Management Companies

The manager of an unregistered hedge fund is typically compensated by a fee based on a: I percentage of assets under management II percentage of net investment income III performance fee based on profits IV performance fee based on exceeding a benchmark index

A I and III

Which of the following statements are TRUE regarding a mutual fund that is considered to be "efficient"? I The fund has a low expense ratio II The fund has a high expense ratio III The fund has a relatively low level of operating expenses IV The fund has a relatively high level of operating expenses

A I and III

Which of the following customers is allowed a breakpoint on mutual fund purchases? I Corporate purchaser II Investment club III Individual purchaser IV Investment adviser omnibus account

A I and III People cannot "join together" to obtain a breakpoint on a mutual fund purchase. Therefore, investment clubs cannot group purchases for a breakpoint, nor can investment advisers group their customers' purchases. An individual or corporation making a purchase is considered to be "one" purchaser and qualifies for the breakpoint.

Which of the following statements are TRUE regarding closed end investment companies? I Shares are issued in a one-time offering II Shares are continually issued III Shares trade on an exchange or over-the-counter IV Shares are redeemed with the issuer

A I and III The initial offering of closed-end investment company shares is made under a prospectus. Then the shares are listed on an exchange and trade like any other stock. The shares are not redeemable; they are negotiable. Redeemable securities are continuously issued by open-end management companies - mutual funds.

Which of the following terms are synonymous when talking about open-end funds? I Underwriter / Sponsor II Underwriter / Dealer III Public Offering Price / Ask Price IV Public Offering Price / Bid Price

A I and III When talking about mutual funds, the Fund Sponsor is the Fund Underwriter. Broker-dealers may join in a selling group to sell these funds, acting as agent only. Public Offering Price of a fund is the same as the fund's ask price.

Qubes (QQQs) are securities whose value is based upon the securities in the:

A NASDAQ 100 Index Qubes (QQQs) are Exchange Traded Funds based on the NASDAQ 100 Index - the 100 largest NASDAQ stocks based on market capitalization. Currently the QQQs trade on the NASDAQ exchange.

An ETF that attempts to emulate the Standard and Poor's 500 Index employs what investment strategy?

A Passive asset management Matching a fund's composition to a benchmark index is "passive asset management." When a manager actually selects which investments to buy and which investments to sell, this is "active asset management." Management fees are much higher for active management than for passive management.

Which of the following is an Exchange Traded Fund?

A SPDRs SPDRs are "Spiders" - the Standard and Poor's 500 Index exchange traded fund. REPOs are repurchase agreements; ADRs are American Depositary Receipts; and ADSs are American Depositary Shares.

Quotes published in the news media for mutual funds show:

B Bid price at NAV; Ask price at NAV plus the maximum sales charge News media quotes for mutual fund shares show the Bid Price at Net Asset Value. The Ask Price is Net Asset Value plus the maximum sales charge imposed by that fund.

The custodian bank usually performs which of the following functions? I Sending dividend and capital gains distributions to shareholders II Holding the portfolio of investments in safekeeping 'III Preparing and mailing proxies to shareholders IV Selecting the investment manager

C I, II, III The custodian bank always safekeeps the assets and usually acts as both paying agent and transfer agent. Therefore, sending dividends and proxies to shareholders would fall to the custodian. The custodian does not manage the fund, nor does it choose the manager. The manager's contract is voted on annually by the shareholders.

Which statement is TRUE regarding mutual funds?

C That day's closing price is the basis for fund purchase price and redemption computations An order placed to buy or redeem mutual fund shares is "filled" at that day's closing Net Asset Value adjusted by any sales charges or redemption fees. If the fund is no load, there's no sales charge.

A mutual fund has a computed Net Asset Value per share of $9.43 and a Public Offering Price of $10.30. The fund has a sales charge percentage of:

D 8 1/2% mutual fund sales charge % = Ask - Bid / Ask

A closed end fund's Net Asset Value is $8.50. The market price of the fund could be: I $8.00 II $8.50 III $9.00 IV $9.50

D I, II, III, IV

All of the following investment company terms are synonymous EXCEPT:

D Offering Price Bid, Redemption Price, and Net Asset Value are all the same terms for mutual fund shares.

The formula for the expense ratio of a mutual fund is:

D Total Expenses / Total Net Assets The expense ratio is found by taking Total Expenses / Total Net Assets. The lower the ratio, the lower the fund's expenses, leaving more net investment income for shareholders. Thus, the ratio measures the fund's efficiency.

The sponsor of a mutual fund is also known as the:

D Underwriter

A customer buys a 3X Inverse Leveraged ETF at $30 per share. The customer's maximum loss per share is:

A $30 Buying an ETF is no different than buying any stock. The most that can be lost is the investment made - which is $30 per share. The fact that this is an inverse, leveraged, ETF has nothing to do with how much can be lost. Rather, the fact that it is inverse means that it will lose when then market rises and will gain when the market falls; and the fact that it is 3X means that it will move 3 times as fast as the reference index. So this stock will move opposite to the movement of the reference index, at a rate that is 3 times as fast. Thus, in a rising market, the customer will lose at 3 times the rate of the reference index, but the maximum loss is still the amount invested.

