Unit 3
Daniel has a number of investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features are most likely found in what type of investment? A) Unit investment trust B) Closed-end investment company C) Hedge fund D) Open-end investment company
B) Closed-end investment company A closed-end investment company (closed-end fund) is a type of investment company whose shares trade in the secondary market.
Regarding open-end investment companies, which of the following sales charges is based on the NAV per share? A) Sales load B) Commission C) 12b-1 fee D) Redemption fee
D) Redemption fee If the fund has a redemption charge (CDSC), it is based on the NAV per share, not the public offering price (POP). That is, if the client liquidated shares when the NAV was $10 per share and the POP was $10.50, the CDSC would be charged based on the $10 rather than the $10.50. Commission is not a term used with mutual funds. The 12b-1 fee is a charge against overall assets of the fund; it is not considered to be a charge related to the buying or selling of fund shares.
Which of the following are characteristics of a money market mutual fund? 1. Shares are offered without a sales charge. 2. There is a redemption fee. 3. All purchasers must receive a copy of the prospectus. 4. The letter of intent must be signed within 16 months. A) I and III B) I and IV C) II and IV D) II and III
A) I and III Money market funds are offered without sales loads or redemption fees. As with all mutual funds, a prospectus is required.
The Investment Company Act of 1940 does which of the following? A) Governs the issuance of new issues B) Prescribes procedures for the establishment of investment companies C) Sets rules for the registration of investment advisers D) Regulates the secondary market
B) Prescribes procedures for the establishment of investment companies The Investment Company Act of 1940 requires all investment companies to register with the SEC as such and be regulated under the act. The companies are still subject to all the other applicable securities acts. However, the Investment Company Act of 1940 provides additional regulations to ensure that investors are fully informed and fairly treated by the management of investment companies. It is the Investment Advisers Act of 1940 that regulates investment advisers.
Which of the following features of exchange-traded funds (ETFs) are also features of mutual funds? A) They are listed on stock exchanges. B) They compute their NAV daily. C) They may sell short. D) They may be purchased on margin.
B) They compute their NAV daily. Both ETFs and mutual funds compute their NAV on a daily basis. Because ETFs are traded on exchanges and the prices are based on supply and demand, the price of an ETF will generally vary somewhat from its NAV. Only ETFs can be purchased on margin and be sold short.
One way in which closed-end management investment companies differ from open-end investment management companies is that A) they trade at a price independent of their net asset value. B) they were in existence prior to 1940. C) their portfolio may contain common stock, preferred stock, and debt securities. D) they are federal covered securities.
A) they trade at a price independent of their net asset value. Unlike open-end companies (mutual funds) where the price is based on the net asset value (NAV), closed-end companies trade at a market price based on supply and demand, which could be above, below, or the same as the NAV. Both are federal covered, can have equity and debt in their portfolios (although only closed-end companies can issue senior securities), and were in existence prior to passage of the Investment Company Act of 1940.
A client is interested in purchasing a REIT and asks you what the differences are between a listed REIT and an unlisted REIT. You could respond that all of the following are differences except A) liquidity. B) fees and expenses. C) regulatory oversight. D) suitability requirements.
B) fees and expenses. The internal operating costs of a REIT, such as management fees and administrative expenses, have nothing to do with where units of the REIT are traded. One of the major risks inherent in an unlisted REIT is lack of liquidity. As a result, there is a greater stringency when it comes to suitability, and this leads to stronger oversight by the regulators.
The Investment Company Act of 1940 allows a majority vote of the outstanding shares of a registered investment company to authorize the fund to do all of the following except A) change from an open-end to a closed-end investment company. B) change the objectives of the fund. C) invest in securities consistent with the fund's objectives. D) change the nature of its business and cease to be an investment company.
C) invest in securities consistent with the fund's objectives. Shareholder approval is not necessary to authorize the fund to invest consistent with the fund's objectives; it is required as part of the contract with the fund's investment adviser. Under the Investment Company Act of 1940, a vote of the majority of outstanding shares may approve changing from an open-end to a closed-end company, changing the investment objectives of the fund, and deciding to cease to be an investment company.
One of your customers called you on Wednesday at 8:00 am ET and asked you to buy $10,000 of the Liberty Balanced Fund Class A shares. If the Wednesday morning financial pages show the fund's NAV to be $45.83 and the POP to be $48.24 and the Thursday morning quote shows the NAV as $46.22 and the POP as 48.65, how many shares did the customer receive? A) 216.357 B) 207.297 C) 218.198 D) 205.550
D) 205.550 Mutual fund pricing is based on the forward pricing rule. That is, the price is based on the next calculated net asset value per share after the order is received. That calculation is always done after the 4:00 pm ET close of the market. Therefore, an order received anytime on Wednesday before 4:00 pm will be executed based on the NAV calculated at that time. That 4:00 pm price will be shown in the financial section of Thursday morning's newspapers. Remember, when purchasing shares, the price is always the POP. That makes the math $10,000 ÷ $48.65 which rounds to 205.550
Which of the following statements about closed-end investment companies are true? 1. Investors in closed-end investment companies may trade only in full shares. 2. Shares in closed-end investment companies may trade at more or less than the net asset value of the shares. 3. A closed-end investment company offers a fixed number of shares and does not continually offer new shares in response to investor demand. A) I, II, and III B) I and II C) II and III D) I and III
A) I, II, and III A closed-end investment company makes an initial public offering of stock, and once those shares have been purchased, no more shares are available from the company until it offers a new issue. Investors may purchase shares of a closed-end investment company on an exchange or over the counter at whatever price the market demands. This price may be more or less than net asset value. Investors may not buy or sell fractional shares but may trade only in full shares.
Under adverse market conditions, it is not unusual for mutual fund investors who had been investing on a regular basis to cease or reduce their level of financial commitment. This can have the effect of A) reducing the operating expense ratio of the fund. B) net redemptions. C) reducing the NAV of the fund as the demand for new shares wanes. D) a reduction in the fund's net operating income due to a reduction in sales charges received.
B) net redemptions. In adverse market conditions, not only do some investors stop putting money in, they also liquidate their holdings. If new sales fall while liquidations rise, the effect could be net redemptions. The NAV is not affected by supply and demand, and if anything, the expense ratio would rise because some of the expenses would remain the same but would be shared by fewer assets. Mutual funds do not receive the sales charges—they go to the underwriter.
