SIE UNIT 4 Packaged Investments
Which class of shares have a front end sales charge? A) Class C shares B) Class A shares C) Class B shares D) No load
B) Class A shares Class A shares have a front end load. Class B shares have a back-end load (CDSC). Class C share have a level load charged as part of the expense ratio. No load funds have no sales charges.
For which of the following investors would Class C shares be most suitable? A) An investor who intends to redeem the shares within a short time B) An investor interested in high-risk, high-potential return speculation C) An investor who intends to leave the money in the fund for many years D) A relatively inexperienced investor
A) An investor who intends to redeem the shares within a short time
Which is the most common way investors pay a mutual fund's sales charge? A) Front-end load B) Level load C) Variable load D) Back-end load
A) Front-end load The front-end load is the most common way a mutual fund's sales charge is paid. The sales charge is paid at the time of purchase. Front-end load, or Class A, shares have lower expenses than other classes, because the fund does not have to keep books on sales charge payments. It's already taken care of.
Which of these would not be included in a mutual fund's list of expenses? I. Shareholder records and service II. Investment adviser's fee III. Broker-dealer sales charges IV. Underwriter's sales loads A) III and IV B) I and III C) I and II D) II and IV
A) III and IV Costs to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The costs paid in the form of sales charges (loads) to an underwriter, or broker-dealers selling mutual funds to the public may never be treated as an expense to the fund. These are expenses to the investor.
A diversified growth fund charging 0.4% of net assets per year as a 12b-1 fee may not make which of the following statements? A) The fund is a no-load fund. B) The fund will have a diversified portfolio with a stated investment objective. C) The fund will have a calculated fully disclosed expense ratio. D) The fund will pay its investment adviser a specified percentage of funds under management.
A) The fund is a no-load fund. The fund would be expected and required to make statements regarding its diversification status, its expense ratio, and the rate at which it pays its adviser. It definitely may not, however, claim to be a no-load fund if it charges a 12b-1 fee, fees charged to market the fund's shares, of more than 0.25% of net assets.
Which of these would cause a change in the net asset value of a mutual fund share? A) The market value of the portfolio declines B) The fund takes a new position C) Many shares are redeemed D) Securities in the portfolio are sold for a capital gain
A) The market value of the portfolio declines A decline in the market value of the portfolio would reduce the assets of the fund without changing the number of outstanding shares. Sales and redemptions of shares change the net assets but also change the number of shares outstanding to the same degree, leaving the NAV per share unchanged. Buying or selling securities for a capital gain simply replaces securities in the portfolio, with an equivalent amount of cash, leaving the NAV unchanged.
The violation of selling mutual fund shares just below the point where the customer would qualify for lower sales charges and not informing the customer that they may qualify for lower sales charges is called A) a breakpoint sale. B) pegging. C) capping. D) supporting.
A) a breakpoint sale.
Class B mutual fund shares are also called A) back-end load shares. B) CDSC shares. C) reverse load shares. D) deferred-load shares.
A) back-end load shares.
If a prospectus is being used to close a mutual fund sale, it must be given to the investor A) before or during the sales presentation. B) always before the sales presentation begins. C) within five business days of purchase. D) within three business days of purchase.
A) before or during the sales presentation.
Benefits of mutual funds include all of the following except A) reinvested dividends are not taxed until withdrawal. B) mutual funds can provide broad diversification inside a single fund. C) mutual funds report distributions annually to investors. D) mutual funds are professionally managed.
A) reinvested dividends are not taxed until withdrawal. When dividends (or capital gains) are reinvested they are still taxed. All the other options are considered benefits of mutual funds.
One characteristic of an open-end investment company that distinguishes it from a closed-end one is that A) there is a continuous public offering. B) there are a wide variety of objectives available for investors to select from. C) it may be either diversified or nondiversified. D) it may avoid taxation by distributing all of its net investment income to shareholders.
