Chapter 7: Questions - SIE Exam
in an LOI within how many months must the investor deposit the required funds?
13 months
Which type of shares are best suitable for investors who wish to redeem shares within a short period (more than 1 yr, less than 3)?
Class C
The purchase price of a no-load fund is determined by: - The net asset value plus a sales charge - The net asset value plus a commission - The net asset value as computed at the end of the business day - The supply and demand for the fund
The net asset value as computed at the end of the business day A no-load fund has no sales charge. The purchase price is determined by the net asset value as computed at the end of each business day.
Which of the following is the BEST rationale for why a mutual fund charges a redemption fee? - To discourage investors from redeeming shares too quickly - To compensate salespersons - To compensate the investment adviser - To encourage investors to sell their shares
To discourage investors from redeeming shares too quickly When mutual fund shares are redeemed, some funds deduct a small redemption fee from the amount that's being returned to the investor. This amount is directed back to the fund's portfolio. Ultimately, the fee is separate from any deferred charge that may apply and is designed to discourage investors from redeeming shares too quickly. Some funds waive redemption fees after the shares have been held for a specific period.
The main difference between closed-end and open-end investment companies is that closed-end investment companies: - Have shares that are not permitted to be purchased on margin - Offer a fixed number of shares - Continually issue and redeem their shares - Determine their shares prices once per day
offer a fixed # of shares Closed-end investment company securities are initially sold in an IPO with a fixed number of shares. After the initial offering, the shares trade on an exchange. Since the shares are traded on an exchange, they can be purchased on margin. Open-end management company shares are purchased directly from the mutual fund and only priced once per day. Since mutual fund shares are not exchange traded, they cannot be purchased on margin.
The day-to-day business activities of a unit investment trust (UIT) are the responsibility of the: - Trustee - Board of directors - Investment adviser - Distributor
trustee While mutual funds are often structured as corporations with a board of directors, a UIT is a trust. A trustee is responsible for overseeing the operation of a UIT. Since a UIT is not actively managed, it has no investment adviser.
Shares of a closed-end fund are available on the NYSE at $21.50 per share. The customer will pay: $21.50 + a sales charge $21.50 + a commission $21.50 with no commission or sales charge $21.50 less a commission
$21.50 + a commission The key to this question is in recognizing that the customer is buying shares of a closed-end fund. Closed-end fund shares are exchange-traded securities and are purchased with commissions or sold less a commission. On the other hand, shares of open-end companies (mutual funds) trade for their NAV plus any applicable sales charges. The NAV + sales charge is considered the mutual fund's public offering price (POP).
A mutual fund has a NAV of $58.23 and a POP of $62.55. The sales charge, when computed as a percentage of the offering price, is approximately:
6.9% The sales charge in this example is $4.32, which is found by subtracting the NAV of $58.23 from the POP, $62.55. To find the sales charge percentage, divide the sales charge of $4.32 by the offer price of $62.55, which comes to approximately 6.9% ($4.23 divided by $62.55 = .0691 = 6.91%).
Which of the following is considered an investment company under the Investment Company Act of 1940? - An American Depositary Receipt (ADR) - A Real Estate Investment Trust (REIT) - A Variable Rate Demand Obligation (VRDO) - A Unit Investment Trust (UIT) company
Answer - A Unit Investment Trust (UIT) company According to the Investment Company Act of 1940, the three types of investment companies are 1) Face Amount Certificate Companies, 2) Unit Investment Trusts, and 3) Management Companies. There are two types of management companies—closed-end and open-end (i.e., mutual funds). REITs, ADRs, and VRDOs are all types of securities, not investment companies.
All of the following statements are TRUE about closed-end investment companies, EXCEPT that the: - Number of outstanding shares is constant - Shares are sold at the current market price - Shares may not sell below the current net asset value - Shares may be listed on the NYSE
Answer - Shares may not sell below the current net asset value Closed-end investment companies are bought and sold in the same manner as common stocks. If a customer wants to sell a closed-end fund at the market, he would receive the current bid price (the market quote, not the net asset value). If a customer wants to buy a closed-end investment company at the market, he would buy it at the current offering (asked) price. The market price of the shares can be at, above, or below the net asset value. Closed-end investment companies have only one issue of shares. Once sold, no new shares are issued. The amount of outstanding shares remains constant. The shares may be listed on an exchange or may trade in the OTC market.
