Investment Companies
A customer buys a 3X Inverse Leveraged ETF at $30 per share. The customer's maximum loss per share is: A. $30 B. $60 C. $90 D. Unlimited
The best answer is A. 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.
When a sales charge is imposed on a fund purchase, this is known as a: A. front-end load fund B. no-load fund C. contingent deferred sales charge fund D. negotiated sales charge fund
The best answer is A. The sales charge that is imposed when a customer initially purchases fund shares is known as a "front-end load sales charge."
Which statements are TRUE regarding Real Estate Investment Trusts? I REITs must distribute at least 90% of Net Investment Income to shareholders II REITs must invest at least 90% of assets in other REIT securities III Interest expense paid by REITs is deductible to the REIT IV REITs are registered as investment companies under the Investment Company Act of 1940 A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. To be regulated, REITs must distribute at least 90% of their Net Investment Income to shareholders. REITs can invest in other REIT securities, but this can be no more than 25% of assets. Interest expense paid is tax deductible. Finally, REITs are not registered as investment companies because they are primarily investing in real estate assets, whereas investment companies invest in securities.
Mutual funds must send their financial statements to shareholders: A. annually B. semi-annually C. quarterly D. monthly
The best answer is B. Mutual funds send their financial statements to shareholders semi-annually.
Real Estate Investment Trusts are: I traded on stock exchanges II traded in the over-the-counter market III securities which are redeemable with the sponsor A. I only B. I and II C. II and III D. I, II, III
The best answer is B. REITs issue shares of beneficial interest which trade like other stocks, either on stock exchanges or over-the-counter. These securities are not redeemable. To liquidate, they must be sold in the market at the current market price.
An investor purchases 1,000 mutual fund shares with a Net Asset Value of $10 each, where the fund imposes a 5% contingent deferred sales charge if the shares are redeemed within the first year. The sales charge decreases by 1% for each year the investor remains invested in the fund. If the investor were to redeem his shares during the fourth year of holding the fund, based upon the NAV of $10, he or she will receive: A. $10,000 B. $9,900 C. $9,800 D. $9,700
The best answer is C. Deferred sales charges are imposed only if a customer redeems, with the amount of the sales charge typically being reduced the longer the investor remains in the fund. This investor is redeeming his $10,000 investment after holding it for 3 full years; therefore the fund is being redeemed during the 4th year. This means the Contingent Deferred Sales Charge is 2% (it is 5% if redeemed in year 1; 4% in year 2; 3% in year 3; 2% in year 4; 1% in year 5; 0 thereafter). If the investor redeems during year 4, he or she must pay the 2% deferred sales charge, and the investor will receive $10,000 x .98 = $9,800 upon redemption.
Crane Mutual Funds offers investors the opportunity to receive breakpoints on all purchases within their family of funds. The following lists the breakpoint schedule: Purchase Amount Sales Charge $0 - $10,000 8 ½% >$10,000 - $20,000 7 ½% >$20,000 - $45,000 6 ½% >$45,000 - $65,000 5 ½% >$65,000 5 % An investor owns $15,000 worth of the Crane Government Fund and wishes to buy $4,000 worth of the Crane Income Fund. What will be the sales charge for this purchase? A. 5 ½% B. 6 ½% C. 7 ½% D. 8 ½%
The best answer is C. Many families apply breakpoints to all purchases within the family, as is the case for the Crane Family of Funds. In this case, the fund has a breakpoint at $10,000, and the customer has $15,000 of one fund in the family. The customer wants to buy another $4,000 of another fund in the family. The customer will get the 7 ½% breakpoint on this purchase, since a total of $19,000 has been invested in the "family." This places the customer in the $10,000 - $20,000 tier that qualifies for a lower 7 ½% sales charge.
