Unit 8 - Investment Companies
Mutual funds have several different methods for assessing charges to become shareholders. One of those is the front-end load and is charged when purchasing A) Class A shares. B) Class C shares. C) Class D shares. D) Class B shares.
The best answer is A. Class A shares Purchasers of Class A shares pay a sales charge on each investment. Because the sales charge comes off the amount invested, it is called a front-end load. Class B and C shares have back-end loads, although Cs usually drop off after one year. There are shares for almost the entire alphabet, but we are not hearing anything about them−only the A, B, and C.
When discussing unit investment trusts with a prospect, it would be correct to state that these are A) regulated under trust law rather than securities law. B) generally traded on the listed exchanges. C) nonmanaged investment companies. D) sold without the requirement to deliver a prospectus.
The best answer is C. non-managed investment companies A primary characteristic of the UIT is that, unlike the open-end and closed-end companies, it has no portfolio managers. That is why it is never referred to as a management company. It may have the term "trust" in its name, but it is an investment company registered under the Investment Company Act of 1940. UITs cannot be sold without a prospectus. Only securities traded in the secondary market are listed on an exchange. UITs are redeemable securities through the issuer.
Due to the excellent skill of the investment management team, the XYZ Growth Fund has realized significant long-term capital gains in its portfolio. The fund may distribute these gains to its shareholders A) no more than once every 12 months B) quarterly along with the dividend payment C) as often as semiannually D) as often as biennially
The best answer is A. no more than once every 12 months Section 19 of the Investment Company Act of 1940 states that "it shall be unlawful for any registered investment company to distribute long-term capital gains more often than once every twelve months." Dividends do not have any restriction on frequency.
An attractive investment for a customer with a very high risk tolerance might be a leveraged ETF. One your firm recommends is the QUID 3x leveraged ETF. You decide to track its performance for several days during a period of high market volatility. The starting date value is $50 per share. Day one ends with the specified index down 3%. Day two sees the index rise by 4%. On the third and final day, the index declines by 1%. The value of the QUID share is now A) $50.06 B) $49.94 C) $49.43 D) $50.00
The best answer is C. $49.43 The 3x leverage will multiply the index movement by a factor of three. Initial Price = $50 Day one, index down 3% =50*(1-(0.03*3)) =$45.5 Day two, index rise by 4% =45.5*(1+(0.04*3)) =$50.96 Day three, index declines by 1% =50.96*(1-(0.01*3)) =$49.43
In order for an investment company to qualify as a regulated investment company (RIC), thereby avoiding triple taxation, it must act as a conduit (pipeline) and distribute a minimum of its net investment income (NII) to shareholders. At least what portion of the NII must be distributed? A) 50% B) 80% C) 90% D) 89%
The best answer is C. 90% Under Subchapter M of the Internal Revenue Code (IRC), an investment company must distribute at least 90% of the NII to be classified as a RIC to avoid triple taxation.
Which of the following investment company portfolios is supervised rather than managed? A) Real estate investment trust B) Regulated open-end fund C) Closed-end bond fund D) Unit investment trust
The best answer is D. Unit investment trust A unit investment trust buys securities and holds them until redemption or until a specified future date. The securities in the portfolio are not traded, so no manager is needed. A real estate investment trust is not considered an investment company.
An open-end investment company may do all of the following except A) continuously offer shares. B) redeem shares. C) borrow money. D) issue bonds.
The best answer is D. issue bonds A mutual fund may not issue any senior securities, although it may purchase almost any type of security for its portfolio.
A new client, age 25, earning $41,000 annually has saved $20,000 to allocate to an investment portfolio for the first time. The client conveys that while he would like to see some growth, an investment with moderate risk and some downside protection are important objectives for his first time investing. Aligning with the client's investment experience and objectives, which of the following would be the most suitable? A) Balanced fund B) Municipal bond fund C) Equities index fund D) Money market fund
The best answer is A. Balanced fund A balanced fund, which consists of both equities and debt instruments, not only aligns with the growth objective but also offers some downside protection against falls in market due to the debt portion of its portfolio. Equity index funds move with the markets and offer no downside protection. A money market fund would not align with growth, and a municipal bond fund would have no benefit for an investor in a lower income bracket.
