Packaged Products: Management Companies

Mutual funds that have an automatic reinvestment provision must reinvest: A. dividends at NAV and capital gains at NAV B. dividends at NAV and capital gains at POP C. dividends at POP and capital gains at NAV D. dividends at POP and capital gains at POP

A. If a fund offers an automatic reinvestment provision, both dividend distributions and capital gains distributions are reinvested at Net Asset Value.

A mutual fund's expense ratio has been increasing over the last 4 years. Which of the following may have caused the increase? I Higher management fees II Higher redemptions III Higher dividend distributions IV Higher capital gains distributions A. I and II B. III and IV C. I and IV D. II and III

A. If expenses rise (such as a higher management fee), or assets fall (caused by increased redemptions), the ratio will rise. Distributions made by the fund have no bearing on the ratio.

The underwriter of a mutual fund is known as the: A. Sponsor B. Manager C. Custodian D. Guardian

A. The fund underwriter is also known as the fund sponsor. The sponsor is responsible for establishing the fund in compliance with the requirements of the Investment Company Act of 1940.

The front-end load on a mutual fund is best described as the: A. expense ratio B. cost of investing in a fund C. taxation of dividend distributions from investing in the fund D. taxation of capital gains from investing in the fund

B. The front-end load cost of a mutual fund is the actual "cost" of investing in a fund. This is the sales charge. This charge is deducted from the gross dollars paid, with the net amount invested in the fund.

Mutual funds must send their financial statements to shareholders: A. annually B. semi-annually C. quarterly D. monthly

B. Mutual funds send their financial statements to shareholders semi-annually.

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

B. The maximum sales charge on a mutual fund is 8.5% under FINRA rules. The formula to find the offering price is: Ask Price = Bid(NAV)/100%-Sales Charge% 11/1-.085 11/.915=12.02

A growth fund would likely invest in which of the following securities? A. Non-convertible corporate bonds B. Government bonds C. Convertible bonds D. Preferred stocks

C. Growth funds would likely invest in common stocks for capital gains; they could also invest in convertible bonds, since they are an "equivalent" to the common stock; and if the common stock price rises substantially, their price will rise as well (because the market will force them to trade at parity with each other). Preferred stocks and non-convertible bonds give a higher rate of current income; but little in the way of capital gains potential (unless interest rates fall by a large amount). In this case, the fund manager is not attempting to profit from market interest rate moves - he or she is simply attempting to select stocks that have excellent growth potential.

Mutual Funds NAV Buy Chg ALPO Fund 9.51 10.39 +.02 AUDI Fund 6.82 7.45 +.04 A customer who buys 100 shares of ALPO Fund will pay: A. $951 B. $951 plus a commission C. $1,039 D. $1,039 plus a commission

C. Mutual funds are bought at the "Ask" price that includes the sales charge. This is the Public Offering Price. The Ask price on ALPO Fund is $10.39 per share or $1,039 for 100 shares.

Spiders (SPDRs) are securities whose value is based upon the securities in the: A. Standard and Poor's 100 Index B. Standard and Poor's 400 MidCap Index C. Standard and Poor's 500 Index D. Standard and Poor's 1000 Index

C. Spiders (SPDRs) are Exchange Traded Funds based on the Standard and Poor's 500 Index. These are an extremely popular product traded on the exchanges.

Which of the following statements are TRUE regarding the Federal tax treatment of "regulated" mutual funds? I Investors have no Federal tax liability on the interest income received from a municipal bond fund II Investors have no Federal tax liability on the interest income received from a corporate bond fund III The investment company has no Federal tax liability on the undistributed income that it retains from a municipal bond fund IV The investment company has no Federal tax liability on the undistributed income that it retains from a corporate bond fund A. I and III B. I and IV C. II and III D. II and IV

A. If a mutual fund invests solely in municipal securities, there is no Federal tax liability on the interest income received (remember, the interest income from municipal securities is exempt from Federal income tax). Under the "conduit" theory, any payment distributed by the fund to shareholders retains the same character and is free from Federal income tax. Similarly, undistributed income retained by the fund would not be taxed, since it consists solely of tax free municipal interest income. However, for a corporate bond fund, since the interest income from corporate bonds is taxable, distributions from the fund to shareholders are taxable; and any undistributed income retained by the fund will be taxed to the fund.

