may not distribute long-term capital gains more frequently than once per year. Reference: 10.8.1.3 in the License Exam Manual.

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

Your answer, buy a security in a falling market and buy it in a rising market., was correct!. Dollar cost averaging requires the investor to invest a fixed amount of money on a regular basis regardless of whether the stock market is rising or falling. Reference: 10.9.1.1 in the License Exam Manual.

Customers could pay a commission, rather than a sales charge, for shares of a(n): A) mutual fund. B) open-end investment company. C) closed-end investment company. D) front-end load fund.

Your answer, closed-end investment company., was correct!. Sales charges could be paid on all types of open-end funds. Commissions are paid on securities traded in the secondary market, such as closed-end investment company shares. Reference: 10.1.1.3.1 in the License Exam Manual.

A breakpoint sale is defined as the sale of mutual fund shares in an amount: A) just below the dollar amount at which the sales charge is reduced. B) required as the minimum investment in a fund as specified by the SEC. C) at or above the dollar amount at which the sales charge is reduced. D) just below the public offering price of the fund.

Your answer, just below the dollar amount at which the sales charge is reduced., was correct!. The term "breakpoint sale" refers to the violation that occurs when a sale is made just below the point at which the investor would receive the reduced sales charge. The practice earns a higher commission for the salesperson but is not in the interest of the customer. Reference: 10.7.5.1.2 in the License Exam Manual.

The fee received by the management company from an investment company depends on the: A) net assets of the fund. B) type of securities in the fund's portfolio. C) volume of new shares sold. D) profits of the fund.

Your answer, net assets of the fund., was correct!. The management company receives a fee based on the average annual net assets of the fund. Reference: 10.3.2 in the License Exam Manual.

Inverse exchange-traded funds (ETFs), also known as reverse or short funds, are managed to A) perform contrary to a benchmark market index such as the S&P 500 B) outperform a benchmark market index such as the S&P 500 C) be profitable only when interest rates are rising D) be used only by professional traders and market makers

Your answer, perform contrary to a benchmark market index such as the S&P 500, was correct!. Inverse funds, which are also commonly referred to as "short" funds, try to deliver returns that are the opposite of the benchmark index they are tracking. When they are exchange traded, they can be bought on margin and are priced throughout the trading day like other exchange-traded products. They are available to individual public investors and firm proprietary traders as well. Reference: 10.10.3 in the License Exam Manual.

A prospectus must be delivered to customers in all of the following transactions EXCEPT the sale of a: A) mutual fund. B) publicly or exchange traded fund (ETF) in the secondary market. C) new issue of registered common stock. D) unit investment trust.

Your answer, publicly or exchange traded fund (ETF) in the secondary market., was correct!. Publicly or exchange traded funds (closed-end funds) trading in the secondary market do not require the delivery of a prospectus. Reference: 10.1.1.3.1 in the License Exam Manual.

All of the following statements concerning investment companies are true EXCEPT: A) an investment company that invests the majority of its assets in one industry may still qualify as a diversified company. B) to be considered a diversified investment company, the company must invest in both equity and debt instruments. C) a diversified company can be either an open-end or a closed-end investment company. D) a nondiversified company is any management company not classified as a diversified company.

Your answer, to be considered a diversified investment company, the company must invest in both equity and debt instruments., was correct!. A diversified investment company could be either a closed-end company or an open-end company. There is no requirement for a diversified company to have both equity and debt in its portfolio. An investment company can follow the 75-5-10 diversification formula and still invest within one industry (e.g., a technology fund). Reference: 10.1.1.3.3 in the License Exam Manual.

*Capital gains distributed by a mutual fund to shareholders are taxed:* A) never. B) when paid by the fund. C) when received. D) when accrued.

Your answer, when received., was incorrect. The correct answer was: when accrued. Capital gains distributed to shareholders by a mutual fund are reported and taxable for the year earned (accrued). Reference: 10.8.1.3 in the License Exam Manual.