A) there is a continuous public offering. The key difference between open-end investment companies and closed-end investment companies is the fact that new shares are continuously being offered for open-end companies. In the case of the closed-end, once the IPO is over, the only way to acquire shares is in the secondary market. Both types of funds may operate as regulated investment companies and avoid taxation, both may choose to be diversified or not, and both offer a wide variety of investment objectives.
A letter of intent may be backdated to include a prior purchase up to A) 90 days. B) 13 months. C) indefinitely. D) 6 months.
A) 90 days. LOIs may be backdated up to 90 days. The obligation under the LOI must be met within 13 months from the date of the letter.
Which of the following are the most likely to make monthly or quarterly payments for the life the investor? I. Fixed annuity II. Unit investment trust (UIT) III. Mutual fund IV. Variable annuity A) I and IV B) I and II C) III and IV D) II and III
A) I and IV Both a fixed and variable annuity is an insurance contract designed to provide retirement income. The term annuity refers to a stream of payments guaranteed for a certain period including the life of the annuitant. In the case of a variable annuity, the actual amount to be paid out may or may not be guaranteed, but the stream of payments itself is. Because an annuity can provide an income for life, the contract has a mortality guarantee. Mutual funds and UITs have no such guarantee.
Which of the following investment companies do not redeem their shares? A) Unit investment trusts B) Closed end funds C) Face amount certificates D) Open end funds
B) Closed end funds Face amount certificates, unit investment trusts, and open end funds all redeem their shares. Closed end funds do not redeem their shares.
When a customer chooses to annuitize a variable annuity, all of these are factors the insurance company will use in calculating the initial payout amount except A) historic inflation rate. B) balance of the separate account. C) age of the annuitant. D) gender of the annuitant.
A) historic inflation rate. Insurance companies do not consider inflation when making this calculation. The components are GAAPI: gender, age, account balance, payout option, and interest rate (AIR).
A mutual fund's public offering price is $10.50. An investor who wishes to invest $1,000.00 in the fund is able to purchase A) 96 and owe $8.00. B) 95.238 shares. C) Partial shares are not allowed. D) 95 shares with $2.50 left.
B) 95.238 shares.
Under the Investment Company Act of 1940 all of these are examples of management companies except A) A growth fund option for a VA. B) A Windmill Income UIT. C) A Windmill Income Fund, an exchange-listed:closed-end fund. D) An S&P 500 Index Trust ETF.
B) A Windmill Income UIT. Unit investment trusts are investment companies, but not management companies under the act. Closed-end funds, ETF's, and separate accounts are all types of management companies.
Under the Investment Company Act of 1940, which of the following is not considered an investment company? A) Face-amount certificate company B) Hedge fund C) Separate account within a variable annuity D) Unit investment trust
B) Hedge fund Hedge funds are organized as private investment companies (often limited partnerships), which are excluded under the definition of investment company under the Investment Company Act of 1940.
Under the IRC Subchapter M, if the WWF Fund only distributes 85% of its net investment income to its shareholders, then which of these is true? I. The fund must pay taxes on the undistributed 15% of net investment income. II. The fund must pay taxes on 100% of the net investment income. III. The shareholder pays no tax if the income is reinvested. IV. The shareholder must pay taxes if the income is received in cash or reinvested. A) II and III B) II and IV C) I and IV D) I and III
B) II and IV To avoid triple taxation according to the IRC Subchapter M, an investment company must distribute at least 90% of its net investment income. Since WWF Fund only distributed 85% of its net investment income, it must pay taxes on 100% of the net investment income. Shareholders always pay taxes on taxable income whether received in cash or reinvested.
A company has just conducted a stock offering, by prospectus, through an investment banker. The proceeds of the offering are used to purchase a portfolio of securities. The stock, now in the hands of the public, is freely traded in the secondary market, and the portfolio is managed to generate maximum profit according to a specific investment objective. The company must be A) a nonfixed UIT. B) a closed-end company. C) a fixed UIT. D) a mutual fund.
B) a closed-end company. A closed-end company, or closed-end management investment company, is much like any other company, just that its source of profit is investments, rather than selling a product or service. Shares of closed-end companies are traded in the secondary markets, while the other choices listed here offer only redeemable securities.