If an investor enters a redemption order for shares of an open-end investment company, what price will she receive? - The previous offering price of the shares - The net asset value (NAV) of the shares on the previous day's close - The net asset value (NAV) of the shares as computed after the order is received - The offering price of the shares as computed after the order is received
Answer - The net asset value (NAV) of the shares as computed after the order is received Open-end investment companies are also referred to as mutual funds. Investors can redeem (i.e., sell) their mutual fund shares and receive the next calculated NAV of the shares. When shares are purchased, investors typically pay the next calculated NAV of the shares plus any applicable sales charge (which is referred to as the public offering price).
Which of the following investments can be purchased on margin? - OTC equities - Closed-end fund shares - Open-end fund shares - Variable annuity units
Answer - closed end fund shares According to the FRB, shares that are listed on a national exchange (e.g., NYSE or Nasdaq) are marginable. Closed-end fund shares are listed on an exchange, traded in the secondary market, and are marginable. Remember, OTC equities are not listed on an exchange; instead, they trade through the OTCBB and OTC Pink Marketplace.
All of the following are likely to be found in the portfolio of a money-market fund, EXCEPT: - Bank certificates of deposit - Treasury bills - Treasury bonds that have a short time to maturity - Common stock
Answer - common stock For a money-market fund, the underlying securities are short-term debt securities. Therefore, common and preferred stock are not found in a money-market fund's portfolio.
The ability to reduce sales charges on mutual fund shares that are purchased through a front-end load is available to: - Spouses who maintain separate accounts and who purchase shares in different fund families - An individual who signs a letter of intent - Immediate family members who live apart and independently purchase shares in the same fund family - A trustee purchasing shares from the same fund family for different trust accounts.
Answer - individual who signs a letter of intent Reduced sales charges, also referred to as breakpoints, are only available on fund shares that are purchased with front-end loads. The reduction can be achieved by signing a letter of intent or through rights of accumulation. However, they are only available when shares are purchased from the same fund family. In order for the reduction to apply to other family members, they must be immediate family members and dependent children. A trust can qualify for breakpoints, but not by consolidating the assets of multiple trusts.
An increase in which of the following choices will cause an increase in the expense ratio for an investment company? - Redemptions - Management fees - Net asset value - Shareholders
Answer - management fees The expense ratio depends on the fees that are charged against the net assets of the fund. The only fee listed in this question is the management fee.
An individual who is considering the purchase of closed-end fund shares would pay: - The closing NAV plus any applicable sales charge - The next computed NAV plus any applicable sales charge - The next computed NAV plus any applicable commission - A market price as determined by the supply and demand for the shares
Answer - market price as determined by the supply and demand for the shares Closed-end fund shares trade in the secondary market and their prices are determined by supply and demand for the shares. Although the shares have an NAV, it's only for comparative purposes.
Who keeps track of the shareholders of a mutual fund? - transfer agent - investment advisor - custodian bank - underwriter
Answer - transfer agent The mutual fund's transfer agent is responsible for keeping track of all of the current owners of a mutual fund. Custodian banks provide for the safekeeping of the fund's securities and cash. The fund's portfolio is managed by the investment adviser.
Which class of shares have low 12b-1 fees?
Class A
Which type of shares are best suitable for investors who wish to redeem shares within 5-7 years?
Class B
Which type of shares convert to class a shares after a certain # of years?
Class B
All of the following are likely to be found in the portfolio of a money-market fund, EXCEPT: - bank certificates of deposit - treasury bills - treasury bonds that have a short time to maturity - common stock
Common stock For a money-market fund, the underlying securities are short-term debt securities. Therefore, common and preferred stock are not found in a money-market fund's portfolio.
An investment company that is purchased in installments and that matures at a fixed-dollar amount is called a:
Face-amount certificate Face-amount certificate companies issue certificates of the installment type. The investor makes periodic payments and receives a fixed sum at the end of the period. Lump-sum payment certificates are also available.
