Investment Companies Securities

Closed-end fund

A type of investment company that issues exchanged-traded share that reflect actively managed portfolios

An investor wants to invest $1,000 in a mutual fund with an NAV of $9.15. The fund charges the highest sales charge allowed. What is the public offering price and how many shares can they purchase? A) 100 shares at POP of $10.00 B) 119 shares at POP of $8.37 C) 80 Shares at a POP $12.50 D) 75 shares at POP of $13.33

A) 100 shares at POP of $10.00 The maximum sales charge percentage allowed is 8 ½%. To find the POP, divide the NAV by 100% minus the sales charge percentage. The NAV of $9.15 is divided by 100% - 8 ½%. 9.15 divided by .915 = $10. $1,000 divided by $10 POP = 100 shares. Note that this item is not covered in the 3rd Edition Revised Textbook, but is reviewed in the Key Concepts. As long as you know the answer and explanation, you will be well prepared for this item on the exam. 4.2.5

When comparing 12b-1 fees across the different share classes of mutual funds, it would be found that A) Class B and C shares carry higher 12b-1 fees than Class A shares. B) all share classes have the same 12b-1 fee structure. C) Class A shares have higher 12b-1 fees than Class B & C shares. D) Class A & B shares have higher 12b-1 fees than Class C shares.

A) Class B and C shares carry higher 12b-1 fees than Class A shares. Class B & C shares tend to have higher 12b-1 fees than Class A shares. 4.2.5.3

The administrative costs of ownership in a closed-end fund are included in the fund's A) Expense ratio B) 12b-1 charges C) Management fee D) Surrender charges

A) Expense ratio A closed-end fund's expense ratio reflects the costs of ownership in the fund as a percentage of the net asset value. It is included in the fund's prospectus. 4.3.2.3

The details of charges that are applied to investors in UITs are found in the A) Prospectus B) Offering circular C) Private placement memorandum D) Trust Indenture

A) Prospectus The prospectus identifies the sales charges that apply to customers that purchase UIT units. 4.4.1.1

Which index measures the value of all U.S. companies with actively traded stocks? A) Wilshire 5000 B) Dow Jones Industrial Average C) Russell 2000 D) S&P 500

A) Wilshire 5000 The Wilshire 5,000 is a market cap-weighted market indicator composed of about 3,500 exchange-listed and over-the-counter common stocks. It is the broadest measure of the market. 4.2.4.6

A mutual fund share report shows a NAV of $4.10 and POP of $4.20. The sales charge percent that applies to this transaction is A) 1.19% B) 2.38% C) 2.44% D) 1.22%

B) 2.38% Sales charge is a percentage of the POP. To calculate, find the amount of the sales charge ($4.20 - 4.10 = .10) and divide it by the POP. 0.10/4.20 = 2.38%. 4.2.5.2

A customer plans to invest in mutual fund shares, but does not want to pay a high upfront sales charge. The investor intends to hold the funds for at least 10 years. Which is most appropriate for this investor? A) A or B share would both be suitable B) B shares C) A shares D) C shares

B) B shares B-shares have a contingent deferred sales charge (CDSC), which is also called a back-end load. There is no front-end load on B-shares, and no CDSCs will apply if the shares are held for a long-time period. There is an ongoing 12b-1 charge that applies however. A shares have front-end loads, and C shares have level loads. 4.2.5.3

Which two of the following charges apply to the purchase of closed-end fund shares? I. 12 b-1 fees II. Surrender charges III. fund administrative costs IV. Sales commission A) II and III B) III and IV C) I and II D) I and III

B) III and IV Expenses that apply to closed-end company shares include a fund administration fee and potential sales commissions when shares are purchased through a registered representative. 12b-1 fees and surrender charges do not apply. 4.3.2.3

Closed-end company investments share all of the following features EXCEPT A) A fixed number of shares issued B) Multiple classes of common shares C) Offer common, preferred, and debt securities D) May be purchased on margin

B) Multiple classes of common shares Closed-end companies issue a single share class only. They are permitted to issue preferred shares and debt securities in addition to common shares. 4.3.2

The NAV of mutual fund shares will increase in which of the following circumstances? A) Outstanding shares are redeemed B) The fund receives interest from bonds that are held within the portfolio C) Capital gains of the fund are distributed D) Shareholders reinvest dividend and capital gains distributions

B) The fund receives interest from bonds that are held within the portfolio The NAV of mutual fund shares increases when the value of securities held in the portfolio increases, when the portfolio receives distributions of dividends or interest from securities it owns, or when it sells portfolio securities at a profit. There is no change to NAV when new shares are issued or when shares are redeemed. The NAV of shares falls when the fund makes dividend or capital gains distributions. 4.2.4