The Windmill Growth Fund has breakpoints at $10,000, $25,000, and $50,000. Your customer places an unsolicited purchase through you for $47,000. You place the trade as requested without question or comment. This action is A) acceptable in all situations. B) a rules violation. C) unsolicited trade are not allowed in mutual funds. D) acceptable because the transaction is unsolicited.
B) a rules violation. This trade, though unsolicited, would still require the representative to disclose the existence of the breakpoint. Unsolicited trades are allowed in mutual funds. The representative's duty is to disclose the existence of the breakpoint, failure to do so is a breakpoint sale.
If a fund sponsor allows an investor to move funds from one fund to another within its fund family, this is called A) a reinvestment right. B) an exchange privilege C) a right of accumulation. D) a 12b-1 waiver.
B) an exchange privilege
The investment return of a variable annuity comes from A) the assumed rate stated in the policy documents. B) the performance of the selected subaccounts within a separate account. C) the insurance company's general account. D) computing the excess of the premiums received over the mortality experience.
B) the performance of the selected subaccounts within a separate account. A key feature of the variable annuity is that most of the premium is invested into the insurance company's separate account rather than the general account. Within the separate account, a number of subaccounts may be selected, depending on the investor's objectives. It is the performance of these subaccounts that provides the annuity's investment return.
An investor asks for a copy of mutual funds Statement of Additional Information (SAI). The request must be satisfied within A) three business days, with a fee for postage permissible. B) three business days, free of charge. C) five calendar days, with a fee for postage permissible. D) five calendar days, free of charge.
B) three business days, free of charge.
All of these are part of the expense ratio of a mutual fund except A) a 12b-1 fee. B) legal and accounting costs. C) CDSC. D) management fees.
C) CDSC. The Contingent Deferred Sales Charge (CDSC) is charged against the proceeds of a sale of the fund's shares, not against the fund's assets.
Which of these would be unlawful regarding the use of a mutual fund prospectus? A) Failing to highlight a small section the customer has specifically asked about B) Leaving a typographical error in the text unmarked C) Calling an investor's attention to a section that may be interesting D) Sending a prospectus to someone who has shown no interest in the fund
C) Calling an investor's attention to a section that may be interesting
Which of the following would be unlawful regarding use of a mutual fund prospectus? A) Sending a prospectus to someone who has shown no interest in the fund B) Leaving a typographical error in the text unmarked C) Calling an investor's attention to a section that may be interesting D) Failing to highlight a small section the customer has specifically asked about
C) Calling an investor's attention to a section that may be interesting A prospectus for any security, not just one for a mutual fund, may not be marked, highlighted, or otherwise altered in any way, nor may steps be taken to call an investor's attention to some passage or section that might be of special interest, even if the potential customer asked that it be done.
A mutual fund has been in existence for 15 years. The prospectus must disclose the fund's performance A) over the last 1, 5, 10, 15, 20, and 25 years. B) for each year over the last 10 years. C) over the last 1, 5, and 10 years. D) broken out as an average over the last 10 years.
C) over the last 1, 5, and 10 years.
A mutual fund's public offering price is $15.23. An investor who wishes to invest $1,000 in the fund will purchase how many shares? A) 66 shares and be billed for an additional $5.18 B) Must purchase some multiple of 100 shares C) 65 shares and receive $10.05 in change D) 65.66 shares
D) 65.66 shares -Mutual funds can issue fractional shares
Which of the following need not be included in the annual reports a mutual fund provides to its shareholders? A) Names and titles of those responsible for portfolio management B) Factors and strategies that materially affected performance C) A graph comparing fund performance to an appropriate index D) A list of the most poorly performing portfolio securities
D) A list of the most poorly performing portfolio securities
ACE, an open-end investment company, operates under the conduit, or pipeline, tax theory. Last year, it distributed 91% of all net investment income as a dividend to shareholders. Therefore, which of the following statements is true? A) ACE paid taxes on 9% of its net investment income and capital gains last year. B) ACE paid taxes on 91% of its net investment income last year. C) ACE paid no taxes last year because it qualified as a regulated investment company under IRC Subchapter M. D) ACE paid taxes on 9% of its net investment income last year.