Who can join together when making mutual fund purchases to get the benefit of a breakpoint?

A A father who has an account at a mutual fund company and who also is the custodian in a UTMA account for his minor son at the same mutual fund company Unrelated investors cannot "join together" to aggregate their purchases and get the benefit of a breakpoint. However, mutual fund companies will aggregate purchases of immediate family members in the same household and give them the benefit of the breakpoint. The two brothers are not in the same household, so this does not count!

Which of the following investment company terms are synonymous?

A Bid; Net Asset Value Bid and Net Asset Value are the same terms for investment company shares. Bid is also the same thing as Redemption Price. Ask is the same thing as Public Offering Price.

Which individuals can join together and qualify for a breakpoint on their aggregate purchases of mutual funds?

A Family members in the same household Unrelated investors cannot "join together" to aggregate their purchases and get the benefit of a breakpoint. However, mutual fund companies will aggregate purchases of immediate family members in the same household and give them the benefit of the breakpoint.

Which of the following customers is NOT allowed a breakpoint on mutual fund purchases? I Investment Club II Omnibus Account III Corporate Purchaser IV Individual Purchaser

A I and II only Investment clubs cannot group purchases for a breakpoint, nor can investment advisers group their customers' purchases. An individual or corporation making a purchase is considered to be "one" purchaser and qualifies for the breakpoint.

A customer places an order to buy mutual fund shares directly from the fund wholesaler rather than to purchase the shares through a broker-dealer. Under FINRA rules, which of the following statements are TRUE? I The wholesaler must be a registered FINRA member II The wholesaler does not need to be a registered FINRA member III The customer must pay the Public Offering Price as described in the prospectus IV The customer may receive a discount from the Public Offering Price since this is a direct purchase

A I and III Fund wholesalers must be FINRA members. Each is a broker-dealer, called the "fund distributor." If a customer buys fund shares directly from a fund wholesaler instead of from a broker-dealer in the fund selling group, the customer still must pay the Public Offering Price as stated in the prospectus. Discounts to the public other than those detailed in the fund prospectus are prohibited.

Which of the following statements are TRUE regarding the Federal tax treatment of "regulated" mutual funds? I Investors have no Federal tax liability on the interest income received from a municipal bond fund II Investors have no Federal tax liability on the interest income received from a corporate bond fund III The investment company has no Federal tax liability on the undistributed income that it retains from a municipal bond fund IV The investment company has no Federal tax liability on the undistributed income that it retains from a corporate bond fund

A I and III If a mutual fund invests solely in municipal securities, there is no Federal tax liability on the interest income received (remember, the interest income from municipal securities is exempt from Federal income tax). Under the "conduit" theory, any payment distributed by the fund to shareholders retains the same character and is free from Federal income tax. Similarly, undistributed income retained by the fund would not be taxed, since it consists solely of tax free municipal interest income. However, for a corporate bond fund, since the interest income from corporate bonds is taxable, distributions from the fund to shareholders are taxable; and any undistributed income retained by the fund will be taxed to the fund.

Which of the following statements are TRUE regarding management fees imposed by mutual funds? I Management fees are paid to the investment adviser of the fund II Management fees are paid to the individuals selling the fund III Management fees are deducted from fund gross investment income before any dividend distributions are made IV Management fees are not deducted from fund gross investment income

A I and III Management fees imposed by mutual funds are based on a percentage of assets under management, and are an annual reduction of the fund's gross investment income. Thus, these are deducted by the fund to arrive at the net investment income available for distribution to shareholders.

Which statements are TRUE about mutual fund "Class A" shares? I Class A shares impose a front-end sales charge II Class A shares impose a contingent deferred sales charge III Class A shares impose no, or a very low, 12b-1 fee IV Class A shares impose a high 12b-1 fee

A I and III Mutual funds offer various share classes to investors. The investor can choose to buy the same fund either as a Class A, B, C, or D share. Class A shares typically charge an up-front sales charge, but have no, or very low, annual 12b-1 fees. Class B shares have no up-front sales charge; instead, they have a contingent deferred sales charge, and impose higher annual 12b-1 fees than A shares. Class C shares have a lower contingent deferred sales charge than B shares, but impose the highest 12b-1 fees. Class D shares are typically sold by investment advisers. There is no sales charge, but they impose annual 12b-1 fees and service fees.

A mutual fund which invests in common stocks, preferred stocks, and bonds of companies in various industries is known as a(n):

A balanced fund The definition of a "balanced fund" is one that allocates investment among common stocks, preferred stocks, and bonds of companies in various industries, creating a balance of growth and income in the portfolio.

Mutual funds that have an automatic reinvestment provision must reinvest:

A dividends at NAV and capital gains at NAV If a fund offers an automatic reinvestment provision, both dividend distributions and capital gains distributions are reinvested at Net Asset Value.

When a sales charge is imposed on a fund purchase, this is known as a:

A front-end load fund The sales charge that is imposed when a customer initially purchases fund shares is known as a "front-end load sales charge."

The most important factor to consider when selecting a mutual fund is:

A investment objective The most important factor to consider when selecting a mutual fund is investment objective. The relevant question is: "Does the fund's investment objective match that of the customer?" While sales charges, expense ratios, and net asset value history are all important mutual fund investment considerations, they are not as important as investment objective.

