UNIT 4 (FINAL)

Class A Shares (Front-end Loads)

(1) A class of mutual fund shares issued with a front-end sales load (paid upfront) (2) Shares of a company that have differing characteristics from other classes of stock (Ex: Class A shares in a company offering multiple share classes may offer super voting privileges of many times the number of votes Class B shares may offer) -Since paid upfront sales charge (Pays POP)- Mutual funds offer lower operating costs on an ongoing basis -Long-term -Have breakpoints Pays 12B-1-Fee of .25% per year (little/none) -Maximum sales charge of 8.5% A shares have front-end loads that can be reduced with larger investments, which is not best for this customer who is limited to the maximum amount allowed for an IRA contribution.

Sales Charge Formula

(POP - NAV) / POP

Class C Shares (Level loads)

-A class of mutual fund shares issued with a level load. A mutual fund offers different classes of shares to allow investors to choose the type of sales charge they will pay -Short-term -Asset-based fees -C shares are level loads that are best for investors with short time frames but not good for a younger person saving for retirement. -Higher ongoing expenses (Act like it never goes away) 1% Contingent deferred sales charge (CDSC) during first year, but no other sales charge beyond that -Good for short-term and avoid sales charges -Fees never go away "Level load" 12B-1-Fee of .75% per year

Annuities "Guaranteed payment"

-An insurance contract deigned to provide retirement income -Actual amount paid out is not guaranteed, but stream of payments itself is guaranteed -Morality Agreement: Pay amount no matter how long lifespan 1. Grow tax deferred/Withdraws before 59 1/2 are subject to a 10% penalty fee 2. Surrender charges may apply upon withdrawal 7-10 years Exceptions Include: Death, etc for need to access money 3. Designed to provide retirement income 4. Stream of payments guaranteed -Non-qualified: After-tax -Money put in is after tax dollars -When someone buys an annuity they get units -Growth occurs on tax deferred basis: At the end

Statement of Additional Information (SAI)

-Available for delivery in 3 business days of investors request -Obtained by writing or calling to investment company -Seeking additional information not found on the prospectus -Not considered mandatory to make investment decisions May request: -Balance sheets -Statement of corporations -Income Statement -Portfolio list *A prospectus may not ever be altered, highlighted, or written

JIM Growth Fund has net assets of $75 million and liabilities of $3 million. The fund has 1.2 million outstanding shares. What is the fund's current net asset value (NAV) per share?

-BE CAREFUL NET ASSETS ARE ALREADY GIVEN so it is just, Net assets/outstanding shares 75/1.2 = 62.5

Class A

-Different from Class B/C shares as they pay their sales charge up front -Have no back-end loads and are sold with low or no 12B-1-Fee and lowering operating costs. -SALES CHARGE UP FRONT (8.5% maximum) Class A shares, also known as front-end load shares, have an up-front sales charge that is usually subject to breakpoints. They have no back-end load and are sold with low or no 12b-1 fees and lower operating expenses.

Deferred Annuity

-Does not kick in for at least 12 months after buying contract -Almost always a variable annuity -Contract promising to pay regular income or lump sum, at some future date in time -Revocable annuity: An annuity contract that can be surrendered and the funds in the account withdrawn. Also called a "deferred" annuity. -Fixed/Variable: Upfront lump sum but agrees to take income at later date in the future -All variable annuities are deferred

What can be traded throughout the day

-ETFs -Closed-End Funds -Secondary Market Not: Mutual funds: before end of close of business day 4:00pm (EST)

Suitability for Annuity

-Funded with available cash -Must have a high risk tolerance -Not needed for immediate lump-sum (When need cash) -Must have maximized all available qualified plans *SHOULD NEVER BORROW MONEY TO PURCHASE AN ANNUITY Variable annuities are suitable for someone who can fund the contract with cash. -Refinancing or having to withdraw equity is not good and NEVER considered a suitable action -In other words, purchasing a variable annuity by cashing out a life insurance policy or an existing annuity is considered "abusive" behavior and not recommended Suitable = Funded with available cash -Not needed for immediate lump sum -Must have tolerance for market risk -Must have maximized all available qualified plans Variable annuities are not suitable for someone who might need a lump sum of cash invested in the variable annuity at a later time for any reason *Anticipating buying a home, cash for college, or other upcoming expenses would need a lumps sum of money in the future would need to be considered outside of a variable annuity Variable Annuities are not suitable for someone: -Afraid of inflation/low-risk tolerance

AIR (Assumed Investment Rate)

