S7 Unit 8 - Investment Companies

No-load means that your 12b-1 charge cannot exceed

.25%

An investor wants to invest $200,000 in the banking industry sector. The investor would like to use leverage and make this purchase in a margin account. Additionally, she stresses wanting to avoid year-end tax statements showing capital gains liabilities. You would suggest which of the following as suitable, given the investor's criteria? A)bank sector mutual fund B)bank sector exchange-traded fund (ETF) C)Stocks in the three largest U.S. banks D)money market fund holding short-term bank notes

A bank sector exchange-traded fund (ETF) The investor's criteria eliminates mutual funds as suitable. Mutual funds make annual capital gains distributions for which the owner incurs a tax liability, and mutual funds cannot be purchased on margin. Conversely, an ETF will rarely make a capital gains distribution, and because they trade like all exchange-traded products, they can be purchased on margin, making them more suitable for this investor. Buying only a few select bank stocks is not a good representation of the entire sector.

If you were reading sales literature about a mutual fund that claimed its objective is to be a single source investment for most equity investors, it would most likely be describing A)a blend/core fund. B)a growth/income fund. C)a specialized fund. D)a target date fund.

A)a blend/core fund. This is asking - if an investor had to put their money into only one mutual fund - for most investors, they would select a blend/core fund

Which of the following statements best describes the effect of reinvesting mutual fund distributions? A)Dividends from investment income that are reinvested have tax-deferred status. B)The reinvestment of capital gains and dividends results in a higher cost basis. C)Capital gains that are reinvested have tax-deferred status. D)The reinvestment of capital gains and dividends has no effect on cost basis.

B)The reinvestment of capital gains and dividends results in a higher cost basis. Because reinvested distributions are taxed in the year received, the investor's cost basis is increased by the amount of the distribution. This is to prevent those distributions from being taxed twice. They are taxed once as the dividend or capital gain and then, if not added to the cost basis, would be taxed a second time when the shares are sold. Reinvestment of these distributions does not avoid or defer current taxation. This is not the same as receiving a stock dividend where the taxes are deferred until those shares are sold.

All of the following events will affect the net asset value (NAV) per share of a mutual fund except A)changes in the market value of the fund's portfolio of securities. B)wholesale redemption of fund shares. C)the fund receives cash dividends on the securities in its portfolio. D)the fund pays dividends to its shareholders.

B)wholesale redemption of fund shares. While share redemption will reduce total NAV, the number of shares outstanding decreases in proportion, so the NAV per share stays the same. LO 8.a

Recent years have shown an enormous growth in the sales of exchange-traded funds (ETFs). Some of the benefits of using ETFs in your clients' portfolio would include A)greater diversification than most comparable mutual funds. B)greater management flexibility than most comparable mutual funds. C)greater tax efficiency than most comparable mutual funds. D)lower risk than most comparable mutual funds.

C)greater tax efficiency than most comparable mutual funds. In general, largely because of the lack of need to rebalance the portfolio to meet investor redemption requests or market changes, ETFs have fewer taxable events.

Class B shares

Have a back-end sales charge (paid on redemption) and do not offer breakpoints Good for smaller investments and longer time horizon

If you reinvest all your distributions automatically, can you purchase at the NAV or POP?

NAV

Investment that provides greatest inflation protection

common stock, common stock growth fund

Receiving a stock dividend

defers taxes until shares are sold

What kind of risk do ETFs have?

tracking risk