Which of the following is a benefit of investing in mutual funds? - Professional management of investments - Sales charges on deposits and withdrawals - Guaranteed investment returns - Management fees that are assessed annually
Professional management of investments Investing in mutual funds is a way for individuals to own a small amount of a large portfolio of securities. In addition, the fund's investment's will be selected and managed by a professional investment advisers. Securities offer variable, not guaranteed, rates of return. Both sales charges and management fees are paid by investors and ultimately reduce their rate of return.
A unit investment trust (UIT): - Will typically have 12b-1 fees - Represents an undivided interest in a fixed account - Represents a dividend interest in a fixed account - Will typically assess a back-end load
Represents an undivided interest in a fixed account Unit investment trusts (UITs) sell shares of beneficial interest (SBIs) that represent an undivided interest in a fixed portfolio of securities. UITs typically assess an initial sales charge (load) along with operating fees. Since UITs are non-managed investment companies, they don't include management fees.
The fund that would probably have the least price volatility is a(n): International equity fund Growth fund Long-term municipal bond fund Short-term corporate bond fund
Short-term corporate bond fund In general, bond funds are less volatile than equity funds. Within the bond category, the NAVs of short-term bond funds are considerably less volatile than long-term bond funds whether corporate or municipal.
Which of the following stipulations is NOT included in a letter of intent? - The maximum time limit for the letter of intent is 13 months. - The letter of intent may be backdated for up to 90 days. - The fund may stop redemptions during the duration of the letter of intent. - The fund may place some of the initially purchased shares in an escrow account to protect against the failure to fulfill the letter of intent.
The fund may stop redemptions during the duration of the letter of intent. A letter of intent (LOI) has a maximum duration of 13 months and may be backdated for up to 90 days to include previous purchases. Also, to protect against the client's failure to fulfill the letter of intent, a certain amount of the initially purchased shares may be placed in an escrow account by the customer's broker-dealer. If the terms of the letter are not met, the shares in the escrow account will be liquidated and used to cover any additional sales charges that are due. The letter of intent will not contain a clause which stipulates that redemptions are prohibited during the 13-month period.
You are reading the prospectus for the Adventurers Aggressive Growth Fund. Which of the following statements are you LEAST likely to encounter? - The primary objective of the fund is income, with preservation of capital as a secondary objective. - There is no guarantee that the fund will meet its objectives. - The fund invests primarily in the stock of small-capitalization companies, some of which have a short or no operating history. - The securities in which the fund invests may be very illiquid.
The primary objective of the fund is income, with preservation of capital as a secondary objective. Many of the stocks owned by an aggressive growth fund represent investments in small, relatively new companies. These companies rarely pay dividends, and such stocks tend to be very volatile. Therefore, income and preservation of capital are NOT objectives that one should expect from an aggressive growth fund.
Which of the following is TRUE if a mutual fund investor chooses to implement a systematic withdrawal plan from the fund? - The dividends and capital gains that are generated from the fund will be sufficient to make the payments. - All payments will end on a specific date. - The amount of each payment will remain the same. - The withdrawals may result in a reduction of capital.
The withdrawals may result in a reduction of capital. The only true statement is that the plan may result in the reduction of capital if the dividends and capital gains that are generated from the fund are NOT sufficient to make the payments and because the shares will need to eventually be redeemed to make payments. Systematic withdrawal plans provide an investor with regular payments. These payments can be structured as fixed-dollar, fixed-percentage, or fixed-time. The option chosen determines whether the payments will remain the same or whether they will cease on a specific date. Payments will first come from dividends and capital gains that are generated from the fund, but after those funds are no longer sufficient, shares will be redeemed to provide the payments.
A "breakpoint sale" is best defined as: - The payment of compensation to a registered representative who has ceased to be employed by a member firm - The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions - The sale of investment company shares in anticipation of an impending distribution - The sales amount in an IPO where institutional clients get a price discount
answer: The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions A breakpoint sale is defined as the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity purchases. Breakpoint sales are generally effected in order to assess higher sales charges on transactions and they are a violation of FINRA rules.