-Investment Return Compared to Assumed Investment Return (AIR) (Rate of interest/Growth rate selected by the insurance company makes about how the sub-accounts should perform over the time AIR: Assumed Investment return the insurance customer -If investment return is greater than AIR the monthly payment increasing for customer -If investment return is equal to AIR the monthly payment remains the same -If investment return is lower than the AIR the monthly payment decreases Ex: You have $1,000 Actual Rate of Return: 6% AIR: 5% (Monthly Payment increases) Ex 2: You have $1,020 Actual Rate of Return: 5% AIR: 5% (Monthly payment stays the same) Ex 3: You have $1,110 Actual Rate of Return: 4% AIR: 5% (Monthly payment decreases)

When is NAV affected and Not affected

-NAV is only affected by value of markets in stocks/bonds -Dividends interest -Increase of an asset -NAV is not affected by money coming in/out - "Supply and Demand" -New purchases -Capital gain or loss -Never changes the actual price value of NAV

Annuity Sales Charge

-No stated maximum charge -Surrender charges (CDSC) -Sold with little or no sales charge -Fair and reasonable *Charges must be fair/reasonable

Assumed Investment Rate (AIR)

-Rate of interest (Growth rate) selected by insurance company Example: 5% The assumed interest rate (AIR) is a percentage given to an annuitant that represents the amount they will be getting when their annuity starts to pay them a period income. This rate is combined with other factors, such as the age of the insured upon annuitization and the price of the annuity.

Summary Prospectus

-Short version of (Full) -CAN BE SENT ONLINE A summary prospectus is the disclosure document provided to investors by mutual fund companies prior to or at the time of sale. The written document is a truncated version of the final prospectus that allows investors to see pertinent information regarding the fund's investment objectives and goals, sales charges and expense ratio, focused investment strategy, and data on the fund's management team. Relevant tax information and broker compensation are also included in the disclosure document. A summary prospectus provides investors the information they need from the final prospectus quickly and in plain English. -An investor who purchases shares on basis of the summary prospectus must be able to access full prospectus no later than confirmation of sale -Investors who receive it have the option to purchase using the application (summary prospectus) or request the full (statutory) prospectus -Summary of key information from the full/final prospectus -Delivery maybe online Requirements: -Fund name -Class -Exchange ticket symbol -Legend (Summary nature of prospectus)

Taxation

-Taxed when withdrawn and when withdrawn is considered ordinary income for the year of the withdraw *Variable will be non-qualified like a 401(k) on exam -When a person withdraws entire amount of the annuity, any growth is taxed as income that year -If annuitant is under the age 59 1/2, the taxable portion of a withdraw is subject to a 10% penalty

Face Amount Certificate

-a contract between an investor and an issuer in which the issuer guarantees payment of a stated (or fixed) sum to the investor at some set date in the future -In return the investor agrees to pay issuer set amount of money, either as a lump sum or in periodic installments -Very few operate today

If a real estate investment trust (REIT) distributes 85% of its net investment income to shareholders, on how much of its net investment income must the trust pay taxes?

100% To qualify as a regulated investment company under Subchapter M of the Internal Revenue Code, a REIT must pass at least 90% of its net investment income on to the shareholder. In this case, it is distributing only 85% and must therefore pay taxes on all of its net investment income.

In order to qualify as a conduit, a mutual fund must pay out a minimum of A) 95% of net investment income B) 90% of net expenses C) 90% of net investment income D) 90% of gross investment income

90% of net investment income An investment company must distribute a minimum of 90% of net investment income in order to qualify for the tax break given to conduits.

Conduit Theory 95% 80%

95% = 5% tax payment 80% = 100% because it does not meet the 90% threshold -REITs -Investments

Class B Shares (back-end load)

A class of mutual fund share issued with a back-end load. A mutual fund offers different classes of shares to allow investors to choose the type of sales charge they will pay. -Contingent Deferred Sales (CDs): the fee that is charged when a shareholder sells or redeems shares in a mutual fund investment within a certain number of years. -No upfront sales charge -Declining sales charge schedule and gradually declines to 0 (zero) -Higher operating costs than Class A shares -When the fund eventually drops to 0 on the B share, the mutual fund company will exchange B-Shares for A-shares -Long-term Pays 12B-1-Fee of .75% per year B shares are also called back-end loads. The back-end load gets smaller over a holding period of five to seven years, eventually dropping to zero. B shares are good for small dollar investors with long time frames.

No loads

A mutual fund whose shares a re sold without a commission or sales charge. The investment company distributes the shares directly Fund does not charge any type of sales load or sales charge -limited for what they charge for 12B-1-Fee -Shares purchased at NAV 12B-1-Fee of .25% per year

When is growth within a variable annuity taxed? A) At withdrawal B) At retirement C) After age 59½ D) Annually

A) At withdrawal Growth within a variable annuity is taxed when the funds are withdrawn. All growth is tax deferred until it is taken out of the annuity.