D) ACE paid taxes on 9% of its net investment income last year. ACE pays taxes on any portion of income it does not distribute, as long as it distributes at least 90%; ACE paid taxes on 9%.
A diversified growth fund charging 0.4% of net assets per year as a 12b-1 fee may not make which of the following statements? A) The fund will have a calculated fully disclosed expense ratio. B) The fund will have a diversified portfolio with a stated investment objective. C) The fund will pay its investment adviser a specified percentage of funds under management. D) The fund is a no-load fund.
D) The fund is a no-load fund.
Regarding sales loads, management fees, and operating expenses for mutual funds, which of the following is true? A) All increase investor returns because each is received by the fund increasing the amount they have to invest. B) Only management fees and operating expenses reduce investor returns by reducing the amount of money available for the fund to invest. C) Sales loads increase investor returns because they are received by the fund increasing the amount they have to invest. D) All reduce investor returns because they reduce the amount of money available for the fund to invest.
D) All reduce investor returns because they reduce the amount of money available for the fund to invest.
An investor can take advantage of intraday price changes due to normal market forces when investing in which of these? I. Closed-end funds II. Exchange-traded funds III. Hedge funds IV. Open-end funds A) II and III B) I and IV C) III and IV D) I and II
D) I and II Both closed-end funds and ETFs trade in the marketplace based upon supply and demand. Open-end funds use forward pricing and generally price only once per day (usually at the end of the trading day). Most hedge funds are organized as private investment partnerships and are considered illiquid. Some have minimum holding requirements known as lock-up provisions, and in that light, their interests do not reliably trade intraday. Information on ETFs can be found in Unit Five under Learning Objective 5.l.
Which of these would not affect the NAV per share of a mutual fund share? A) The fund pays its monthly operating expenses like utility bills B) The portfolio's market value undergoes a large increase C) The fund receives a dividend from one of the portfolio stocks D) Portfolio securities that had to be sold for a big capital loss
D) Portfolio securities that had to be sold for a big capital loss Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share.
The violation of selling mutual fund shares just below the point where the customer would qualify for lower sales charges and not informing the customer that they may qualify for lower sales charges is A) supporting. B) pegging. C) capping. D) a breakpoint sale.
D) a breakpoint sale.
All of the following actions would cause the NAV per share of a mutual fund to decrease except A) the fund distributes capital gains. B) liabilities increase. C) the fund distributes dividends. D) a large number of shareholders make withdrawals from the fund.
D) a large number of shareholders make withdrawals from the fund. When shareholders redeem shares the assets in the fund go down, but the number of shares also decrease proportionally, so the NAV per share is unchanged. In a similar way, when investors purchase shares the assets and the outstanding share increase proportionately, so the NAV remains unchanged. In the other responses the assets decrease with no proportional decrease in the number of shares, so NAV would decrease.
Class B mutual fund shares are also known as A) contingent-deferred shares. B) deferred-load shares. C) partially loaded shares. D) back-end load shares.
D) back-end load shares. Class B mutual fund shares are bought with no sales charge at the time of purchase. The sales charge is paid instead at the time of redemption, or at the back end. Hence, they are known as back-end load shares. For this type of share, the sales charge percentage is reduced each year of ownership, typically becoming zero after five years. At this time, they convert to Class A shares.
All of these are true regarding no-load shares except they A) are sold by the fund with no sales charges or fees of any kind. B) offer more return-per-dollar invested versus load funds if investing results are the same. C) are redeemed with no charges or fees of any kind. D) have fees associated with sales and redemptions.
D) have fees associated with sales and redemptions. No-load shares have expenses that are not considered sales charges. Some broker-dealers may charge fees for transactions, but these fees are not from the fund.
The Investment Company Act of 1940 classified all the following as investment companies except A) face-amount certificates. B) management companies. C) unit investment trusts. D) private investment companies.
D) private investment companies.