A customer asks the following; "One of my neighbors was talking about his investment in an ETF (Exchange Traded Fund) and said that it is "low cost." Is this true?" The registered representative should respond that:

A the expense ratios of most ETFs are lower than those for comparable index mutual funds ETFs have been increasing in popularity as compared to traditional mutual funds because of their low cost (low expense ratios). However, when buying or selling an exchange traded fund, there is a commission cost; whereas when buying or redeeming a mutual fund there is no charge if the fund is "no-load" or there can be a sales charge.

Which of the following is a fair comparison of two mutual funds?

A comparison of a municipal bond fund and an income fund should use after-tax return for both Municipal bond funds are a type of income fund, so they can fairly be compared to another income fund. However, to have a valid comparison, the yield on the income fund must be brought to an "after-tax" basis, since municipal bond yields are free of federal income tax (and state income tax for the purchaser of a bond that lives in the state of issuance). Thus, Choice D is correct.

An investor buys 100 shares of an open-end investment company with a 5% contingent deferred sales charge. The sales charge is reduced by 1% for every full year that the fund is held. The investor redeems the 100 shares at an NAV of $15 per share after holding them for 5 months. The investor will receive:

B $1,425 A contingent deferred sales charge is imposed if an investor redeems a mutual fund before holding the fund for a stated time period. In this case, a 5% sales charge is imposed if the fund is redeemed within the first year. Using the redemption price of $15 per share x .95 = $14.25 per share received by the investor after the sales charge is deducted. $14.25 x 100 shares = $1,425 received upon redemption.

Aggregation to qualify for a breakpoint is available to:

B A group of family members in the same household A breakpoint on a mutual fund is a lowered sales charge for a large purchase. The breakpoint schedule is in the fund prospectus. Unrelated persons cannot group together to take advantage of a breakpoint, so these are not available to investment clubs or investment partnerships. However, all members of a "household" can group together for a breakpoint. Mutual fund sponsors apply the breakpoint sales charge reductions to all funds purchased within that fund's family. It is not based solely on the purchase of an individual fund.

When comparing an ETN to an ETF, which statement is FALSE?

B ETFs have credit risk An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. It is listed and trades like a stock, so it has little marketability risk. Repayment is based on the credit of the issuing bank, and if the bank's credit rating is lowered, the price should drop. This is credit risk. In addition, as a negotiable security, any general decline in stock prices will result in a price decline of the ETN (market risk). ETFs (Exchange Traded Funds) have an NAV that is based on the value of the physical underlying securities. There is no credit risk here. If a single company held in the underlying stock portfolio has its credit rating lowered, this will have a minimal impact on the value of the overall portfolio. However, since these are negotiable securities, they do have market risk.

When comparing an Exchange Traded Index Fund to an index mutual fund, the customer should be made aware that: I ETFs can be bought at the current market price at any time during normal trading hours II ETFs are bought based on that day's closing market price III mutual Funds can be bought at the current market price at any time during normal trading hours IV mutual Funds are bought based on that day's closing market price

B I and IV ETFs (Exchange Traded Funds) are actively traded on stock markets like any other stock - they can be bought or sold any time that the market is open. Mutual fund shares are bought from the fund sponsor and are a prospectus offering. They are "forward priced" - that is, the purchase price is calculated based on that day's closing Net Asset Value.

Which of the following statements are TRUE regarding money market funds? I The Net Asset Value per share is constant at $1 II The Net Asset Value per share is constant at $10 III As Total Assets in the fund increase, the shareholder has the same number of shares at an increased Net Asset Value per share IV As Total Assets in the fund increase, the shareholder receives more shares at the same Net Asset Value per share

B I and IV Money market funds are unusual in that the Net Asset Value per share is constant at $1.00. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each. For example, if an investor has 1,000 shares @ $1 ($1,000 total) in the fund, and the assets appreciate by 10%, then the customer will have 1,100 shares at $1 ($1,100 total).

Which of the following statements are TRUE about money market funds? I All distributions are fully taxable as investment income II Money market funds usually have high beta coefficients III The objective of such funds is long term capital growth IV Money market funds usually have no sales charge

B I and IV Money market funds invest in very short term (usually 30 day maximum maturity) money market instruments with an investment objective of high current income. All distributions are fully taxable as investment income. The beta coefficient (volatility of a security relative to the market) of these funds is very low - the securities are not volatile because the maturities are so short. Money market funds typically do not have sales charges.

Which of the following statements are TRUE about the Investment Company Act of 1940's requirements for management companies? I At least 40% of the Board of Directors must be "non-interested" persons II At least 60% of the Board of Directors must be non-interested III To establish a fund, a minimum of $10,000 of Total Net Assets is required IV To establish a fund, a minimum of $100,000 of Total Net Assets is required

B I and IV The Investment Company Act of 1940 requires that the minimum capital to start a fund is $100,000. It also requires that at least 40% of the Board of Directors be "non-interested parties" - that is, they are not affiliated with the sponsor, custodian, transfer agent, or firms in the selling group.