A mutual fund has breakpoints at $25,000, $50,000, $100,000, and $250,000. Which of the following transactions might be considered a breakpoint sale? The client purchases $48,000 worth of shares The client redeems $24,000 worth of shares The client purchases $252,000 worth of shares The client purchases $96,000 worth of shares

A) I and IV -Below threshold $48 - $50 $96 - $100

Which of the following would be a suitable objective for recommending a variable annuity? A) Supplemental retirement savings B) Primary retirement savings C) Saving for college education D) Saving for a down payment

A) Supplemental retirement savings Annuities are designed to supplement an investor's retirement. Investors should maximize use of qualified retirement accounts before investing in a VA. Annuities should not be used for preretirement goals like education and a home purchase.

Which of the following would cause a change in the net asset value of a mutual fund share? A) The market value of the portfolio declines. B) Securities in the portfolio are sold for a capital gain. C) Many shares are redeemed. D) The fund takes a new position.

A) The market value of the portfolio declines. A decline in the market value of the portfolio would reduce the assets of the fund without changing the number of outstanding shares. Sales and redemptions of shares change the net assets but also change the number of shares outstanding to the same degree, leaving the NAV per share unchanged. Buying or selling securities for a capital gain simply replaces securities in the portfolio with an equivalent amount of cash, leaving the NAV unchanged.

After the owner of a variable annuity elects to annuitize, they begin to receive lifetime income payments. The calculation that determines the amount of those payments includes several factors. Which of the following is not one of those factors? A) The projected rate of inflation B) The assumed interest rate C) The amount of assets in the variable annuity D) The age of the annuitant

A) The projected rate of inflation Inflation is not one of the factors in calculating the payout. An acronym to assist in remembering the criteria is SAAPI: sex, age, amount, payout choice, and interest rate.

An investor is purchasing $48,000 of the Windmill Alternative Energy Fund. The fund has a breakpoint at $50,000. The least appropriate action would be to A) place the order B) explain letters of intent C) explain breakpoints D) discuss combination privilege

A) place the order All the other options introduce breakpoints to the customer. Not disclosing the breakpoint would make this a breakpoint sale.

All of the following are true regarding breakpoints for mutual funds except A) the first breakpoint investors can achieve is mandated by industry rule to be at the $10,000 investment threshold. B) the greater the investment, the lower the sales charge. C) a breakpoint sale is considered to be a sale just below a breakpoint. D) breakpoints must be disclosed to potential investors.

A) the first breakpoint investors can achieve is mandated by industry rule to be at the $10,000 investment threshold. These are all true: B) the greater the investment, the lower the sales charge. C) a breakpoint sale is considered to be a sale just below a breakpoint. D) breakpoints must be disclosed to potential investors. There is no standardized industry mandated breakpoint schedule. Offering breakpoints and where they occur is at the discretion of the investment company. In accordance with a breakpoint schedule, the greater the investment, the lower the sales charge will be. A breakpoint sale occurs when a sale is made just below a breakpoint with the intent of the registered representative to be the recipient of a higher sales commission. In this light, disclosure of breakpoints when they are offered is required.

The investment return of a variable annuity comes from A) the performance of the selected subaccounts within the separate account B) the assumed rate stated in the policy documents C) the insurance company's general account D) computing the excess of the premiums received over the mortality experience

A) the performance of the selected subaccounts within the separate account

Expense Ratios/Fund Expenses

All mutual funds have expenses (Load/No load) of management and operating costs 1) 12B-1-Fees (Covers sales/Distribution expenses) (A/No Load): .75% & (B/C): .25% 2)Managers Fee: Finance professionals who make investment decisions for the firm 3) Admin Costs: Trading, Transfer agent, Accounting, Legal, etc 4) Board of Directors (BOD) -Sales charges are charged in addition to expense ratio -Generally stocks have an expense ratio between 1% and 1.5% of fund's net assets. -Generally bonds have an expense ratio between 0.5% and 1% *Typically, more aggressive funds have higher expense ratios Mutual funds generally have higher expense ratios than ETFs because there are more actively managed mutual funds than ETFs. ETFs= Lower expense ratio *CDSC is not part of expense ratio

Regarding sales loads, management fees, and operating expenses for mutual funds, which of the following is true?

All reduce investor returns because they reduce the amount of money available for the fund to invest. Sales loads go to the underwriters or broker-dealers selling the shares for the fund. Therefore, they are subtracted from the dollars invested and in that light reduce possible returns for investors. Management fees and operating expenses are ongoing costs to the fund and, therefore, reduce the dollars that can be invested, again reducing potential returns.