In which of the following funds is the percentage that's invested in each of the various asset categories adjusted as financial markets change? - An asset allocation fund - An S&P Index fund - A bond index fund - A growth fund
asset allocation fund Asset allocation funds hold diversified portfolios of stocks, bonds, and money-market instruments. The percentage of the portfolio invested in each of these categories is shifted by the fund manager from time to time, often according to computer models.
An investment company that diversifies its portfolio with stocks, bonds, and money market instruments, but will always hold some of each, is called: - equity income fund - balanced fund - growth fund - asset allocation fund
balanced fund A balanced fund invests its portfolio among a variety of investment classes, such as equities, bonds, and "cash" (money-market investments). The fund manager might change the allocation based on market conditions, but they must always keep some of each.
Jamie has inherited 500 shares of an investment company. She calls her broker to redeem the shares and is informed that the kind of investment company she owns makes no provision for future purchases or redemptions. What kind of investment company does she own? - An open-end fund - closed-end fund - A unit investment trust - face-amount certificate company
closed end fund
Which of the following entities is responsible for the safeguarding of the securities that are owned by a mutual fund? - The registrar - The custodian bank - The sponsor - The transfer agent
custodian bank The custodian bank is responsible for the safekeeping or safeguarding of the securities that are owned by a mutual fund. The custodian bank has no responsibility relating to the management of the fund's portfolio.
The fund that would probably have the most price volatility is a(n): International equity fund Growth fund Income fund Municipal bond fund
international equity fund In general, bond funds are less volatile than equity funds. Within the equity category, the NAVs of growth and income bond funds are considerably less volatile than international equity funds whether corporate or municipal. International equity funds are not only vulnerable to market risk, but exchange and political risk as well.
Which of the following is an advantage of a unit investment trust as compared to a managed mutual fund? - It usually has lower operating costs. - Its securities are redeemable. - The manager can adjust the portfolio when market conditions change. - It is not registered with the SEC.
it usually has lower operating costs Since unit investment trusts (UITs) have fixed portfolios with no manager, they have no management fee. Therefore, UITs have lower operating costs than most mutual funds. Both UITs and mutual funds issue redeemable securities and are registered with the SEC under the Securities Act of 1933 and the Investment Company Act of 1940.
Which of the following is BEST defined as a provision which provides a sales charge discount (breakpoint) for making mutual fund share purchases without initially depositing the entire amount required? Dividend reinvestment A letter of intent Dollar cost averaging Rights of accumulation
letter of intent A letter of intent qualifies an investor for a sales charge discount (breakpoint) for making mutual fund shares purchases despite the fact that the required amount has yet to be deposited. The rights of accumulation provision gives investors the ability to receive cumulative quantity discounts when purchasing mutual fund shares. Under the rights of accumulation provision, rather than using the original purchase price, the current market value of the investment plus any additional investments is used to determine the applicable sales charge. Once a breakpoint is reached, all future purchases qualify for the reduced sales charge.
The purchase price of a no-load fund is determined by the:
net asset value
When purchasing mutual fund shares, the ability to receive cumulative quantity discounts is referred to as: - Rights of accumulation - breakpoint sale - A letter of intent - Dollar cost averaging
rights of accumulation The rights of accumulation provision gives investors the ability to receive cumulative quantity discounts when purchasing additional mutual fund shares. Rather than using the original purchase price, the current market value of the investment plus any additional investments are used to determine the applicable sales charge. A letter of intent qualifies an investor for a discount that's made available through breakpoints without initially depositing the entire amount required.
Which one of the following statements concerning money-market funds is TRUE? - These funds will maintain a stable NAV of one dollar. - These funds are typically invested in Treasury bonds. - These funds are FDIC insured. - These investments are liquid.
these investments are liquid Money-market funds are investments in which investors park cash holdings to wait out dips in the market or to maintain a source of liquid funds. These mutual funds are not FDIC insured, and will not necessarily maintain a stable NAV. Rather than investing in long-term debt like T-bonds, money-market funds typically hold short-term investments (e.g., T-bills).