The investment adviser performs which of the following functions? I Sending dividend and capital gains distributions to shareholders II Selecting the securities to be purchased in the portfolio of investments III Selecting the securities to be sold from the portfolio of investments IV Selecting the brokers to sell the fund shares

B II and III only The investment adviser manages the fund within its stated objective, deciding which securities to buy into the portfolio; and which securities to sell from the portfolio. The paying agent (usually the custodian bank) sends payments. The fund distributor selects the brokers that will sell that fund's shares.

An institutional hedge fund customer has invested $100 million with your brokerage firm in the Madison Family of Funds. Madison allows its shareholders to exchange shares of any fund within the family at no charge. NAV of each fund in the family is computed as of 4:00 PM ET. The fund processes orders received until 4:30 PM ET each day. A representative with an institutional hedge fund client notices that this customer has been placing daily orders at 4:15 PM to exchange fund shares within the family. Which statement is TRUE regarding this situation?

B It appears that the hedge fund customer is engaging in the prohibited practice of late trading of mutual fund shares

SPDRs are based on the:

B Standard and Poor's 500 Index SPDR is the acronym for the Standard and Poor's 500 Index Depository Receipt. This is an Exchange Traded Fund traded - an ETF.

Under FINRA rules, a "no load" mutual fund:

B can charge a maximum annual 12b-1 fee of .25% FINRA allows a mutual fund to call itself "no load" (as in no sales charge) as long as the maximum annual 12b-1 fee does not exceed .25%. Note, in contrast, that if a fund wishes to advertise itself as a "pure no-load fund" then it cannot charge any 12b-1 fees.

All of the following statements are true regarding money market funds EXCEPT:

B fund dividends are not taxable if reinvested in additional shares The reason why these funds are called "money" funds is that the securities held in the portfolios have very short maturities (less than 30 days) and turn over into cash quickly. Fund dividends are taxable, whether or not they are automatically reinvested in additional fund shares. Money market funds usually do not impose sales charges but all funds impose management fees.

When a sales charge is not imposed on a fund purchase, nor on redemption, this is known as a:

B no load fund The sales charge that is imposed when a customer initially purchases fund shares is known as a "front-end load sales charge."

The custodian bank usually performs all of the following functions EXCEPT:

B selecting the investment manager The custodian bank always safekeeps the assets and usually acts as both paying agent and transfer agent. Therefore, sending dividends and proxies to shareholders would fall to the custodian. The custodian does not manage the fund, nor does it choose the manager. The manager's contract is voted on annually by the shareholders.

Mutual funds must send their financial statements to shareholders:

B two times per year Mutual funds must send their financial statements to shareholders semi-annually (twice a year).

During a period of falling interest rates, which investment would be most profitable?

C 2X (Leveraged) 20+ Year Treasury ETF If market interest rates fall, both stock and bond prices are positively impacted. However, fixed income security prices rise more than stock prices. Furthermore, the longer maturity and lower coupon issues rise the fastest as market interest rates fall. A bond ETF profits when prices rise. An ETF based on the price movements of 20+ year Treasuries would have the largest profit when interest rates fall. This type of ETF is long 20+ year Treasuries in the hopes that prices will rise, and because it is a 2X leveraged ETF, it has margined the bond positions so that as interest rates fall, the price should rise at 2 times the normal rate of increase of a similar maturity unleveraged bond portfolio.

A customer redeems 1,000 shares of ABC Fund. The customer must be paid the money within:

C 7 days Under the Investment Company Act of 1940, customers who redeem must be paid within 7 calendar days (the same as 5 business days, or 1 week) of the redemption date. Note that most funds process redemptions much more quickly than this.

The purchaser of an unregistered fund of hedge funds must complete a(n):

C Accredited investor questionnaire

When must a mutual fund prospectus be delivered to a customer?

C At, or prior to confirmation of the purchase The basic rule on prospectus delivery is that the prospectus must be delivered "at, or prior to, confirmation." When a customer buys a security that requires a prospectus delivery (a new issue), in the "good old days," a confirmation was generated detailing the purchased security and amount due, a prospectus was included in the envelope, and this was mailed by "snail mail" to the customer. When the customer opened the envelope, the prospectus was included with the confirmation, meeting the rule's requirements. The SEC has modernized the prospectus delivery rule for stock and bond offerings, allowing an electronic prospectus to be sent to the customer's e-mail address. However, the mutual fund rule still requires a paper "profile prospectus" sent to the customer with the confirmation, with the full paper prospectus being available electronically if requested.

If a regulated mutual fund pays out a dividend and capital gains distribution, which the shareholder has automatically reinvested, which statement is TRUE?

C Both the dividend and the capital gain are taxable Every year that the fund distributes dividends and capital gains, both must be included on that year's income tax return - whether or not the investor reinvests the monies in additional fund shares or whether the investor takes the monies as cash.

A growth fund would likely invest in which of the following securities?

C Convertible bonds Growth funds would likely invest in common stocks for capital gains; they could also invest in convertible bonds, since they are an "equivalent" to the common stock; and if the common stock price rises substantially, their price will rise as well (because the market will force them to trade at parity with each other). Preferred stocks and non-convertible bonds give a higher rate of current income; but little in the way of capital gains potential (unless interest rates fall by a large amount). In this case, the fund manager is not attempting to profit from market interest rate moves - he or she is simply attempting to select stocks that have excellent growth potential.