Rights of Accumulation

Allow for investors to apply for a reduced sales charge -Available for subsequent investment and do not apply to initial transactions; allow the investor to use prior share appreciation and reinvestment to qualify for breakpoints and do not impose time limits The Right of Accumulation allows investors to combine previous investments in fund with today's investments to determine today's sales charge -Based on account value (growth counts) Allows investor to make additional payments Ex: Investment of $25,000 additional growth to $50,000 -After additional investment can add more growth Ex: Put $10,000 grow to $50,000 -Allow investor to make additional investments -No time limit to reach breakpoint -In order to avoid sales charge

12B-1-Fee

Annual fees charged by a mutual fund to pay for marketing and distribution costs -Sales marketing expense -Covers sales/distribution expenses -Ongoing expenses Class A/No Load: 12B-1-Fee of .75% per year Class B/Class C: 12B-1-Fee of .25% per year

Variable Annuity

Annuity that has a varying rate of return based on the mutual funds in which one has invested "Keep pace with inflation" (Have the risk of underperforming) -Investor assumes investment risk -Insurance/Security product -Opportunity to keep pace with inflation -More risk (still guarantee payment it just might change) -SECURITY: Need insurance license and securities license -Suitability is a primary consideration -Potential of underperforming -Must know the risks with this specific type of annuity All fees must be disclosed w/ variable annuity buyer Including: Advisory fee, custodial fees, administrative fees, and must also be aware of surrender charges (7-10 years) NO LIMIT to Annual Contribution on annual contribution accounts on commercial (non-qualified) customers *Premium Payments for variable annuities are invested in "separate accounts" various sub-accounts that behave like a diversified portfolio of mutual funds (just cant call them "mutual funds") w/ objectives for growth/income -The returns in the separate account sis not guaranteed, and therefore, a loss of principal is possible -All variable annuities are Deferred annuities -Accumulation Phase: Putting money in -Payout Phase: Taking money out

Your customer, Maya Jenyer, is 27 years old and in the 20% federal income tax bracket. She is interested in opening a Roth IRA as a supplement to her retirement savings. Her intention is to place the entirety of her contribution into the Windmill Growth Fund, which offers a choice of share classes. Which share class would likely be best for this customer?

B shares B shares are also called back-end loads. The back-end load gets smaller over a holding period of five to seven years, eventually dropping to zero. B shares are good for small dollar investors with long time frames.

An investor interested in the GHI Growth Fund, a diversified closed-end management investment company, sees in the financial news that the fund has declared a dividend of $0.33 per share. The payable date is Wednesday, April 26, and the record date is Wednesday April 5. In order to receive the dividend, the investor must purchase shares of the fund no later than A) Monday April 24. B) Monday, April 3. C) Tuesday, April 4. D) Wednesday April 5.

B) Monday, April 3. Note that the dividend procedure for a closed-end fund is the same as that for a publicly traded stock: the settlement is T+2. Therefore, the investor must make the purchase at least two business days before the record date to be eligible for the dividend. With a record date of Wednesday, April 5, the latest purchase allowing for T+2 regular way delivery is Monday, April 3. If this had been an open-end management investment company (mutual fund), the correct date would be Wednesday, April 5.

An investor interested in the GHI Growth Fund, a diversified open-end management investment company, sees in the financial news that the fund has declared a dividend of $0.33 per share. The payable date is Wednesday, April 26, and the record date is Wednesday, April 5. In order to receive the dividend, the investor must purchase shares of the fund no later than A) Tuesday, April 4. B) Monday, April 3. C) Wednesday April 5. D) Wednesday, April 26.

B) Monday, April 3. -Open-end: Set by BOD, so record day of -Mutual funds settle/own at the end of day at NAV by 4:00 Because shares of open-end investment companies (mutual funds) are purchased directly from the issuer, an investor's name makes it onto the list of owners of record on the purchase date. With the record date for this dividend being Wednesday, April 5, as long as an investor purchases by that date, their name will be on the records for the payment of the dividend three weeks later. If this had been a closed-end investment company, then the normal T+2 delivery period would be in effect so the investor would have to purchase no later than Monday, April 3 to be on the records by April 5.

The decision to annuitize a variable or fixed annuity may be reversed within how many days of election? A) 30 days B) 7 days C) 0 days D) 90 days

C) 0 days Annuitization is a one-time irrevocable action.

An investor interested in the GHI Growth Fund, a diversified open-end management investment company, sees in the financial news that the fund has declared a dividend of $0.33 per share. The payable date is Wednesday, April 26, and the record date is Wednesday, April 5. In order to receive the dividend, the investor must purchase shares of the fund no later than A) Tuesday, April 4. B) Monday, April 3. C) Wednesday April 5. D) Wednesday, April 26.

