Chapter 7
The KAPCO Growth mutual fund's annual report shows receipt of $10 million of interest income from corporate bonds, $15 million in cash dividends, and $5 million of operating expenses. According to the conduit theory, how much must the fund distribute to investors if it wishes to avoid paying any taxes? $16 million $18 million $20 million $10 million
$20 million According to Subchapter M of the Internal Revenue Code, the conduit theory requires that an investment company pay out a minimum of 90% of its net investment income (NII) to investors. In that case, the fund pays taxes on the remaining 10%. However, distributing 100% of the NII leaves no taxable income remaining. A fund's net investment income is the gross investment income minus the expenses. The NII for this fund is the interest ($10 million) plus the dividends ($15 million) minus the expenses ($5 million). That is $10 million + $15 million = $25 million − $5 million = $20 million. LO 7.f
The Class A shares of the GEMCO Balanced Fund carry a sales charge of 4.5%. If the next computed net asset value per share is $32.74, purchase orders will be filled at a price of $34.21 per share. $32.74 per share. $34.28 per share. $31.27 per share.
$34.28 per share. Mutual funds sell at the public offering price (POP). That POP includes the sales charge, which in this case is 4.5%. The sales charge is a percentage of the POP, not the NAV. The computation is the NAV ÷ (100% - the sales charge). In our question, that is $32.74 ÷ 0.955, or $34.28 per share.
A married couple owns Class A shares of the KAPCO Balanced Fund. The older of the pair has an individual account with a current value of $10,000. The other individual's account is valued at $20,000, and they have a JTWROS account valued at $12,000. KAPCO offers rights of accumulation and has breakpoints at $25,000 (4%), $50,000 (3%), and $100,000 (2%). How much will the sales charge be if they invest an additional $15,000 into the JTWROS account? $300 $600 $450 $530
$450 Rights of accumulation means that we add a new purchase to the value of the existing accounts. If that total reaches or exceeds the breakpoint, the entire purchase is made with the lower sales charge. The question tells us that the next breakpoint is at $50,000. Once that dollar amount is reached (or exceeded), the sales charge on all new purchases is reduced from 4% to 3%. In this question, adding the $15,000 purchase to the existing $42,000 takes the customer's account well past the $50,000 breakpoint. That means the entire new purchase is charged 3%. Therefore, $15,000 times 3% equals $450 in sales charge.
Sales charge percentage
(POP - NAV) / POP
how much assets need to be diversified in order for a stock mutual fund to be diversfiied
75 percent
The investment adviser of the GEMCO Special Situations Fund would find which of the following companies least attractive for the fund's portfolio? JKL Transportation Services, a company preparing to report a profit for the first time in four years ABC Corporation, whose shareholders have just reelected the current board of directors GHI Technologies, whose new microchip devices have caught the attention of the largest manufacturer in the field DEF Pharmaceuticals, whose application for approval of a new disease-fighting drug will likely be approved by the FDA
ABC Corporation, whose shareholders have just reelected the current board of directors A special situations fund looks for special situations. Those are defined as management changes, turnaround situations (loss to profit), or new developments. A company reelecting the existing board of directors is not sending a message of something special going on.
Certain events will affect the net asset value (NAV) per share of a mutual fund. Which of the following events will not affect NAV? The fund paying dividends to its shareholders The fund receiving cash dividends on the securities in its portfolio The value of the fund portfolio's securities fluctuating Fund shares being redeemed by the fund upon the request of shareholders
Fund shares being redeemed by the fund upon the request of shareholders Dividends paid and received by the fund directly affect NAV. Changes in the portfolio value affect NAV because the securities are marked to market daily. Although share redemption will reduce total NAV, the number of shares outstanding decreases in proportion, so the NAV per share stays the same.
ustomer A and Customer B both have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? Receiving cash distributions may reduce Customer A's proportional interest in the fund. Customer A may use the cash distributions to purchase shares later at net asset value (NAV). Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. Due to compounding, Customer B's principal will be at greater risk.
I and III If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment, the customer's proportional interest in the fund will decline. The option to have distributions automatically reinvested allows those purchases to be made at NAV, but a purchase made later would be made at the public offering price like any other new purchase.
One of your clients was at a social gathering and heard a friend talking about a recent investment in an interval fund. How would you describe this investment? It is an option available in many qualified retirement plans that changes the asset allocation at certain specified intervals as the investor ages. It is a closed-end investment company that, at certain specified intervals, allows investors to sell their shares back to the company at net asset value. It is a closed-end investment company that computes its net asset value at certain specified intervals. It is an investment company that debits an investor's money market account at certain specified intervals to purchase shares of the fund.