One of your customers has recently celebrated a 58th birthday. The investor began a regular investment program into shares of the KAPCO Growth Fund over twenty years ago. The account is showing a substantial gain. Because retirement is getting closer, you suggest using the exchange privilege offered by the KAPCO fund group. Your recommendation is to place half of the holdings into the KAPCO Balanced Fund. Following this recommendation would result in A) tax deferral of any gains because the money is still in the KAPCO fund group. B) a taxable transaction for those shares exchanged. C) tax deferral of any gains because the investor has not received any proceeds. D) a taxable transaction for those shares exchanged plus a 10% tax penalty for early withdrawal.
The best answer is B. a taxable transaction for those shares exchanged The exchange or conversion privilege allows the investor to exchange shares of one fund in a family of funds for another at net asset value. The benefit is the saving of sales charge. The IRS treats this exchange as the sale of one security and the purchase of another. Therefore, any gains will be subject to tax. There is no 10% tax penalty. That applie only when there has been deferral of earnings, such as in an IRA.
When is the sales charge deducted from purchases of mutual fund shares made under a letter of intent? A) When each letter of intent is completed B) When each purchase is made C) Monthly D) Annually
The best answer is B. When each purchase is made When the customer makes the first investment under a letter of intent, the reduced sales charge applies immediately and to each subsequent investment. With each additional investment, the same reduced charge is deducted. If the customer does not invest the amount stated in the letter, the full sales load applies retroactively to the total investment.
According to Municipal Securities Rulemaking Board (MSRB) rules, can a municipal securities representative give $50 crystal vases to 10 of his favorite clients? A) He can, but only with written permission from the MSRB. B) Yes, he is permitted. C) No, the aggregate amount exceeds the permissible annual limit. D) The representative is not allowed to give gifts to customers.
The best answer is B. Yes, he is permitted. If each gift meets the $100 annual gift limitation, then they are permitted.
The public offering price for a mutual fund, as quoted in the financial press, reflects A) no sales charge because the offering price depends on the quantity purchased. B) the average sales charge for the preceding three months. C) the maximum sales charge the fund distributor collects. D) the minimum sales charge the fund distributor collects.
The best answer is C. the maximum sales charge the fund distributor collects The public offering price for a quoted mutual fund includes the maximum sales charge the fund distributor can assess.
In the purchase of Class A shares, many mutual funds provide quantity discounts to those reaching breakpoints specified in the fund's prospectus. To qualify for the quantity discount, purchases of which of the following may not be combined under the definition of any person? A) Spouses investing in a joint account and individual accounts B) A parent's account and the parent's child in a UTMA account C) A parent and a 35-year-old child investing in separate accounts D) A trustee of an irrevocable trust and the beneficiary of that trust
The best answer is C. A parent and a 35-year old child investing in seperate accounts For the purpose of qualifying for breakpoints, the definition of any person includes family units, but only minor children are included. Adults, other than spouses, are separate persons. Purchases made by trustees or other fiduciaries may be combined with purchases in the accounts of the beneficiary of the fiduciary account.
Leveraged index funds I can be exchange-traded funds (ETFs). II can never be exchange-traded funds. III can be inverse or reverse funds. IV can never be inverse or reverse funds. A) II and IV B) II and III C) I and III D) I and IV
The best answer is C. I and III Leveraged funds—those attempting to deliver a multiple (e.g., 2X or 3X) of the returns delivered by the index they track—can be ETFs, as well as inverse (reverse) funds. Inverse funds attempt to deliver returns the opposite of those realized by the index they track.