C) Wednesday April 5. -Priced bought and settled at the same day at the end of the day for mutual fun (NAV)

Public Offering Price (POP) Calculation Sales Charge Calculation

Calculate Sales Charge: The purchase price of a fund share (NAV + SC = POP) -When the NAV and POP are known, the sales charge price can be determined -Sales Charge is expressed as a percentage (%) Sales Charge Formula: POP-NAV/POP EX: POP ($10) - NAV ($9.50) = ($.50)= Sales Charge (5%) Calculate POP: If the dollar amount for the NAV and the percentage for sales charge are specified, the formula for determining the POP of mutual fund shares is: Public Offering Price (POP) Formula: NAV/100% - Sales Charge Percentage = POP NAV ($9.50)/100%-Sales Charge Percentage (5%) = POP ($10.)

Open-End

Capitalization: Continuous offering of shares (Mutual funds) Issues: Common Stock only Shares: Full or fractional There is no limit to the number of shares that can be issued in an open-end fund. Offerings/Trading: Sold and redeemed by the fund -Investors get money back Pricing: Price determined by formula (NAV) Shareholder Rights: Dividends (when declared); voting *Mutual funds are most common type of open-end: Trade once before 4pm Ex-Date: Set by the BOD -Mutual funds do not trade on exchange (Sell on the primary market) so the dividend is set by the Board of Directors -NOT DERP Method because it does not trade on Exchange

Closed-End

Capitalization: Single offering: Fixed Issues: Common, preferred, debts, bonds Shares: Full only Closed-end funds issue only a set number of shares, which then are traded on an exchange. Closed-end funds are considered a riskier choice because most use leverage. Offerings and Trading: IPO (secondary market) after IPO Pricing: Determined by Supply and Demand Shareholder Rights: Dividends (when declared); voting Ex-Date: Set by exchange/SPO

Primary difference between Open/Closed end funds

Closed-end company's initial offering of shares is limited (closes after a specific authorized number of shares have been sold) -Specific number of shares sold then closed (Stocks, Bonds, Preferred, Common) in the investment portfolio Open-End company is offering new shares to the public (continuously) open to new investors -Continuously open to the public (Just common stock) in investment portfolio Open-end and closed-end funds differ mostly in how they're bought and sold. Closed-end funds trade more like stocks, driven by supply and demand, while open-end funds trade at the end of each trading day at their NAV.

BOB Income Fund has net assets of $120 million and liabilities of $5 million. The fund has 5 million outstanding shares. What is the fund's current net asset value (NAV) per share? A) $22 B) $23 C) $25 D) $24

D) $24 "NET ASSETS GIVEN" = $120 million Divided Outstanding Shares = 5 120/5= 24

Which of the following statements regarding both mutual funds and closed-end funds is true? A) Both are priced using the same method. B) Both issue full and fractional shares. C) Both issue equity and debt securities. D) Both may be purchased in a primary offering.

D) Both may be purchased in a primary offering. Both open- and closed-end funds (like mutual funds) may be purchased in a primary offering; closed-end shares only once (after which the shares trade in the secondary markets), and open-end shares in a continuous primary offering. Only open-end funds can issue fractional shares, and only closed-end funds can issue debt securities. Open-end fund shares are priced by formula (NAV + sales charge = POP), and closed-end fund shares are priced by supply and demand.

Which of the following is an exempt issue? A) Variable life insurance B) Variable annuity C) Treasury mutual fund D) Fixed annuity

D) Fixed annuity Fixed annuities are exempt from registration. Variable insurance products and investment companies are required to register.

The board of directors of the ABC Growth Fund has declared a $1-per-share dividend payable to holders of record on Wednesday, April 27. What is the most likely ex-dividend date for this dividend? A) Friday, April 29 B) Monday, April 25 C) Tuesday, April 26 D) Thursday, April 28

D) Thursday, April 28 Open-End Mutual funds Ex-dividends are set by the BOD day after record

Under the Investment Company Act of 1940, all of the following are examples of management companies except A) the S&P 500 Index fund B) the growth fund option for a VA C) the Windmill Income Fund, an exchange-listed closed-end fund D) the Windmill Income UIT

D) the Windmill Income UIT Unit investment trusts are investment companies, but not management companies, under the act. Closed-end funds, ETFs, and separate accounts are all types of management companies.