An investor wishes to buy mutual fund shares that provide him with income and capital gains potential. Based on this information, the appropriate recommendation is a: A. balanced fund B. hedge fund C. sector fund D. dual purpose fund

A. A balanced fund is a type of fund that allocates assets among different types of securities - maintaining a "balance" of equities and fixed income securities. It provides both income and capital gains potential. A dual purpose fund issues 2 classes of shares - either income shares or capital shares. After choosing the class of share to invest in, the customer either has an income fund or a growth fund, but not a balance of both.

What risk should an investor in an ETN consider that would not be associated with an ETF? A. Credit Risk B. Liquidity Risk C. Market Risk D. Volatility Risk

A. An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. It is listed and trades like a stock, so it has little marketability risk. Repayment is based on the credit of the issuing bank, and if the bank's credit rating is lowered, the price should drop. This is credit risk. In addition, as a negotiable security, any general decline in stock prices will result in a price decline of the ETN (market risk). ETFs (Exchange Traded Funds) have an NAV that is based on the value of the physical underlying securities. There is no credit risk here. If a single company held in the underlying stock portfolio has its credit rating lowered, this will have a minimal impact on the value of the overall portfolio. Because both ETFs and ETNs are exchange traded, both have minimal liquidity risk. Both have market risk - for ETNs, the market risk is the risk of an interest rate rise; for ETFs, which hold an equity portfolio, the risk is a general market price decline. Finally, volatility risk is an issue for leveraged ETFs, which are designed to move faster than the market. It is not as much of an issue for an ETN, which will exhibit volatility due to market interest rate changes.

Which of the following customers is allowed a breakpoint on mutual fund purchases? A. A corporate treasurer buying for investment B. An investment club account buying for the club participants C. A partnership account where the partnership is formed to buy mutual funds D. An investment adviser omnibus account

A. An individual or corporation making a purchase is considered to be "one" purchaser and qualifies for the breakpoint. People cannot "join together" to obtain a breakpoint on a mutual fund purchase. Therefore, investment clubs cannot group purchases for a breakpoint; nor can investment advisers group their customers' purchases; nor can a partnership be formed to buy mutual funds at a breakpoint.

Which of the following investment company terms are synonymous? A. Bid; Net Asset Value B. Bid; Public Offering Price C. Ask; Net Asset Value D. Ask; Redemption Price

A. Bid and Net Asset Value are the same terms for investment company shares. Bid is also the same thing as Redemption Price. Ask is the same thing as Public Offering Price.

Which term BEST describes an ETF? A. Stock B. Mutual Fund C. Derivative D. Bond

A. ETF stands for Exchange Traded Funds. These are fund shares that trade like any other stock. They are not mutual fund shares because they cannot be redeemed at any time with the sponsor. Rather, they are negotiable securities.

What is a characteristic of an ETF and not of a mutual fund? A. Investment in securities in proportions that mirror an index B. Shares that are redeemable with the issuer C. In kind redemptions when necessary D. Shares that are purchased at the POP

A. ETFs (Exchange Traded Funds) are index funds that are passively managed. The portfolio composition mirrors a recognized index. They are traded in the market like any other stock. In contrast, mutual funds do not trade. A mutual fund might be an index fund (passively managed) or it might be an actively managed fund, such as a growth fund, where the manager selects the investments. Mutual funds do not trade. Shares are issued as new money is invested and the customer pays the next computed POP (the closing NAV that business day plus a sales charge as stated in the Prospectus). When shares are redeemed by the issuer, they are redeemed at the next closing NAV. A rather obscure fact about mutual funds is that the fund manager, if he or she is facing an extraordinary amount of redemption requests, can "pay" them by giving clients the stocks in the underlying portfolio, instead of having to liquidate them in the market at unfavorable prices to generate the cash to pay the redemption requests. This is called an "in kind" redemption.

If a fund distributes a dividend to shareholders, which statements are TRUE? I The dividend is taxable if it is taken as a check II The dividend is not taxable if it is taken as a check III The dividend is taxable if it is automatically reinvested in the fund IV The dividend is not taxable if it is automatically reinvested in the fund A. I and III B. I and IV C. II and III D. II and IV

A. Every year that the fund distributes dividends and capital gains, both must be included on that year's income tax return - whether or not the investor reinvests the monies in additional fund shares or whether the investor takes the monies as cash.