An investor in a "Ginnie Mae" mutual fund assumes all of the risks EXCEPT:

C Credit Risk Since Ginnie Maes are backed by the full faith and credit of the U.S. Government, there is no credit risk (as is the case with direct Government obligations). Since Ginnie Mae only issues mortgage backed pass-through certificates, in periods of declining interest rates, prepayment risk exists. Homeowners tend to prepay their "old" high rate mortgages when rates have declined by refinancing at the new lower rates. When these prepayments are reinvested by the fund, the monies earn lower current rates, so reinvestment risk is also present. As with any mutual fund (other than a money fund which has a constant $1 per share NAV), there is the risk that NAV can decline - which would occur if interest rates rise, forcing Ginnie Mae certificate values down.

Which statement is TRUE about hedge funds?

C Hedge funds are illiquid investments that use aggressive investment strategies to maximize returns, and thus have high risk levels Hedge funds are set up as private placements, open only to accredited investors. They are illiquid, since money can only be withdrawn once per year (and usually only with general partner approval). They use sophisticated aggressive investment strategies that are high-risk (but these can also be high-reward), including short selling, using large amounts of leverage, and speculating in futures, commodities, and foreign currencies. Because of this, they are only suitable for sophisticated, wealthy investors that are able to bear risk.

A money market fund would invest in which of the following? I Commercial Paper II Treasury Bills III American Depositary Receipts IV Banker's Acceptances

C I, II and IV Money market funds invest in short term maturity money market instruments. These include Treasury Bills issued by the U.S. Government, commercial paper issued by corporations and banker's acceptances issued by banks. American Depositary Receipts are not a money market instrument - they are an equity security that is the vehicle for foreign stocks to trade in the United States.

Which statements are TRUE under FINRA rules? I The maximum annual 12b-1 fee is .25% II The maximum annual 12b-1 fee is .75% III If a fund charges a 12b-1 fee, the maximum up front sales charge is limited to 7.25% IV If a fund charges a 12b-1 fee, the maximum up front sales charge is limited to 8.50%

C II and III 12b-1 fees are permitted under SEC Rule 12b-1. If a fund adopts a 12b-1 plan it may charge its existing shareholders for the cost of soliciting new investment to the fund. For example, if you see a television or web advertisement for a mutual fund, it is being paid for by 12b-1 fees. The "cost" of soliciting new investment also includes compensation to registered representatives selling the fund shares. The maximum annual 12b-1 fee is .75% of net assets per year under FINRA rules. If a fund imposes a 12b-1 fee, FINRA limits to maximum up-front sales charge to 7.25% instead of 8.50%.

Dollar cost averaging will result in a lower average per share price only if: I the price of the stock remains fixed II the price of the stock fluctuates III a fixed dollar amount is invested periodicallyIV a varied dollar amount is invested periodically

C II and III Dollar cost averaging requires that an investor make periodic payments (say monthly) of a fixed dollar amount (say $100 per month) to buy a given security. If the price of the security is fluctuating, the average purchase cost per share will be lower for the investor than the simple mathematical average price of the shares over the same period. Dollar cost averaging does not work if the price of the stock remains fixed, nor does it protect against loss in a falling market.

Exchange Traded Funds (ETFs) are: I registered under the Investment Company Act of 1940 as closed-end management companies II registered under the Investment Company Act of 1940 as open-end management companies III regulated by the SEC and FINRA IV regulated by FDIC and the Department of Treasury

C II and III ETFs are almost a "hybrid" type of investment company structure because they allow for the creation of additional shares, like an "open-end" fund; but they are listed and trade like a "closed-end" fund. Technically, most ETFs are structured as open-end investment companies, since they allow for the creation of additional shares in minimum "creation units" of $50,000 - $100,000. If the shares are trading in the market at a discount to NAV, institutional investors can buy new creation units and short the equivalent shares that compose the units, in an arbitrage trade. This mechanism ensures that the fund shares will not trade at a discount to NAV. Because new shares can be created, these are registered as open-end funds under the Investment Company Act of 1940. Since ETFs are securities, they are regulated by the SEC and FINRA.

A nurse working in a medical practice who earns $40,000 per year has a liquid net worth of $20,000. She overhears some of the doctors in her office talking about hedge funds and is interested in using her cash funds to make an investment. She should be informed that hedge funds: I offer higher returns II are high-risk investments III are lightly regulated IV are like mutual funds

C II and III This nurse is not wealthy enough for a hedge fund investment. She should be told that these are lightly regulated, high risk investments that are only suitable for wealthy, sophisticated investors.

Which of the following statements are TRUE about the expense ratio of a mutual fund? I The lower the ratio, the less efficient the fund is II The lower the ratio, the more efficient the fund is III The higher the ratio, the less efficient the fund isIV The higher the ratio, the more efficient the fund is

C II and III expense ratio = fund operating expenses / total net assets

An income fund would likely invest in which of the following securities? I Common stocks II Preferred stocks III Debentures IV Income bonds

C II and III only Income funds invest primarily in bonds and preferred stocks for a high level of current income. Common stocks are not typically a choice for investment because the dividend yields are comparatively low. Income bonds would not be chosen as an investment because they only pay interest if the corporation has enough income; otherwise no payment is made.