One characteristic of an open-end investment company that distinguishes it from a closed-end one is that A) there are a wide variety of objectives available for investors to select from B) it may be either diversified or nondiversified C) it may avoid taxation by distributing all of its net investment income to shareholders D) there is a continuous public offering

D) there is a continuous public offering

Full (statutory) prospectus

Full and fair disclosure document that provides a prospective investor with the material information needed to make a fully informed investment decision Information Includes: -Funds objective -Investment policies -Sales Charges -Management expenses -Services offered -1-5-10 Performance Activity of fund: -If shorter lifespan of fund, Ex: 8 years of life for the fund 1, 5, 8 or Ex: 4 years of life for the fund 1, 4 *Use whichever one is shorter -Disclosure updated annually

Omitting Proespectus

Fund Advertisement (Rule 482) "Tombstone Ad" -Ad does not include enough information to qualify as a full or fail disclosure -Not sufficient to soliciting a trade w/ delivery of omitting prospectus

Which of the following would not be included in a mutual fund's list of expenses? I. Shareholder records and service II. Investment adviser's fee III. Broker-dealer sales charges IV. Underwriter's sales loads

III and IV Costs to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The costs paid in the form of sales charges (loads) to an underwriter or BDs selling mutual funds to the public may never be treated as expenses to the fund. They are expenses to the investor.

Annuitization

If the investor chooses annuitization, the amount of the monthly check is dependent on several factors: *Annuitization is a one time irrevocable action Age Gender (sex) Payout Option Amount of $ in contract Investment Return vs. AIR S, A, A, P, I or G, A, A, P, I

When the owner of an annuity elects to annuitize, they begin to receive income payments that are guaranteed for the life of the annuitant. Who provides this guarantee?

Insurer The income is guaranteed by the insurance company that issued the policy and is backed by that insurer's financial strength.

ABC Corporation's board of directors declared a $0.25 per share dividend on Wednesday, June 15. The dividend will be paid to shareholders of record on Tuesday, July 5. The dividend will be sent to shareholders on Tuesday, July 26. What is the last day to purchase the stock and receive the dividend, assuming a regular way settlement? A) July 3 B) June 30 C) July 1 D) July 2

June 30 This is a potent example of a difficult question that requires you to slow down and think it through. The ex-date for a corporation will be one business day prior to the record date. The record date is July 5. The day before is July 4, which is a holiday and not a business day. The days before that are Sunday and Saturday. The first business day before the ex-date is Friday, July 1. The last day to purchase the stock and qualify for the dividend is the day before the ex-date (June 30). The only holidays we have heard of appearing on the exam are July 4 and December 25.

Mutual Fund

Most common type of open-end (Primary market only) A mutual fund is a pooled collection of assets that invests in stocks, bonds, and other securities. -Open-end (Do not pay a sales charge) NAV -Sold at one point in the day before 4:00 pm -Redeemable securities/guaranteed marketability -Do not trade on the secondary market -Only issue common stock -Not marginable Characteristics: -Redeemable -Continuous offering of new shares -Forward pricing: Priced at once per business day before 4:00pm (EST) -Max sales charge of 8.5% or 8 1/2 of POP Mutual funds offer lower operating costs on an ongoing basis -Not as low of an expense ratio as ETFs -When someone buys a mutual fund they get shares

conversion (exchange) privileges

Moving from one fund to another within the same family of funds. *This is a taxable event (Tax consequences) -Move from one fund to another within the same fund family -Allowing investor to convert investment in one fund for equal investment in another fund in same family, without incurring additional sales charge Example: Vanguard Stock to Vanguard Bond -This is a taxable event -In order to avoid sales charge/To reach breakpoint

Public Offering Price (POP) Formula

NAV per Share / (100% -Sales charge Percentage)

Which type of shares allow the investor to buy and sell the shares at NAV and have a 12b-1 fee of 0.25% or less?

No load

Not redeemable vs Redeemable

Not redeemable: -Closed-End Funds (On secondary market) (OTC) Redeemable: UITs, Face amount certificates, Open-End Funds, Mutual Funds

1035 Exchange

One insurance contract to another w/out tax liability (Old to New) *Can do any transfer besides Annuity to Life *Life to Life is fine *Annuity to Annuity is fine The funds in an annuity may be transferred to another annuity with no tax implications. -A 1035 exchange allows funds to be moved from one annuity to another annuity without taxes. It does not prevent surrender fees. -Free of taxes, but any surrender fees due under the contract would still be paid -Cannot do 1035 exchange from annuity to life -Transfer of cash value from annuity to annuity, life to life, NOT annuity to life

Straight life Life w/ period certain:

Paid until death and ends when dead -Largest potential monthly payout: Ends when annuitant dies Payments for a certain amount of years -Guarantees payment for life but combines guarantee with insurer paying payments for a minimum amount of years if annuitant were to die early shortly after annuitization

