Investment Companies - Practice Questions
Some mutual fund companies allow investors to exchange shares of one fund for those of another fund under the same management or family of funds at the fund's Net Asset Value. This is known as A) Exchange Privilege B) Refunding C) Convertible Fund D) Redemption
A) Exchange Privilege Conversion/Switching/Exchange Privileges allow investors to exchange shares of one fund for those of another fund under the same management (family or complex) at NAV. This switch may involve a nominal charge for conversion but does not require additional sales charges. This switch may also result in a tax gain or loss to the investor because the IRS classifies it as a sale and a purchase.
A particular mutual fund focuses its investments in one state, and even more specifically, within a specific county of that state. Such a fund would primarily be exposed to which type of risk? A) Marketability B) Interest rate C) Capital D) Systematic
A) Marketability The fund described would be a sector fund. Of the choices listed, the marketability or liquidity of such a fund would be a primary risk factor. Though interest rate risks, capital and systematic risks are inherent to mutual funds, these risks will be similar or the same for all mutual funds across the board, and these risks would not differ by region. A lack of geographic diversity within a fund would subject the fund to marketability issues.
When a customer signs a Letter of Intent (LOI) to buy shares of a mutual fund, the customer A) can still be eligible for breakpoint discounts at lower investment thresholds if the total commitment in the LOI is not met. B) can factor in appreciation of already-held fund shares when determining breakpoints on additional purchases. C) will be forced to liquidate all purchases if the customer doesn't pay in the agreed-upon amount in the LOI. D) will have no less than 13 months to buy the agreed-upon amount of shares and achieve a breakpoint discount.
A) can still be eligible for breakpoint discounts at lower investment thresholds if the total commitment in the LOI is not met. If a customer signs a Letter of Intent (LOI) and does not end up being able to invest the total that was committed to in the agreement, the customer can normally still achieve breakpoints at lower dollar thresholds.
The price at which a mutual fund's shares will be redeemed A) cannot be determined before the order is entered B) is the average of the previous day's close and the opening price of the day the order is placed C) can be ascertained by contacting the mutual fund D) is determined by the current supply and demand in the market
A) cannot be determined before the order is entered The value of a mutual fund's shares are calculated at close of the market each day; therefore, there is no way to know in advance what the exact value of the share price will be.
The redemption value of a mutual fund is based on the A) next computed bid price on the day the order is received. B) previous day's bid price on the day the order is received. C) next computed ask price on the day the order is received. D) previous day's ask price on the day the order is received.
A) next computed bid price on the day the order is received. when calculating the redemption price of a mutual fund forward pricing is required, which means the investor will receive the next calculated Bid after their order is entered. Bid = NAV = Redemption Price
Which of the following most accurately describes the figure that results from subtracting a mutual fund portfolio's cost from its current market value? A) NAC B) Appreciation C) Amortization D) Offering price
B) Appreciation Appreciation is the increase in value of an asset. Amortization is an accounting procedure such as the depreciation of the value of an asset over its useful life. Net asset value is the market value (bid price) of mutual fund shares. The offering price is the NAV of a fund plus its sales charge.
Each of the following would be potential ways to distinguish between different classes of mutual funds shares, EXCEPT: A) Sales load percentages B) Investment objectives C) Fund fees and expenses D) Timing of the assessment of sales loads
B) Investment objectives Different classes of mutual fund shares can be determined by the sales loads charged by the fund, expenses and fees charged to the fund, and the timing of when fund sales loads are charged (front-end versus back-end). The investment objective of a fund would not be helpful in determining the class of fund shares, as all fund shares can have the same or differing investment objectives
A retired individual seeking income would consider all of the following funds EXCEPT A) Growth and Income Fund. B) Special Situation Fund. C) Money Market Fund. D) Income Fund.
B) Special Situation Fund. Specialized funds are considered to be the riskiest fund because they are concentrated or limited to certain securities.
All of the following fall under the definition of a registered investment company EXCEPT A) a growth and income fund B) a separately managed account C) the separate account of a variable annuity D) a money market fund
B) a separately managed account A growth fund and an income fund are both mutual funds and therefore are investment companies. The sub-account of a variable annuity must register under the Investment Company Act of 1940 and is considered to be an investment company registered under the Act. A separately managed account is a professionally managed portfolio of securities but the securities are directly owned by the account owner (the customer) therefore they are NOT classified as investment companies.
