STC Series 7 Chapter 9 Test

Which of the following statements is TRUE regarding dollar cost averaging? A. It is a systematic method of investing B. If employed, the average price will be less than the average cost C. It can only be set up through a payroll deduction plan D. The benefits can be obtained if one invests in a money-market fund

A. It is a systematic method of investing Dollar cost averaging is a systematic method of investing that results in the average cost of the securities purchased being less than the average of the prices paid (not the other way around). The benefits are not obtained with funds that have a stable asset value, such as money-market funds.

The credit rating agencies have downgraded an issuer of an exchange-traded note. Which of the following statements is TRUE? A. It will have a negative impact on the security B. It will have a positive impact on the security C. It will have no impact on the security D. The issuer will be obligated to repay the investor his principal immediately

A. It will have a negative impact on the security Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates and the credit rating agencies downgrade the issuer of the ETN, it would impact the value of the ETN negatively.

An individual has been purchasing shares of a mutual fund and has chosen to reinvest all distributions rather than take the payments. If the individual chooses to sell the shares purchased through these reinvestments, the cost basis will be: A. The purchase price of these shares B. Zero since reinvestment is made with pretax dollars C. The same as the purchase price on previous investments D. The purchase price less any sales charge

A. The purchase price of these shares Investors must report all distributions from a mutual fund as taxable income, whether reinvested or not. When an individual chooses to reinvest the distributions, the cost basis is the purchase price of the shares.

An investor places an order to buy shares of a mutual fund after that investment company has determined its net asset value for the day. The RR instructs the fund company to purchase the shares at that day's NAV for the investor. Which of the following statements concerning this potential trade is TRUE? A. This is a sales practice violation known as late trading B. This is an acceptable practice known as market timing C. The RR would need to have prior written approval by a principal of the firm to execute this order D. The investor may only purchase Class B shares in this case, since Class A shares are not available under this arrangement

A. This is a sales practice violation known as late trading This activity would constitute a sales practice known as late trading, which is prohibited under federal securities laws. According to securities law, orders placed after the close of trading for the day (and after the determination of the closing NAV) must be filled at the next calculated NAV, which is usually the price at the end of the next business day. Investors placing orders after the close of the market (based on information that they have learned after the close), and seeking to purchase shares at prices determined before the close, are engaging in late trading, which clearly places other investors in that mutual fund at a clear disadvantage. The investor must receive the price as calculated by the fund company at the NAV on the following day.

A mutual fund that invests in stocks that are currently trading below their intrinsic market value is a(n): A. Value fund B. Growth fund C. Index fund D. Exchange-traded fund

A. Value fund Value funds invest in stocks that their managers believe are currently undervalued -- selling for less than they are really worth

The Statement of Additional Information is supplied to a client: A. When the account is opened B. When the customer purchases shares C. When the semiannual report is mailed D. When a customer requests it

A. When the account is opened The cover page of a mutual fund prospectus indicates that an investor may receive a Statement of Additional Information upon request. There is no requirement for periodic distribution.

Class A shares of an open-end investment company are different from Class B shares in that: A. Class A shares are common shares, while Class B shares are preferred shares B. Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge C. Class A shares pay quarterly dividends, while Class B shares pay a monthly dividend D. Class A shares can be purchased directly from the fund, while Class B shares are offered through broker-dealers

B. Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge

A client is interested in obtaining the expense ratio of a mutual fund recommended by the RR. Which of the following actions would be BEST for the RR to take? A. Instruct the client to obtain the information from FINRA B. Refer the client to the fund's sponsor since the RR may not be authorized to release this information C. Instruct the client to obtain that information from the SEC database of mutual fund prospectuses D. Inform the client that this information may be obtained by reviewing the front of the fund's prospectus

D. Inform the client that this information may be obtained by reviewing the front of the fund's prospectus Mutual funds are required to disclose in the front of a prospectus a standardized fee table of all its fees. The fee table must include the expense ratio, which is the percentage of a fund's assets that is used to pay its operating costs. It is determined by dividing total expenses by the average net assets in the portfolio.

Which of the following statements is characteristic of a closed-end investment company? A. Shares may not sell below the net asset value B. The investment company must distribute all income to shareholders C. Shares are redeemed at the net asset value minus a redemption fee D. Shares may sell at a premium or discount to the net asset value

D. Shares may sell at a premium or discount to the net asset value The market price for a closed-end investment company is based upon supply and demand for the shares in the marketplace. A closed-end investment company share may sell at, above, or below its net asset value. Open-end investment company shares may never sell below the current net asset value. Shares are sold at the current market price; they are not redeemed like in an open-end fund.

Regarding ETFs, which of the following statements is TRUE? A. ETFs are considered hedge funds by the SEC. B. ETFs may only hold equity positions. C. ETFs grow tax-deferred. D. Typically, ETFs may be sold short.

D. Typically, ETFs may be sold short. Exchange-traded funds (ETFs) are investments that resemble UITs. These products may be sold short, may be purchased on margin, and may invest in either equity or debt instruments. A fixed portfolio is typically constructed to either track a specific index (e.g., the Wilshire 5000) or a given market segment (e.g., airlines or medical companies). An ETF's portfolio typically remains constant unless there is a change to the underlying index or in one of the individual investments within the fund. Since ETFs are not hedge funds, there is no requirement for the investors to be accredited.