Investment return on variable annuities is based

Performance of the selected sub-accounts within the separate account -Key feature of a variable annuity is that most of the premium os invested in the insurance company's separate account rather than the general account. -Within the separate account, there are a number of sub-accounts that may be selected, depending on the investor's objective. -It is the performance of these sub-accounts that provides the variable annuity's investment return

Forward Pricing

Price of fund shares Total Assets- Liabilities = NAV NAV/Outstanding Shares = NAV Price per share -Mutual funds must calculate NAV on minimum at least once per business day (After Market closes that day @4:00pm (EST) -Priced to investor- determined by next NAV calculation after order received Ex: Purchase made on Thursday, June 22 (EST)- Closing Price that day Ex: Purchase made on Friday, June 23 @4:30pm (EST)- Closing price on Monday, June 26 *Calculate NAV daily, after market closes at (4:00pm) *Remember open-end investment companies= Mutual Fund priced once per business day w/higher expense ratios than ETFs NEXT AVAILABLE PRICE THE CUSTOMER RECEIVES AFTER REDEMPTION REQUEST

Fixed Annuities

Promises a state of return *Insurance company at risk to provide rate of return to investor *Investor assumes no investment risks w/ fixed annuity -Invested in the company's general account -A GUARANTEED FIXED payout -Insurer bears the investment risk -Owner bears the purchasing power risk (inflation risk) -Index annuity is a type of fixed annuity -Safer than variable annuities NOT A SECURITY PRODUCT -Not regulated as a securities product -Not as risky as variable annuities RRs need only insurance license With no investment risk= Not a security

Breakpoints

Quantity discounts on open-end management company shares (mutual funds) - the greater the dollar amount of a purchase, the lower the sales charge. *Breakpoints only apply to Class A shares $1-$9,999 = 8.5% Sales Charge (8 1/2 Max Load) per Investment Act of 1940 $10,000-$24,999 = 7% Sales Charge $25,000-$49,999= 6% Sales Charge $50,000-$99,999 = 4% Sales Charge -Purchases may be combined between spouses, parents, and minor children, and with different funds within the same fund family in order to get a breakpoint Ex: Combined Lori & Frank = $50,000, so 4% Sales charge *A higher amount of money ($) invested = Lower sales charge *Sales charge drops with higher $Dollar amount invested

Pipeline (or Conduit) Tax Theory

Should not be taxed like regular companies -If investment qualifies for subchapter M or Internal Revenue Code (IRO) Regulation that allows regulated investment companies to pass taxes from capital gains, dividends, and interest distributions onto individual investors. -Avoid triple taxation by passing through 90% -Pass to conduit from corporation to shareholder -Distributed 90% Conduit theory states that an investment company that passes all capital gains, interest, and dividends to its shareholders shouldn't be taxed at the corporate level. -If fund acts as a conduit, or pipeline for distribution of (NII) the fund may qualify as a regulated investment company, subject to tax on only the amount of investment income the fund retains Subchapter M, also referred to as the "conduit rule," allows funds to avoid taxation. This tax-based rule requires funds to distribute at least 90% of their net investment income (NII) to shareholders to qualify. Pay 10% tax on undistributed -If a company passes all capital gains, interest, dividends to shareholders: Should NOT be taxed at corporate level *In order to qualify for a conduit of a mutual fund must pay a minimum 90% conduit theory where they pass through 90% of their net income to the investors they only pay 10% tax. So you are getting the income before it has been taxed.

Breakpoint Sales

Solicited sales at dollar amounts just below the point where a breakpoint (reduced sales charges) would occur. A breakpoint sale is a violation of industry rules -DO NOT DO THIS (Rule violation) A breakpoint sale is the sale of a mutual fund at a set dollar amount that allows the fundholder to move into a lower sales charge bracket. Breakpoint sales provide fee discounts to investors based on investment breakpoint levels determined by the fund company.

The board of directors of the Windmill Growth Fund have declared a dividend. The ex-date for the dividend will likely be on which of the following days?

The first business day after the record date Mutual funds do not trade in the secondary market. Orders may be entered on the record date, and the trade settle that day. The ex-date for a mutual fund dividend is the business day after the record date.

Your customer purchased 100 shares of Cuesta Verde Homes at $15 per share in a margin account. How much must the customer deposit by settlement day to pay for the trade?