An open-end investment company may do all of the following EXCEPT A) lend money. B) issue bonds. C) continuously offer shares. D) borrow money.
B) issue bonds. Open-end investment companies may issue only voting common stock- no preferred -and no bonds.
Under a Letter of Intent agreement to invest a total of $25,000, an investor invested $13,000. Later, the value of the shares appreciated to $17,000. To complete the L.O.I. agreement, the investor would be required to invest A) 0 B) $8,000 C) 12,000 D) 25,000
C) 12,000 Under the Letter of Intent, you always work from the original amount invested, NOT the current value therefore the investor would be required to invest another $12,000.
According to FINRA rules, the maximum sales charge on a mutual fund is A) 8% of net asset value. B) 8 1/2 of net asset value. C) 8 1/2% of the total amount invested. D) 9% of the total amount invested.
C) 8 1/2% of the total amount invested. The maximum sales charge on a mutual fund is 8 1/2% of the total amount invested.
When purchasing shares collectively, which of the following would likely be eligible for sales breakpoints when purchasing mutual fund shares under one family of funds? A) Members of an investment club in the investment club account B) Adult sibling who live in separate households in separate cities but who have the same last name and open accounts at the same broker-dealer firm C) A father and minor daughter living in the same household where the father invests in a retirement account for himself and a 529 college saving plan for his daughter D) Two friends who start a business as a partnership and buy fund shares in the partnership's investment account
C) A father and minor daughter living in the same household where the father invests in a retirement account for himself and a 529 college saving plan for his daughter A father and minor daughter who live in the same household would be likely to qualify for a sales charge breakpoint when buying mutual fund shares under the same family of funds, even though the shares are being purchased in a retirement account and separate college saving plan account. Breakpoints are typically available to individuals, spouses and dependents, fiduciaries, and trustees including those of a corporate pension plan or profit-sharing plan. All other choices are not eligible for breakpoints.
Based on the information above, which of the following statements is most likely TRUE? A) Both funds are closed-end. B) Both funds are open-end. C) Athens is a closed-end fund, while Troy is an open-end fund. D) Troy is a closed-end fund, while Athens is an open-end fund.
C) Athens is a closed-end fund, while Troy is an open-end fund. Based on the above information, you can determine that the Athens fund is closed end because the NAV is greater than the Ask. Whenever the NAV is more than the Ask, the fund has to be a closed-end fund. Troy is probably an open-end fund because the NAV is less than the Ask, and because the difference between the two is less than 9%.
The yield of a money market fund is most affected by: A) Fees associated with auditing B) Fees associated with the custodian C) Fees associated with management D) Registration fees and taxes
C) Fees associated with management Since the largest expense of a money market fund is the management or advisory fees, those fees would have the greatest impact on the yield of the fund.
One of your clients invested $75,000 in the fund. The worth of the client's investment has now fallen to $68,000. The client wishes to invest an additional $5,000 and wants to know what the sales charges will be on the $5,000 investment. Which is CORRECT regarding the charges to the client on the additional investment? A) The client will have to pay the 7% sales charge because the client is only investing $5,000 at this time. B) Because the client's investment is only worth $68,000 and the additional $5,000 does not push that value over $75,000, the client will have to pay 6%. C) The client will have to pay a sales charge of 5.5% because the original investment was $75,000 and the client wishes to invest an additional $5,000. D) Because the client's other investment at the firm are not known, there is no way to determine the sales charge.
C) The client will have to pay a sales charge of 5.5% because the original investment was $75,000 and the client wishes to invest an additional $5,000. When covering questions on "Breakpoints" and "Rights of Accumulation" it is very important to thoroughly read the full question. Under "Rights of Accumulation" regulations, an investment company may base charges on NAV plus additional investments, amount invested plus additional investment, or the higher of the two. Here, the "Rights of Accumulation" are based on "AMOUNTS INVESTED." Since the investor has put up $75,000 already, and intends to invest an additional $5,000, the investor would get the breakpoint rate of 5.5%, even though NAV plus the $5,000 is less than $75,000.