At the market opening, a customer purchases 200 shares of an S&P 500 Inverse ETF (-1x) at $50 per share. At the end of that day, the S&P 500 Index declines by 10%. The next day, the index partially recovers and closes up 5%. What will be the market value of the 200 share position? A. $9,450 B. $9,500 C. $10,450 D. $10,500
The best answer is C. Since this ETF is "-1x," it is an inverse ETF that moves at the same rate (1x), but in the opposite direction (-), to the market. The customer starts with 200 shares at $50, or a $10,000 position. At the end of the first day, because the index falls by 10%, this position will rise by 10% to $11,000 value ($10,000 x 1.1). At the end of the second day, because the index goes up by 5%, the ETF value will decline by 5%. $11,000 x .95 = $10,450.
The ex date for a mutual fund is: I set by the Board of Directors of the Fund II 2 business days prior to the Record Date III the date on which the fund's NAV per share is reduced for any distributions A. I and II B. II and III C. I and III D. I, II, III
The best answer is C. The ex-date for a mutual fund is set by the Board of Directors. On that date, the price of the shares is reduced for any distributions. The normal ex-date of 2 business days prior to record date does NOT apply because there is no trading of mutual fund shares.
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% A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. 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
An equity REIT would most likely invest in all of the following EXCEPT: A. apartments B. office buildings C. shopping malls D. industrial parks
The best answer is D. An equity REIT invests in income producing real estate. These include apartment buildings, shopping centers, and office buildings. The key here is that these have a large, diverse tenant pool. If any one tenant moves out, that will not have a great impact on the income stream. Industrial parks usually have only a few large tenants, not a lot of smaller tenants.
Which statements are TRUE regarding ETFs (Exchange Traded Funds)? I ETFs are available on broad-based stock indexes II ETFs are available on narrow-based stock indexes III ETFs are available on international stock indexes IV ETFs are available on bond indexes A. I and III only B. II and IV only C. I, II, III D. I, II, III, IV
The best answer is D. ETFs have been increasing in popularity as compared to traditional mutual funds because of their low cost (low expense ratios); ease of buying and selling like any other stock; and tax efficiency (no mandatory annual long term capital gain distributions). ETFs are now available based on sector indexes; narrow-based stock indexes; broad based stock indexes; bond indexes and international stock indexes.
A mutual fund that wishes to change its investment objective: A. is not permitted to do so under the provisions of the Investment Company Act of 1940 B. can do so only with majority vote of the Board of Directors of the fund C. can do so only with majority vote the independent members of the Board of Directors of the fund D. can do so only with majority vote of the shareholders of the fund
The best answer is D. If a fund wishes to change its investment objective, this action requires majority vote the shareholders of the fund.
Which of the following is a term that is NOT associated with mutual funds? A. LOI B. ROA C. CDSC D. SIPC
The best answer is D. Mutual funds can offer Rights of Accumulation (ROA), where one's accumulated position counts towards a breakpoint; a Letter of Intent provision, where a customer can sign a letter showing the customer's intent to complete a breakpoint within a 13 month time window and can start getting the lower sales charge immediately; and can offer a CDSC - Contingent Deferred Sales Charge - where there is no up-front sales charge, but if the customer redeems before specified dates, then a redemption fee will be imposed. An interesting fact - customer accounts at mutual fund companies do not have SIPC insurance - only customer accounts at broker-dealers have SIPC insurance. This is true because in their 70+ year history being regulated under the Investment Company Act of 1940, there has never been a fund company fraud that has lost customers their investments. So if a mutual fund is held in a brokerage account, it gets SIPC insurance; if it is purchased directly from a fund company and not through a broker-dealer, it does not get SIPC insurance.
All of the following sources of REIT income are counted towards the 75% test required by Subchapter M EXCEPT: A. net rental income B. interest income from mortgages C. real estate tax refunds D. dividend income from investments
The best answer is D. To qualify as a regulated investment company, 75% of REIT income must be real estate related. This income includes rents, mortgage interest earned, and real estate tax refunds received (as a source of income, an REIT can buy a property and attempt to get its tax assessment lowered - any resulting tax refund is income to the REIT).