The minimum initial deposit under FINRA rules is 100% or $2,000, whichever is less. Reg T requires 50%. The higher requirement of the two is the FINRA requirement of $1,500 (100% of the trade if the trade is less than $2,000). WHICHEVER IS LESS

Investment Act of 1940

This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. -8.5 or 8 1/2 (Max load) per investment Act of 1940 Classifies investment companies into 3 categories -UITS -Face Amount Certificates -Management Companies

Calculating Net Asset Value (NAV)

Total assets - Liabilities = Net Asset Value Net Assets/Shares Outstanding = NAV per share Example: The ABC fund has total assets of $100 million and $5 in liabilities. If it has 10 million shares outstanding. What is the NAV per share Net assets: $100 million (total assets) - $5 million (liabilities) = $95 million total (NAV: Net asset value) NAV per share: $95 million/ $10 million shares outstanding = $9.50 per share -Must be calculated at once each trading day -W/ Mutual fund the NAV is higher than POP -Shares are both purchased and redeemed at NAV -NAV is only affected by value of markets in stocks/bonds -Dividends interest -Increase of an asset -NAV is not affected by money coming in/out - "Supply and Demand" -New purchases -Capital gain or loss -Never changes the actual price value of NAV from initial calculation: Still $9.50 a share

Letter of Intent (LOI)

Used to reach breakpoint and cannot be pay upfront An investor agrees to invest a certain amount of money in mutual fund over a 13 month period. By signing the (LOI) agreement the investor gets a reduced sales charge applied to the entire investment -Others held in escrow and released when fulfilled. If investor does not fulfill the (LOI terms) the investor loses what is left in escrow -If cannot pay use securities in escrow to make up for lost amount not satisfied to reach breakpoint -A letter of intent is valid only if the investor completes the terms of the agreement within 13 months of signing the agreement. -A letter of intent may be backdated 90 days. -Binding Agreement -Reduced sales charge *Used for people who cannot pay upfront Ex: Intend to invest $50,000, but $20,000 for now to reach breakpoint -In order to avoid sales charge/To reach breakpoint

Your customer opens a position at 45 and then closes it later at 47. This represents

a 2-point gain or loss. Because we do not know if the opening transaction was a buy or a sell from what we are told, this could be either a 2-point gain or loss. If the opening transaction was a buy, this represents a gain (bought at 45, sold at 47). But if the opening transaction was a sell, this represents a 2-point loss (sold at 45, bought back at 47).

Management Companies

a company that is set up to manage a group of properties, a mutual fund, an investment fund, etc. type of investment company that manages publicly issued fund shares. Management investment companies can manage both open-end funds and closed-end funds. -Mutual Funds/ETFs (Closed and Open) -To invest in actively managed securities all controlled under the Investment Act of 1940 -Sells shares to public in an initial public offering (IPO)

Redeemable

able to be turned in or exchanged for money or products -Exchanged for cash

When a customer chooses to annuitize a variable annuity, all of the following are factors the insurance company will use in calculating the initial payout amount except A) historic inflation rate B) sex of the annuitant C) balance of the separate account D) age of the annuitant

historic inflation rate Insurance companies do not consider inflation when making this calculation. The components are SAAPI: sex, age, account balance, payout option, and interest rate (AIR).

Unit Investment Trust (UIT)

is an investment company that offers a fixed portfolio, generally of stocks and bonds, as redeemable units to investors for a specific period of time. It is designed to provide capital appreciation and/or dividend income. -Fixed portfolio of securities that do not change -Redeemable: When investor wants $ back -Not actively managed (No management fees) -Not sold on secondary market

A breakpoint sale is defined as the sale of mutual fund shares in an amount

just below the dollar amount at which the sales charge is reduced. A breakpoint sale refers to a sale made just below the point at which the investor would otherwise receive the reduced sales charge. The unethical practice may earn a higher commission for the salesperson, but it is not in the best interest of the customer.

Class A shares are best for investors with A) larger investment amounts and long time frames B) larger investment amounts and short time frames C) smaller investment amounts and short time frames D) smaller investment amounts and long time frames

larger investment amounts and long time frames The one-time cost and lower expense ratios make Class A shares better for investors with larger investments (to get breakpoints) and long time frames (to spread the impact of the front-end cost over many years).

Immediate Annuity

life annuity contract where the first pay-out is made within 12 months after it is purchased. can only be purchased with a single premium/lump-sum payment. -One lump-sum payment -Start receiving payments 12 months of purchasing -Basic type of annuity (one-lump sum) -Irrevocable: An annuity issuing payments in accordance with the annuity contract, and cannot be cashed in. Also called an "immediate" annuity. -Funded with up-front lump sum -Customer starts receiving income immediately -Almost always fixed annuities purchased for life-time guarantee

Regulation T

set by the FRB, the initial margin requirement is 50% of sale proceeds to be deposited in the customer's margin account Settlement: (T+4) or (S+2)

Net Asset Formula

total assets - total liabilities= Net assets of fund Net Assets of fund/Number of shares outstanding= NAV per share