Of the following statements, which if FALSE about mutual fund information services? A) Many services require a paid subscription to access the information. B) The performance results listed by such services will not always follow SEC and FINRA guidelines. C) The performance of funds is often reliably projected by these services. D) The information services can be a resource for investors to research funds.
C) The performance of funds is often reliably projected by these services. Predictions or projections ono fund performance are prohibited. Thus, even services of this kind would not be allowed to predict fund performance.
The Board of Directors of a mutual fund may change the investment objectives of the fund if A) at least two-thirds of the Board of Directors votes for specific change. B) shareholders are given the opportunity to switch to a similar fund with the same objectives. C) more than 50% of the outstanding shares voted in favor of the change. D) less than 10% of the stockholders voted against the change and the Board of Directors approved.
C) more than 50% of the outstanding shares voted in favor of the change. The investment objectives of a mutual fund may be changed only if the majority of the shares vote in favor of the change.
Carrie is a conservative investor and is interested in purchasing Class A shares of Mutual Fund XYZ using the proceeds of a fund she just sold from a different mutual fund family. XYZ Mutual Fund allows her to make the purchase without paying a front-end sales charge. Given this situation, what is the most likely reason that Carrie did not pay a front-end sales charge? A) Mutual Fund XYZ was able to give her a significant discount on a front-end sales load because she is a conservative investor. B) The fund family granted her Rights of Reinstatement. C) Mutual Fund XYZ was able to give her a breakpoint through a Letter of Intent (LOI). D) Carrie took advantage of a Net Asset Value Transfer.
D) Carrie took advantage of a Net Asset Value Transfer. Carrie performed a Net Asset Value (NAV) transfer. Some fund families allow customers to purchase Class A shares without paying a front-end sales charge if the customer purchases such shares using proceeds from the sales of shares of a different mutual fund family for which the investor paid a front-end or back-end sales charge.
A portfolio manager is creating several new mutual funds. Which of the following investment products could the manager purchase for these funds? I. Warrants on common stock II. Revenue bonds issued by a municipality III. Treasury bills of the U.S. Government IV. Equity securities such as the common stock of a corporation A) III only B) III and IV only C) II, III, and IV only D) I, II, III, and IV
D) I, II, III, and IV Any or all of these investment securities could be included in the portfolio of a mutual fund depending on its investment objective and investment policies.
An investor seeking a high yield asks his registered representative which type of fund to invest in. The registered representative should recommend which one of the following? A) Balance fund B) Dual Purpose fund C) Growth fund D) Income fund
D) Income fund An income fund's objective is to maximize current income (high yield).
An investor switches his investment in a mutual fund to another fund within the same family, incurring a nominal service fee but no additional sales charges. What are the tax consequences? A) There are no tax consequences since the switch is within the same family of funds. B) There are no tax consequences if the switch is completed in 45 days. C) Any gain is non taxable because a service fee is charged. D) There are possible tax consequences because the switch is treated as a sale and a purchase.
D) There are possible tax consequences because the switch is treated as a sale and a purchase. If an investor switches his investment from one fund to another fund under the same management at NAV, the switch does not require additional sales charges. However, the switch may result in a tax gain or loss because the IRS classifies it as a sale and purchase.
The calculation of the contingent deferred sales load upon the redemption of a mutual fund is based on A) the NAV at the time of the fund shares are redeemed B) the NAV at the time the funds shares were purchased C) either the NAV at the time of purchase or the NAV at the time of redemption, whichever is greater D) a percentage of either the NAV at the time of purchase or the NAV at the time of redemption, whichever is less.
D) a percentage of either the NAV at the time of purchase of the NAV at the time of redemption, whichever is less. "Typically, a fund calculates the amount of a back end sales load based on the lesser of the value of the shareholder's initial investment or the value of the shareholder's investment at redemption."
An investor places an order to sell a mutual fund at noon. The redemption price the investor will receive is A) the NAV value from the previous trading day. B) whatever the offering price is at the time of the order. C) the lowest offering price indicated during the previous trading day. D) the next NAV value determined by the fund after the order was received.
D) the next NAV value determined by the fund after the order was received. The redemption value of a mutual fund is determined shortly after the end of each trading day. Also, the redemption price is based on the net asset value (NAV), not the offering price.