A customer places an order to buy mutual fund shares directly from the fund wholesaler rather than to purchase the shares through a broker-dealer. Under FINRA rules, which of the following statements are TRUE? I The wholesaler must be a registered FINRA member II The wholesaler does not need to be a registered FINRA member III The customer must pay the Public Offering Price as described in the prospectus IV The customer may receive a discount from the Public Offering Price since this is a direct purchase A. I and III B. I and IV C. II and III D. II and IV

A. Fund wholesalers must be FINRA members. Each is a broker-dealer, called the "fund distributor." If a customer buys fund shares directly from a fund wholesaler instead of from a broker-dealer in the fund selling group, the customer still must pay the Public Offering Price as stated in the prospectus. Discounts to the public other than those detailed in the fund prospectus are prohibited.

A growth fund would likely invest in which of the following securities? I Common stock II Common stock options III Treasury stock IV Treasury bonds A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

A. Growth funds invest in common stocks and equivalent securities for capital gains caused by earnings growth of the company. A way for a growth fund to "pump up" returns would be to buy call options on stocks that are viewed as good investments. Treasury stock is only purchased by the issuing corporation, as a means of reducing shares outstanding and increasing the corporation's stock price. Outside investors cannot buy Treasury Stock. Treasury bonds would not be purchased by a growth fund. These provide safety and current income; but would only provide capital gains if interest rates dropped. The fund manager is selecting stocks with growth potential; he or she is not placing a bet on market interest rate movements.

A customer with an 8+ year investment time horizon has $60,000 to invest. She has the choice of either Class A or Class B shares of ACME Fund. The Class A shares have the following sales charge breakpoint schedule with no annual 12b-1 fees: Purchase Amount Sales Charge 0 - $10,000 6% $10,001 - $20,000 5% $20,001 - $30,000 4% $30,001 - $50,000 3% $50,000 - $100,000 2% $100,000 and over 1% The Class B shares have the following declining sales charge schedule and a .50% annual 12b-1 fee: Contingent Deferred Sales Charge If Redeem After Year 1: 6% If Redeem After Year 2: 5% If Redeem After Year 3: 4% If Redeem After Year 4: 3% If Redeem After Year 5: 2% If Redeem After Year 7: 1% If Redeem After Year 8: 0% The best recommendation for the customer is to: A. Buy $60,000 of the Class A shares B. Buy $60,000 of the Class B shares C. Sign a Letter of Intent to buy over $100,000 of the Class A shares D. Split the purchase evenly into a $30,000 Class A Share purchase and a $30,000 Class B share purchase

A. If the customer invests $60,000 in Class A shares, she will pay a 1-time 2% sales charge. If the customer invests in Class B shares, she will pay no sales charge to redeem after 8 years, but will have paid .50% in 12b-1 fees for each of the 8 years, for a total of 4%. Thus, the Class A shares are less expensive.

An income fund would likely invest in all of the following securities EXCEPT: A. common stocks B. preferred stocks C. corporate bonds D. government bonds

A. Income funds invest primarily in bonds and preferred stocks for a high level of current income. Common stocks are not typically a choice for investment because the dividend yields are comparatively low.

All of the following statements are true regarding a Standard and Poor's 500 Index fund EXCEPT the: A. portfolio manager can decide to invest in any stock as long as it is included in the Standard and Poor's 500 Index B. the portfolio manager must change the composition of the fund if the stocks included in the index are changed C. fund must weight its investments in the same manner as the Standard and Poor's 500 index is weighted D. management fee for such a fund is typically lower than for an actively managed fund

A. Index funds attempt to "shadow" the performance of a designated index, such as the Standard and Poor's 500 index; or the Value Line Index. Such funds match their composition and weighting every day to match the designated index. Because no research is done to select stocks for the fund, the management fees are lower than for actively managed funds. It is false that the portfolio manager can invest in any stock in the Standard and Poor's 500 index, since the fund must match the composition of the index as a whole.