All of the following statements regarding mutual fund A- shares are true EXCEPT A) The sales charge for A-share funds is often discounted for large purchases B) They usually do not charge 12b-1 fees C) They charge up-front sales charges, paid fully at the time of the initial purchase D) They are often cost effective for persons who hold their shares for a long period of time

B) They usually do not charge 12b-1 fees A-share normally charge front-end sales charges that are paid at the time of the initial purchases. 12b-1 fees are in addition to these sales charges. A-shares make sense for persons who plan to hold their shares for a long period of time. Breakpoints are often applied to large purchases of A-shares. 4.2.5.2

The greatest cost to an investor when investing in a money-market fund is A) brokerage fees B) management fees C) custodial fees D) overhead

B) management fees Management fees are always the largest expense of a fund. They are paid to the Investment Advisor as a percentage of assets under management and are the single largest liability of a fund. 4.2.2.2

The cost basis of an asset is that asset's A) amortized value for tax purposes. B) original value for tax purposes. C) stepped up value for tax purposes. D) adjusted purchase price for tax purposes.

B) original value for tax purposes. 4.2.5.7

If given a NAV of $16.45 and a sales charge of 4 ½%, find the POP. A) $15.70 B) $17 C) $17.23 D) $18

C) $17.23 POP = NAV divided by (100% - Sales charge %). $16.45 divided by (100 - 4 ½) or $16.45 divided by .955 = $17.23. Note that this item is not covered in the 3rd Edition Revised Textbook, but is reviewed in the Key Concepts. As long as you know the answer and explanation, you will be well prepared for this item on the exam. 4.2.5

When a redemption of mutual fund shares is requested, the fund must redeem shares within A) 3 business days of request B) 48 hours of request C) 7 calendar days D) 5 business days of request

C) 7 calendar days 4.2.5.1

A selling agreement with the issuing company is required for the distribution of which of the following? I. Open end company shares II. Closed-end company shares III. ETFs A) II and III only B) I, II, and III C) I only D) I and II only

C) I only A selling agreement is required for the distribution of open-end company shares only. Because closed-end company shares and ETFs are traded on exchanges, purchase or sale of these securities can be executed through any brokerage account. 4.2.2.5

Which two of the following statements are TRUE regarding equity UITs? I. They issue a set number of units and their offerings are then closed II. They issue as many units as necessary to complete their IPO III. They often pay monthly dividends IV. They have an unlimited life A) I and IV B) II and IV C) II and III D) I and III

C) II and III Equity UITs issue as many units as necessary during their IPO, while bond UITs issue a fixed number of units during their IPO, while Both bond and equity trusts often pay monthly dividends. 4.4.3

Asset allocation funds invest A) In cash and cash equivalents only B) In two asset classes at a time C) In a combination of assets to help diversify their investments D) in a single asset class at a time

C) In a combination of assets to help diversify their investments Asset allocation funds invest in a combination of asset classes, including stock, bonds, and cash equivalents. This blend of assets helps investors achieve diversification in their portfolio. 4.2.4.5

What party is responsible for the administrative duties of a unit investment trust? A) Bond Counsel B) Sponsor C) Trustee D) Custodian

C) Trustee A trustee is responsible for administrative duties of a unit investment trust, which include the custodial, recordkeeping and tax and accounting responsibilities. 4.4.1

Open-end funds are actively managed while exchange-traded funds are A) verified B) monitored C) supervised D) reviewed

C) supervised Exchange-traded funds are supervised, usually by a trustee on behalf of the fund. 4.6

A mutual fund that wishes to charge the maximum sales charge of 8.5% must offer all of the following features EXCEPT A) Breakpoint schedule B) Automatic reinvestment of dividend and capital gains distributions at NAV C) Rights of accumulation D) A level load share class option

D) A level load share class option A level load share class option is not one of the features required for a mutual fund to charge the maximum sales charge. The three required features are breakpoints, reinvestment of dividends at NAV, and rights of accumulation. 4.2.5.4

Which type of investment company product issues a single class of shares only and trades on the market at a discount or premium to its NAV? A) Both closed-end companies and UITs B) Unit investment trust C) Open end company D) Closed-end company

D) Closed-end company Closed-end companies issue a single share class of securities only; mutual funds commonly issue Class A, B and C shares. Closed-end shares trade on exchanges at a discount or premium to NAV; UITs are redeemed by the trust. 4.3.2.2

A mutual fund sales charge that is paid at redemption and decreases over a period of years is a A) Front-end load B) Combination charge C) 12b-1 fee D) Contingent deferred sales charge

D) Contingent deferred sales charge A contingent deferred sales charge (CDSC), also called a back-end load is paid at redemption and decreases over a period of years as defined by a published schedule. B-shares have CDSCs. 4.2.5.3