Which statements are TRUE regarding a mutual fund "Letter of Intent"? I The letter can cover a period of 16 months II The letter can be backdated 90 days III The extra shares purchased under the breakpoint are held in escrow until the letter is completed IV During the period covered by the letter, the customer cannot redeem his shares A. I and II B. II and III C. II, III, IV D. I, II, III, IV
The best answer is B. 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.
A customer has $20,000 to invest in a mutual fund with a Net Asset Value per share of $9.42 and a Public Offering Price of $10.30. In the prospectus is the following breakpoint schedule: Purchase Amount Sales Charge $0 $10,001 $25,001 - - - $10,000 $25,000 over 8 1/2 7 3/4 6 1/2 % % % How many shares of the fund can the customer purchase? A. 1,942 B. 1,959 C. 2,123 D. 2,159
The best answer is B. The customer is purchasing enough ($20,000) to qualify for a 7 3/4% sales charge. To compute the new lowered offering price, the formula is: Net Asset Value 100% - Sales Charge % = $9.42 100% - 7.75% = $9.42 .9225 = $10.21 New Price The customer will pay $10.21 per share. A $20,000 investment will buy $20,000 / $10.21 = 1,959 shares.
All of the following investment company terms are synonymous EXCEPT: A. Bid B. Redemption Price C. Net Asset Value D. Offering Price
The best answer is D. Bid, Redemption Price, and Net Asset Value are all the same terms for mutual fund shares.
Quotes for mutual funds in the news media show: A. Net Asset Value only, since the offering price can vary depending on the sales charge imposed B. Public Offering Price only, computed using the minimum sales charge imposed by the fund C. Net Asset Value and the Public Offering Price computed using the minimum sales charge imposed by the fund D. Net Asset Value and the Public Offering Price computed using the maximum sales charge imposed by the fund
The best answer is D. 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.
A customer sells short a 3X Leveraged ETF at $30 per share. What is the customer's maximum potential loss? A. $30 per share B. $60 per share C. $90 per share D. Unlimited
The best answer is D. Shorting an ETF is the same thing as shorting any stock. Borrowed shares are sold, and then must be bought back and replaced at a later date. If the market rises, the customer's loss can be infinite.
MUTUAL FUNDS Fund Net Asset Value Offering Price Change Capital $9.01 $9.59 - .02 Common $6.37 $6.64 - .04 Corporate $7.72 $8.44 + .03 A customer who placed an order to buy 200 shares of Capital Fund this day will pay: A. $1,802 B. $1,802 plus a commission C. $1,918 D. $1,918 plus a commission
MUTUAL FUNDS Fund Net Asset Value Offering Price Change Capital $9.01 $9.59 - .02 Common $6.37 $6.64 - .04 Corporate $7.72 $8.44 + .03 A customer who placed an order to buy 200 shares of Capital Fund this day will pay: A. $1,802 B. $1,802 plus a commission C. $1,918 D. $1,918 plus a commission
A customer is considering the purchase of $60,000 of ABC Growth Fund, to pay for his 13 year old child's undergraduate college education starting when the child reaches age 18. The fund offers the following share classes: Class A shares: 5% initial sales charge No 12b-1 fees Breakpoint Schedule: $0 - $10,000 5% sales charge $10,001 - $30,000 3% sales charge $30,001 - $50,000 2% sales charge $50,001 - $100,000 1% sales charge Class B shares: No initial sales charge .40% annual 12b-1-fee CDSC if the customer redeems within the following time periods: Redeem within Year 1: 5% redemption fee Redeem within Year 2: 4% redemption fee Redeem within Year 3: 3% redemption fee Redeem within Year 4: 2% redemption fee Redeem within Year 5: 1% redemption fee Redeem after Year 5: 0% redemption fee Class C shares: No initial sales charge .75% annual 12b-1 fee No CDSC The best recommendation for this customer is:
The best answer is A. If this customer invested $60,000 in Class A shares, he pays a 1% sales charge and no annual 12b-1 fees for the 5 year investment time horizon. If the customer invested $60,000 in Class B shares, there is no up-front sales charge; and if the monies remain invested for 5 years, then there is no redemption fee. However, the customer must pay .40% in annual 12b-1 fees for 5 years = 2.00% total 12b-1 fees. If the customer invested the $60,000 in Class C shares, then the customer must pay .75% annually in 12b-1 fees over 5 years, for a total of 3.75%. The lowest fee purchase is, therefore, Class A shares.