Which of the following customers is NOT allowed a breakpoint on mutual fund purchases? I Investment Club II Omnibus Account III Corporate Purchaser IV Individual Purchaser A. I and II only B. III and IV only C. I, II and III D. I, II, III, IV

A. Investment clubs cannot group purchases for a breakpoint, nor can investment advisers group their customers' purchases. An individual or corporation making a purchase is considered to be "one" purchaser and qualifies for the breakpoint.

An ETF that attempts to emulate the Standard and Poor's 500 Index employs what investment strategy? A. Passive asset management B. Active asset management C. Fundamental analysis D. Technical analysis

A. Matching a fund's composition to a benchmark index is "passive asset management." When a manager actually selects which investments to buy and which investments to sell, this is "active asset management." Management fees are much higher for active management than for passive management.

The bid price of a mutual fund is $14.30 and the ask price is $15.50. The fund has the following breakpoint schedule: Purchase Amount Sales Charge $0 - 10,000 7.75% $10,001 - 25,000 7.25% $25,001 - over 6.50% The fund charges a redemption fee of 1/2%. A customer who redeems 200 shares this day will receive: A. $2,846 B. $2,846 less a commission C. $2,860 D. $2,860 less a commission

A. Mutual funds are redeemed at NAV less a redemption fee (if any). No commissions are charged on purchases or redemptions. The redemption fee of 1/2% must be deducted to get the net proceeds. $14.30 NAV x .995 x 200 shares = $2,846

Which statements are TRUE about mutual fund "Class A" shares? I Class A shares impose a front-end sales charge II Class A shares impose a contingent deferred sales charge III Class A shares impose no, or a very low, 12b-1 fee IV Class A shares impose a high 12b-1 fee A. I and III B. I and IV C. II and III D. II and IV

A. Mutual funds offer various share classes to investors. The investor can choose to buy the same fund either as a Class A, B, C, or D share. Class A shares typically charge an up-front sales charge, but have no, or very low, annual 12b-1 fees. Class B shares have no up-front sales charge; instead, they have a contingent deferred sales charge, and impose higher annual 12b-1 fees than A shares. Class C shares have a lower contingent deferred sales charge than B shares, but impose the highest 12b-1 fees. Class D shares are typically sold by investment advisers. There is no sales charge, but they impose annual 12b-1 fees and service fees.

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 Common Fund has a 1/2% redemption fee. A customer who redeemed 200 shares this day will receive: A. $1,268 B. $1,268 less a commission C. $1,274 D. $1,274 less a commission

A. Open end mutual fund shares are redeemed at Net Asset Value, without any commissions being charged. However, the fund may impose a redemption fee. Common Fund has a Net Asset Value per share of $6.37 x 200 shares = $1,274 gross redemption amount. Since .5% is taken as a redemption fee, the customer receives $1,274 x .995 = $1,268.

Which of the following customers is allowed a breakpoint on mutual fund purchases? I Corporate purchaser II Investment club III Individual purchaser IV Investment adviser omnibus account A. I and III B. II and IV C. I, II, III D. I, II, III, IV

A. People cannot "join together" to obtain a breakpoint on a mutual fund purchase. Therefore, investment clubs cannot group purchases for a breakpoint, nor can investment advisers group their customers' purchases. An individual or corporation making a purchase is considered to be "one" purchaser and qualifies for the breakpoint.

A sector fund is a mutual fund that: A. invests in securities found in one industry or geographic area B. allocates investment among common stocks, preferred stocks, and bonds of companies in various industries C. sells futures on market indices and uses short sales to limit risks of long positions D. invests solely in the common stocks of companies that exhibit faster than average gains in earnings

A. The definition of a "sector fund" is one that invests in securities found in one industry or geographic area. For example, an "energy" fund or a country fund are "sector" funds.

The sales charge on a fund with a Net Asset Value of $9.50 and a Public Offering Price of $10.00 is: A. 5% B. 6 1/4% C. 7 3/4% D. 8 1/2%

A. The formula to find the sales charge percentage is: Mutal Fund Sales Charge % = Ask - Bid / Ask 10-9.50=.50 .50/10=.05 or 5%

Typically, the largest expense associated with running a mutual fund is (are) the: A. management fee B. custodial fees C. brokerage fees D. legal fees

A. The largest expense of running a mutual fund is the annual management fee. It is typically 1/2 - 1% of assets annually.