It is a closed-end investment company that, at certain specified intervals, allows investors to sell their shares back to the company at net asset value. Interval funds are closed-end investment companies that permit shareholders to sell their shares back to the company at net asset value. The frequency varies by fund and can range from monthly to annually
An investor with $5,000 to spend could purchase approximately how many shares of a mutual fund with a net asset value per share of $13.00, a sales charge of $1.00 and an underwriter's concession of $0.20? 378 shares 362 shares 352 shares 357 shares
Mutual funds sell at NAV plus sales charge. In this case, $13.00 plus $1.00 = $14.00 public offering price (POP). Dividing $5,000 by $14 equals 357 shares. What about the underwriter's concession of $0.20? That is part of the $1.00 sales charge. On each sale, the principal underwriter of the fund earns $0.20 and the selling broker-dealer keeps the other $0.80.
a mutual's fund POP is the
NAV price plus any sale charges
The Investment Company Act of 1940 has two types of management investment companies: the closed-end and the open-end. Which of the following is a significant difference between the two? Closed-end companies will never sell below net asset value per share, while open-end companies might if there are net redemptions. The closed-end company generally has a one-time offer of shares, while the open-end company's offer of shares is continuous. The closed-end investment company is generally more attractive for those investing small amounts. The closed-end investment company's portfolio can contain common stock, preferred stock, and bonds, while the open-end is limited to common stock only.
The closed-end company generally has a one-time offer of shares, while the open-end company's offer of shares is continuous. Most of the differences between closed-end and open-end companies revolve around the different method of capitalization. That is, the one-time offer of shares on the part of the closed-end company is why the shares trade in the secondary markets, often at a discount to the NAV. Because closed-end funds trade in the secondary markets, there are buying and selling commissions. That is usually a disadvantage when making small investments. Do not confuse the limited capital structure of an open-end company (only issuing common stock) with the contents of the portfolio. Open-end investment companies issue common stock and then use the capital they raise to purchase securities for their portfolio. For example, a bond fund issues common shares and then uses the money to purchase bonds, or a money market fund to buy T-bills and other money market instruments. Open-end companies can never sell below NAV, while closed-ends frequently do.
A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has a net asset value (NAV) of $12 and a public offering price (POP) of $12.50, and that the ABC Fund has an NAV of $11.50 and a POP of $10.98. The customer should conclude that ABC is an open-end fund and GEM is a closed-end fund. GEM may be an open- or closed-end fund, and ABC is a closed-end fund. ABC and GEM are both unit investment trusts. both are open-end funds.
The price for open-end funds is determined by adding the sales charge to the NAV. An open-end fund can never have a POP less than its NAV; therefore, ABC cannot be an open-end fund.
Most mutual funds operate as regulated investment companies. This means that they register with the SEC under the Investment Company Act of 1940. their principal underwriter (sponsor) is a FINRA member. they qualify for special tax treatment under Subchapter M of the Internal Revenue Code. they register with the SEC under the Investment Advisers Act of 1940.
The term regulated investment company refers to the Internal Revenue Code (IRC) section offering favorable tax treatment to qualifying investment companies. Triple taxation of investment income can be avoided if the mutual fund qualifies under Subchapter M of the IRC. To avoid taxation under Subchapter M, a fund must distribute at least 90% of its net investment income to shareholders. The fund then pays taxes only on the undistributed amount. This rule applies to management companies (open-end and closed-end) and UITs. That means ETFs are also included. Although not investment companies registered under the Investment Company Act of 1940, REITs can also take advantage of Subchapter M's tax benefits. It is true that mutual funds register with the SEC under the Invesment Company Act of 1940 (their portfolio managers register as investment advisers under the Advisers Act) and their principal underwriter is a FINRA member, but those statement have nothing to do with the question.
Net investment income
dividends + interest - expenses of the fund
If the value of securities held in a fund's portfolio increases, and the amount of liabilities stays the same, the fund's net assets decrease. are more liquid. increase. stay the same.
increase. An appreciation in value of fund assets, without a corresponding increase in liabilities, leads to an increase in the fund's net asset value (total assets minus liabilities equals net assets
In most cases, a mutual fund is structured as a corporation. Because of certain tax regulations, it is important for the fund to compute its net investment income. That computation is interest plus dividends received on portfolio securities, plus realized capital gains, minus the operating expenses of the fund. interest plus dividends received on portfolio securities, minus the operating expenses of the fund. dividends minus interest received on portfolio securities, minus the operating expenses of the fund. interest minus dividends received on portfolio securities, minus the operating expenses of the fund.
interest plus dividends received on portfolio securities, minus the operating expenses of the fund. The net investment income (NII) of a mutual fund is the gross investment income of the fund minus the fund's operating expenses. The gross investment income is the sum of the interest and dividends received on the holdings in the fund's portfolio. Subtracting the operating expenses results in the net investment income. In general, mutual funds will qualify as regulated investment companies and follow the pipeline or conduit theory. Doing so requires that a minimum of 90% of the NII be distributed to investors in the form of dividends. Any portion not distributed is taxable to the fund. Capital gains distributions are treated separately and also have a 90% distribution requirement.
Close ended funds trade at a
premium or discount from their NAV value
When an investor in a mutual fund elects to reinvest dividends into additional shares, the price paid is the net asset value per share (NAV). the public offering price POP) without a sales charge. the public offering price (POP) plus a sales charge. the net asset value per share (NAV) plus a sales charge.
the net asset value per share (NAV) For test purposes, all reinvestments of mutual fund dividends (and capital gains distributions) are at the NAV with no sales charge.
The management fees paid by an investment company are part of the custodial fees. the underwriting agreement. the sales load. the operating expense of the fund.
the operating expense of the fund The management fees paid by an investment company are part of the operating expenses of the fund. Custodial fees are also part of the operating expenses. A sales load is a selling cost contained within the underwriting agreement.