Which of the following statements are TRUE regarding a Standard and Poor's 500 Index fund? I The portfolio manager can decide to invest in any stock as long as it is included in the Standard and Poor's 500 Index II The portfolio manager must change the composition of the fund if the stocks included in the index are changed III The fund must weight its investments in the same manner as the Standard and Poor's 500 index is weighted IV The management fee for such a fund is typically lower than for an actively managed fund

C II, III, IV Index funds attempt to "shadow" the performance of a designated index, such as the Standard and Poor's 500 index; or the Value Line Index. Such funds match their composition and weighting every day to match the designated index. Because no research is done to select stocks for the fund, the management fees are lower than for actively managed funds. It is false that the portfolio manager can invest in any stock in the Standard and Poor's 500 index, since the fund must match the composition of the index as a whole.

To impose the maximum sales charge, mutual funds must offer investors which of the following benefits? I Family of Funds II Breakpoints III Letter of Intent IV Rights of Accumulation

C II, III, IV To impose the maximum sales charge of 8 1/2%, FINRA requires funds to give investors specified breakpoints (lowered sales charges for large dollar purchases), a letter of intent option (once the letter is signed, the investor has 13 months to complete a breakpoint), and rights of accumulation (the investor's accumulated position counts towards completion of a breakpoint). There is no requirement for the sponsor to offer families of funds.

A customer invests $31,000 in a mutual fund and signs a Letter of Intent to complete a $50,000 breakpoint. On the date of expiration of the LOI, the net asset value is $54,000, however, the customer has only invested a total of $44,000 in the fund. What should the representative do?

C Inform the client that he or she must invest another $6,000, otherwise the price paid per share will be recalculated and will be higher The Letter Of Intent (LOI) provision operates separately from Rights of Accumulation and takes precedence over Rights of Accumulation. Because of this, the customer must deposit new money in the dollar amount required by the LOI to get the lowered sales charge. Since the customer has deposited $44,000 of the $50,000 required by the LOI already, the remaining $6,000 must be deposited to retain the reduced sales charge. If this is not done, the price paid per share will be recalculated using a higher sales charge level, resulting in the customer owning fewer shares.

An inverse ETF is most similar to taking what options position(s) on the reference index?

C Long Put An inverse ETF is unprofitable when the market rises, and profitable when the market falls. So the answer is either a Long Put or a Short Call. Since the maximum loss in a rising market is capped to the amount invested, and the gain keeps increasing as the market falls, the best choice is a Long Put, which has a maximum loss of the premium in a rising market and ever-increasing gain as the market falls. In contrast, with a Short Call, in a rising market there is ever-increasing loss, and in a falling market, the gain is capped to the collected premium

A mutual fund sponsor has three different income funds, holding AAA rated debt securities with similar maturities. Assuming that the expense ratios for the funds are identical, which fund would have the lowest yield from investment income?

C Municipal Bond Fund If the securities held in each of the bond funds have similar maturities and the funds have similar expense ratios, the remaining differences affecting yields are credit rating and tax status. Corporates are considered more risky than both governments and municipals, and are fully taxable, so their yield is the highest. Governments are less risky than municipals, but are taxable by the Federal government, so government yields are higher than municipal yields. The order from highest to lowest yield is: Corporates, Governments, Municipals.

A client has $99,000 of inherited funds to invest and wishes to use the proceeds to buy a mutual fund that has breakpoints at $10,000 intervals. The registered representative accepts the customer purchase order without making any additional disclosures. Which statement is TRUE?

C The representative has committed a violation known as a breakpoint sale If a customer is "close" to a breakpoint, it is a violation to not make the customer aware that putting in the additional funds to reach that level will result in a lower sales charge. If the disclosure is not made, the registered representative has committed a violation known as a "breakpoint sale." A "backing away" violation is where a firm quote is given to a customer and then not honored - the representative has "backed away" from that quote.

A retired investor seeks monthly income along with preservation of capital and minimum risk. Which of the following funds would be a suitable recommendation?

C U.S. Government securities fund To meet the objectives of minimum risk and income, a government securities fund is suitable, since these securities are considered to be risk free; and provide current interest income. Special situation funds invest in companies that are in bankruptcy or "in trouble," but that have created a turnaround plan. The gains are expected to be so large on the successful turnarounds that the shareholders will enjoy capital gains. Such funds have no or little income. Similarly, the principal objective of a growth fund is capital gains; not income. Specialty funds invest in one industry or geographic area; and the lack of diversification increases risk. Since this customer wants minimum risk, these are not suitable recommendations.

The Value Line Index fund consists of:

C all companies included in the Value Line Investment Survey Index funds attempt to "shadow" the performance of a designated index, such as the Standard and Poor's 500 index; or the Value Line Index. Such funds match their composition and weighting every day to match the designated index - thus, the Value Line Index Fund would include all stocks included in the Value Line Investment Survey, which is the basis of the index.