Jim is checking the financial page of a website and notices that the net asset value of a product is higher than the public offer price of the product. The product that Jim is looking at is most likely a (an) A) open-end investment company B) master limited partnership C) variable rate demand note D) closed-end investment company

D) closed-end investment company When the net asset value is higher than the public offer price, this means the product is selling at a discount. This is most likely to occur with a closed-end investment company. With a traditional open-end investment company, the net asset value will be lower than the public offering price. 4.3.2.2

Breakpoints

Offer mutual fund investors discounts off the sales charge based on the dollar amount invested

Net Asset Value (NAV)

The value of a mutual fund and the basis of what investors pay, calculated as the total assets minus its total liabilities = Portfolio value - fund expenses

Redeemable

a type of investment company security, such as a mutual fund and a unit investment trust, for which there is no secondary market Instead the security is directly bought from and sold back to the issuer

Mutual Fund

a type of management investment company that makes a continuous offering of brand new, redeemable shares to investors, also referred to as an open-end fund

Exchange-traded fund (ETF)

an exchange-traded investment company that is designed to closely track the performance of a specific benchmark, sector, or index

Management Investment Company

an investment company, such as a mutual fund or closed-end fund, that hires an investment adviser to actively select and manage a securities portfolio to achieve a stated investment goal

B Mutual Fund Shares

mutual fund shares that have a contingent deferred sales charge (CDSC), also called a back-end load. No CDSCs will apply if shares are held for a long-time period

A Mutual Fund Shares

mutual fund shares that have front-end loads

C Mutual Fund Shares

mutual fund shares that have level loads

Forward pricing

the method by which mutual funds calculate the purchase and redemption prices, which are based on the next NAV calculation after the order is received

All of the following practices are prohibited in the sales of mutual fund shares EXCEPT A) A registered representative recommends that an investor make a slightly larger investment to qualify for a breakpoint B) A redemption request that is received today is processed at the NAV calculated at the previous day's close C) An investor is encouraged to engage in a trading strategy that involves regularly purchasing and redeeming shares within a short time frame to take advantage of share pricing inconsistencies D) An investor is encouraged to purchase shares in a fund just before the ex-dividend date to receive the dividend distribution

A) A registered representative recommends that an investor make a slightly larger investment to qualify for a breakpoint Breakpoints allow investors to receive a discount on the sales charge based on the dollar amount invested. Registered representatives are required to disclose the existence of breakpoints to clients. Late trading is the prohibited practice of redeeming or purchasing shares at a price previously calculated instead of following the forward pricing rule. Market timing, or executing short term purchase and sales of mutual fund shares is also a prohibited practice. Because of their fee structures, mutual funds should be recommended as a long-term investment. Encouraging the purchase of shares just prior to a dividend distribution is called "selling dividends" and subjects the investor to a taxable event and a reduction in share value, since the NAV of fund shares falls when a dividend is distributed. 4.2.6

An investor in a mutual fund owns which of the following? A) Specific securities within the mutual fund B) A proportionate interest in the specific portfolio securities that meet the investor's objectives C) An undivided interest in the shares of the securities held by the mutual fund D) A divided share of the securities that are held within the mutual fund's portfolio

C) An undivided interest in the shares of the securities held by the mutual fund An advantage of mutual fund investments is that investors own a proportionate share of all the securities within the portfolio (an undivided interest). They can achieve a high degree of diversification for a minimal investment. 4.2.5

Under which of the following circumstances is a closed-end fund share purchase most likely to return the greatest profit to the owner? A) Shares are purchased at a discount from NAV and the discount widens over time B) Shares are purchased at a premium over NAV and the premium narrows over time C) Shares are purchased at a premium over NAV and then sold at NAV D) Shares are purchased at a discount from NAV and the discount narrows over time

D) Shares are purchased at a discount from NAV and the discount narrows over time A purchase of closed-end company shares is most profitable if the investor buys them at a bargain price (discount) and the discount narrows over time. In other words, the shares have grown in value while they are held. 4.3.2.4

In a unit investment trust, what party is primarily responsible for the selection of the securities held by the trust? A) Administrator B) Trustee C) Investment advisors D) Sponsor

D) Sponsor The role of a unit investment trust sponsor includes the selection of the securities that are held in the trust portfolio and the organizational duties of creating the trust. 4.4.1

Unit investment trust (UIT)

a type of investment company that issues redeemable securities representing an undivided interest in a fixed trust, in which there no active management of the portfolio

Reconstitution

the process of updated an ETF portfolio as companies are added or subtracted from the underlying index ex) S&P 500 removes a company from its index