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: A. $1,350 B. $1,425 C. $1,475 D. $1,500
The best answer is B. 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.
Which of the following securities can be sold by an individual holding an investment companies/variable annuities (Series 6) registered representative's license? I Municipal Investment Trusts II Real Estate Investment Trusts III Municipal Bond Funds IV Revenue Bonds A. I and II only B. I and III only C. III and IV only D. I, II, III, IV
The best answer is B. A person holding an investment companies/variable annuities (Series 6) license is only allowed to sell mutual funds, unit investment trusts, and variable annuities. To sell other securities such as Real Estate Investment Trusts, municipal bonds, corporate bonds, options etc., the broader Series 7 general securities license is required.
Exchange Traded Funds (ETFs) are: I registered under the Investment Company Act of 1940 II not registered under the Investment Company Act of 1940 III closed-end management companies IV open-end management companies A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. 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.
Which of the following statements concerning comparison of mutual funds are TRUE? I Comparison of funds over the same period of time is appropriate when the funds have different investment objectives II Quality of management can be compared by looking at performance over the same period of time III A fund can achieve high performance for a few years by taking greater risk and then have a period of poor performance IV Funds with the same investment objectives will have the same risks A. I and II only B. II and III only C. II and IV only D. III and IV only
The best answer is B. Quality of management can be compared by looking at performance over the same period of time. Funds with the same investment objectives will not necessarily have the same risks. A fund can achieve high performance for a few years by taking greater risk and then have a period of poor performance. Comparison of funds over the same period of time is appropriate when the funds have the same investment objectives.
A customer sells stock out of his account receiving net proceeds of $28,000. The customer wishes to use the proceeds to buy ACME mutual fund shares. The fund has breakpoints at $5,000 intervals. The customer has no additional funds available for investment. You should recommend that the customer: A. reinvest $25,000 ACME fund, and use the remaining $3,000 to buy common stocks B. sign a Letter of Intent to buy $30,000 of ACME fund C. invest an additional $2,000 in ACME fund in addition to the proceeds from the stock sale D. refrain from investing in ACME fund until $30,000 has been accumulated
The best answer is B. Since the customer needs to invest $30,000 to achieve the next breakpoint, and has $28,000 now, an additional $2,000 is required. The customer may not have this money at this time. If the customer signs a Letter of Intent to complete the $30,000 breakpoint, he or she has 13 months to make payment of the additional $2,000, and will still receive the lower sales charge.
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 A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. 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.
A mutual fund has a net asset value per share of $11.00. The maximum offering price per share is: A. $11.85 B. $12.02 C. $12.42 D. $12.56
The best answer is B. The maximum sales charge on a mutual fund is 8.5% under FINRA rules. The formula to find the offering price is: Net Asset Value 100% - Sales Charge % = $11.00 100% - 8.5% = $11.00 .915 = $12.02
When a sales charge is not imposed on a fund purchase, nor on redemption, this is known as a: A. front-end load fund B. no load fund C. contingent deferred sales charge fund D. negotiated sales charge fund
The best answer is B. The sales charge that is imposed when a customer initially purchases fund shares is known as a "front-end load sales charge."
Which of the following terms are synonymous when talking about open-end funds? I Underwriter / Sponsor II Underwriter / Dealer III Net Asset Value / Ask Price IV Net Asset Value / Bid Price A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. 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. Net asset value of a fund is the same as the fund's bid price.