Net Asset Value per share for a mutual fund can be expected to decrease if the:

C fund has made dividend distributions to shareholders This is a tricky question. If a fund distributes a dividend to shareholders, an ex date is set by the Board of Directors of the Fund. On this date, the Fund's shares are reduced by the value of the distribution. If the securities in the fund portfolio pay dividends, these are received by the Fund. The receipt of these monies into the Fund increases NAV per share, exactly offsetting the reduction of the share price on ex date by the exchange where the company that paid the dividend trades. Thus, when securities in the portfolio pay a dividend, there is no effect on NAV. Appreciating securities in the Fund portfolio will also increase NAV per share. Redemption of shares should have no effect on NAV per share.

The type of investment company that only redeems its shares periodically at stated dates is known as a(n):

C interval fund

All of the following statements are true regarding mutual funds that have adopted "12b-1" plans EXCEPT:

C mailings to existing shareholders of the fund are an acceptable "12b-1" charge

A fund that distributes at least 90% of its Net Investment Income to shareholders is termed a(n):

C regulated fund A fund that distributes at least 90% of Net Investment Income to shareholders is "regulated" under Subchapter M of the Internal Revenue Code and pays no tax on the distributed amount.

An investor wishes to buy mutual fund shares that have investments in computer and high technology companies. Based on this information, the appropriate recommendation is a:

C sector fund A sector fund invests in a specific industry or geographic area. Because of the lack of diversification, there is greater gain potential, as well as higher risk.

A fund which invests in companies in bankruptcy or takeover situations is known as a:

C special situations fund A Special Situations Fund invests in companies in "special situations" such as bankruptcies or takeovers, to reap capital gains if the company recovers. Do not confuse a special situations fund with a specialty fund. A specialty fund is one that invests in one industry or geographic area.

A customer has signed a Letter of Intent to buy at least $50,000 of a mutual fund in return for getting a lowered sales charge. The customer has already invested $40,000, and the customer notices on his account statement that the current NAV of the position is $52,000. The fund is going to make a distribution of the $12,000 capital gain. The registered representative recommends that the customer take the capital gain as cash and use the proceeds to buy shares of the fund to finish the breakpoint. This suggestion by the registered representative is inappropriate because it was not disclosed that:

C the capital gain would be automatically reinvested at NAV if not taken in cash while the purchase of the shares would occur at POP including a sales charge

ETFs are:

C traded on exchanges Exchange Traded Funds, as the name says, trade on stock exchanges. Most are AMEX (now renamed the NYSE American) listed, but there are ETFs on the NYSE and NASDAQ as well.

At the market opening, a customer purchases 200 shares of an S&P 500 2X ETF at $50 per share. At the end of that day, the S&P 500 Index increases by 10%. The next day, the index declines by 5%. What will be the market value of the 200 share position?

D $10,800 Since this ETF is "2x," it is an ETF that moves in the same direction as the market, but it moves twice as fast The customer starts with 200 shares at $50, or a $10,000 position. At the end of the first day, because the index rises by 10%, this position will rise by 20% to $12,000 value ($10,000 x 1.2). At the end of the second day, because the index goes down by 5%, the ETF value will decline by 10%. $12,000 x .90 = $10,800.

An individual wishes to receive a fixed amount monthly from her investment company. She should elect which type of withdrawal plan?

D Fixed dollar If an individual wishes to redeem shares of a mutual fund under a "systematic withdrawal plan," he or she gets to elect a withdrawal option. He or she could elect to have a fixed number of shares liquidated each month (Choice A); could elect to have a fixed percentage of the portfolio liquidated each month (Choice C); or could elect to have enough shares liquidated so that a specific dollar amount is received each month (Choice D). In this example, Choice D meets the customer's requirements.

When comparing a mutual fund to a hedge fund, which statement is FALSE?

D Hedge funds are liquid Hedge funds are "lightly regulated" partnership investments only open to accredited (wealthy, sophisticated) investors. The fund manager uses aggressive investment strategies that are risky in order to generate higher returns. Hedge funds' investments are completely illiquid. Usually, the limited partner investor can only "cash out" at year end. For the rest of the year, the investor is locked into the investment.

A customer who invests in a "fund of hedge funds" should be made aware that: I there are 2 layers of fees associated with the investment - those of the fund manager; and those charged by the underlying hedge fund managers II the computation of NAV is difficult because investments may be made in highly illiquid securities that are infrequently traded III the level of risk associated with the investment is typically higher than that of a mutual fund IV fund distributions will generally consist of more highly taxed ordinary income and short term capital gains

D I, II, III, IV

Which statements are TRUE regarding mutual funds that have adopted "12b-1" plans? I Mailings to existing shareholders of the fund are an acceptable "12b-1" expense II Mailings to existing shareholders of the fund are not an acceptable "12b-1" expense III Expense ratios for funds that have adopted 12b-1 plans can be expected to be lower than for similar funds without a 12b-1 fee IV Expense ratios for funds that have adopted 12b-1 plans can be expected to be higher than for similar funds without a 12b-1 fee

D II and IV 12b-1 plans allow a mutual fund to charge, as an expense to the existing shareholders, the cost of advertising and soliciting for new customers (included are mailings). The theory behind such plans is that the advertising will attract more assets to the fund (more shareholders), and as the fund's size increases, the expense ratio (ratio of all fund expenses to total net assets) should decrease for all shareholders. These monies can only be used to solicit prospective shareholders - they cannot be used to solicit existing shareholders. For most funds which have adopted 12b-1 plans, expenses have risen faster and expense ratios have increased.