Probably the most significant difference between a business development company (BDC) and any other investment company registered under the Investment Company Act of 1940 is that a BDC A) is required to file annual reports with the SEC. B) issues shares that trade actively in the secondary markets. C) makes available significant managerial assistance to the investments in their portfolio. D) qualifies for special tax treatment by distributing at least 90% of its net investment income to owners.
The best answer is C. makes available significant managerial assistance to the investments in their portfolio All other registered investment companies are passive investors. That is, they do not take an active role in the management of the companies held in their portfolios. The purpose behind BDCs is just that - help small companies with management issues. BDCs, like most other investment companies, qualify as regulated investment companies by distributing at least 90% of their net investment income. Doing so enables them to avoid tax on the distribution. Like closed-end funds and ETFs, shares of BDCs trade actively in the secondary markets. Many trade on the NYSE and the Nasdaq Stock Market, while others trade OTC. As do all registered investment companies, BDCs file annual reports with the SEC.
Nonstatistical factors used in comparing one mutual fund to another would include all of the following except A) withdrawal plan options. B) reinvestment privileges. C) management fees. D) conversion or exchange privileges.
The best answer is C. management fees Nonstatistical factors are those that cannot be quantified. That is, you cannot put an exact number on them. Management fees are a measurable statistic. The other factors listed are features, but do not have numbers, as such, attached to them.
An investor wishes to invest $5,000 into the KAPCO Balanced Fund, an open-end investment company. How many shares will the investor receive if the next computed NAV per share after receipt of the order is $41.30 and the fund has a sales charge of 4%? A) 121.065 B) 43.021 C) 116.414 D) 116.225
The best answer is D. $116.225 POP = Nav per share / (100% - sales charge percentage) The investor will pay the POP (public offering price) of $43.02 per share. That price is computed by dividing the NAV of $41.30 by (100% - 4%). Remember, the 4% sales charge is a percentage of the offering price, not the NAV. Dividing the $5,000 investment by the POP of $43.02 results in a purchase of 116.225 shares.
A high net worth couple in their 40s earning a combined $480,000 annually have $100,000 they would like to conservatively invest. Given their income bracket, they stress reducing tax exposure and also note that having access to the funds is important. Which of the following would be the most suitable investment? A) Direct participation program B) GNMA fund C) Special situation mutual fund D) Municipal bond ETF
The best answer is D. Municipal bond ETF Municipal bonds and GNMAs are the two conservative choices offered here. However, distributions of interest from the GNMA fund will be taxed at the federal, state, and local level. Income distributions from the municipal bond ETF will be tax exempt at the federal level, reducing tax exposure at their income level, and is the better choice. Direct participation programs are not conservative or liquid, and special situation mutual funds offer no reduced tax exposure.
Your firm has just assigned you a new client. Wanting to do the best job you can, you review the current investment holdings of the client. Included are the following mutual fund accounts: $50,000 in Class B shares of the STU Growth Fund $25,000 in Class A shares of the STU International fund $15,000 in Class A shares of the TUV Utility Fund STU and TUV offer rights of accumulation and breakpoints at $25,000, $50,000, and $100,000. If the client wishes to invest $20,000 into the Class A shares of the TUV Technology Fund, the sales charge would be based on A) the $100,000 breakpoint. B) the next computed net asset value. C) the $50,000 breakpoint. D) the $25,000 breakpoint.
The best answer is D. the $25,000 breakpoint There are several important points in this question. Rights of accumulation provide that a new purchase is added to the value of existing accounts to determine the breakpoint reached. However, only Class A shares count because the Class B shares never paid a front-end load. Of course, only shares in the same fund family are used - we cannot combine STU shares with TUV shares. As far as the math, we have $15,000 in one TUV fund and are adding another $20,000. That brings the investor's account in TUV funds to $35,000, which is enough to meet the $25,000 breakpoint. Finally, the sales charge is computed as a percentage of the public offering price (POP), not the NAV.