A 200% Leveraged Dow Jones Industrial Average Index ETF would be expected to move: I up 50% in price when the DJIA moves up 100% II up 100% in price when the DJIA moves up 50% III down 50% in price when the DJIA moves down 100% IV down 100% in price when the DJIA moves down 50%

D II and IV A leveraged ETF uses borrowing (margin) and options to magnify price movement as compared to the reference index. A 200% leveraged ETF can be expected to move 2 times as fast as the reference index, either up or down. A 300% leveraged ETF can be expected to move 3 times as fast as the reference index, either up or down

A 200% Leveraged Inverse Dow Jones Industrial Average Index ETF would be expected to move: I up 50% in price when the DJIA moves down 100% II up 100% in price when the DJIA moves down 50% III down 50% in price when the DJIA moves up 100% IV down 100% in price when the DJIA moves up 50%

D II and IV A leveraged ETF uses borrowing (margin) and options to magnify price movement as compared to the reference index. An inverse ETF is one that uses short and options to move opposite to the market. A leveraged inverse ETF combines both. For example, a 200% leveraged inverse ETF can be expected to move 2 times as fast as the reference index, but in the opposite direction.

Which of the following statements are TRUE regarding mutual funds and the ex dates for mutual fund distributions? I Mutual fund shares trade over-the-counter II Mutual fund shares do not trade III The ex date for a mutual fund is set by FINRA IV The ex date for a mutual fund is set by the fund's Board of Directors

D II and IV Since mutual funds do not trade, the Board of Directors sets the ex-date (reduction date) for fund distributions.

Under FINRA rules, the maximum sales charge that may be imposed on a mutual fund purchase is: I 5% II 8 1/2% III of Net Asset Value IV of the Public Offering Price

D II and IV Under FINRA rules, the maximum sales charge that may be imposed by a mutual fund is 8 1/2% of the Public Offering Price. Note that in the real world, competition among funds has forced sales charges well below this maximum permitted level. Note that the maximum is a percentage of all dollars invested; it is not a percentage of Net Asset Value.

What is the best recommendation to an investor, age 40, who is looking to save for retirement at age 65 and who does not want to spend time managing his investments?

D Target Date Fund A Target Date Fund starts with a more aggressive asset allocation and then moves to a safer and safer asset mix as the target date approaches. Investment might start with growth stocks, then shift to a balance of stocks and bonds, and finally shifts into money market instruments as the "target date" approaches. Basically, it puts investing on "autopilot" over the client's investment time horizon.

Hedge funds typically charge their investors an annual advisory fee that is:

D a combination of a percentage of AUM and a percentage of profits

A customer buys $10,000 of Government Bond Fund shares from Acme Investors, a fund sponsor and broker-dealer. Acme is the sponsor for a variety of funds within the Acme "family." The ACME family has an "exchange feature" at NAV. The customer decides to exchange his Government Bond Fund shares for Growth Fund shares within the same family. All of the following statements are true EXCEPT the:

D customer will pay a sales charge The statement that the customer will pay a sales charge to exchange shares within a family is not true. This fund family has an "exchange feature" at NAV, which means that shares of one fund can be redeemed and reinvested in shares of another fund within the family without any sales charge. For the customer exchanging Government Bond Fund shares for Growth Fund shares, a tax event has occurred. It would be expected that the customer's yield will decrease but that capital gains will increase, since he or she is moving from an "income" fund to a "growth" fund.

All of the following statements are true regarding a mutual fund "Letter of Intent" EXCEPT:

D during the period covered by the letter, the customer cannot redeem his shares A letter of intent can cover a period of 13 months, inclusive of a 90 day "backdate." The extra shares purchased at the lower sales charge are held in escrow until the letter is completed. If the letter is not completed, the purchase price is recalculated to the higher sales charge and the customer does not get the extra shares. The customer can always redeem his shares.

Shareholders in a management company have all of the following rights EXCEPT the right to vote:

D on the dividend distribution amount Shareholders in a management company have the right to vote for the Board of Directors; to vote for changes in the investment objective; to vote annually on the investment adviser; and to receive semi-annual and annual reports. The dividend distribution is not decided on by the investors of the fund - it is decided by the Board of Directors.

When making a presentation to a client that wishes to purchase a mutual fund, the representative compares the 5-year return of the fund to the 10-year return of the Standard and Poor's 500 Index to illustrate the fund's performance. This action is:

D prohibited This is the case of comparing "apples to apples" and not "apples to oranges." If a 5-year mutual fund Total Return is being compared to the return of the Standard and Poor's 500 Index, it must be for the EXACT same time period to be a valid comparison. In such a comparison, the Standard and Poor's Index Return is the benchmark return against which the fund's return can be compared.

Exchange traded funds can NOT be:

D redeemed with the sponsor ETFs (Exchange Traded Funds) such as SPDRs are negotiable - they trade as would any regular stock. They are marginable and they can be sold short since ETFs are available for many different indexes and sectors. ETFs are not redeemable - it is mutual fund shares that are redeemable.