Which of the following statements are TRUE regarding a mutual fund that is considered to be "efficient"? I The fund has a low expense ratio II The fund has a high expense ratio III The fund has a relatively low level of operating expenses IV The fund has a relatively high level of operating expenses A. I and III B. I and IV C. II and III D. II and IV

A. The more efficient the fund, the lower the level of expenses would be, and the lower the expense ratio would be, leaving a greater proportion of gross investment income to shareholders.

The primary function of the investment adviser is to: A. manage the fund B. set the investment objective for the fund C. safekeep the assets of the fund D. prepare the financial statements of the fund

A. The primary function of the investment adviser is to manage the fund within its stated objective - choosing the securities to be purchased and sold in the fund portfolio. For this, the adviser is paid a management fee. The custodian bank safekeeps the assets of the fund. The custodian bank can also perform the clerical functions of transfer agent and paying agent. The investment objective of the fund is initially set by the sponsor. The financial statements of the fund are prepared by the outside accountants.

I-Shares allow investors to invest in stock indexes based on all of the following EXCEPT: A. Industry sector B. Industry performance C. Country D. Market capitalization

B. Exchange traded funds based on indexes by industry sector, country, or market capitalization, are known as "I-Shares," as in "Index Shares."

All of the following would reduce the Net Asset Value per share of a mutual fund EXCEPT: A. asset depreciation B. asset appreciation C. capital gains distribution D. dividend distribution

B. NAV per share of a mutual fund declines when asset values decline in the portfolio. When a fund pays either a dividend distribution or capital gains distribution, the NAV per share is reduced on the ex date to reflect the lower per share value. Of course, any person who elects to reinvest the distributions in more shares will have now hold more shares, each one worth less than before. But in aggregate, the investment value would not have changed.

Which statements are TRUE regarding closed end investment companies? I The initial offering of shares is made under a prospectus II Shares are redeemable with the issuer at Net Asset Value III Shares trade in the secondary market at prevailing market prices IV The portfolio of investments is not managed A. I and II only B. I and III only C. III and IV only D. I, III, IV

B. The initial offering of closed end investment company shares is made under a prospectus. Then the shares are listed on an exchange and trade like any other stock. The shares are not redeemable; they are negotiable. The portfolio of investments is managed - this is a closed-end management company.

Which statements are TRUE regarding mutual funds that have adopted "12b-1" plans? I Mailings to prospective purchasers of the fund are an acceptable "12b-1" charge II Mailings to prospective purchasers of the fund are not an acceptable "12b-1" charge III Expense ratios for funds that have adopted 12b-1 plans can be expected to be lower than for similar funds without a 12b-1 fee IV Expense ratios for funds that have adopted 12b-1 plans can be expected to be higher than for similar funds without a 12b-1 fee A. I and III B. I and IV C. II and III D. II and IV

B. 12b-1 plans allow a mutual fund to charge, as an expense to the existing shareholders, the cost of advertising and soliciting for new customers (included are mailings). The theory behind such plans is that the advertising will attract more assets to the fund (more shareholders), and as the fund's size increases, the expense ratio (ratio of all fund expenses to total net assets) should decrease for all shareholders. For most funds which have adopted 12b-1 plans, expenses have risen faster and expense ratios have increased.

When comparing an ETN to an ETF, which statement is FALSE? A. ETNs have credit risk B. ETFs have credit risk C. ETNs have market risk D. ETFs have market risk

B. An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. It is listed and trades like a stock, so it has little marketability risk. Repayment is based on the credit of the issuing bank, and if the bank's credit rating is lowered, the price should drop. This is credit risk. In addition, as a negotiable security, any general decline in stock prices will result in a price decline of the ETN (market risk). ETFs (Exchange Traded Funds) have an NAV that is based on the value of the physical underlying securities. There is no credit risk here. If a single company held in the underlying stock portfolio has its credit rating lowered, this will have a minimal impact on the value of the overall portfolio. However, since these are negotiable securities, they do have market risk.

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 second year of holding the fund, based upon the NAV of $10, he or she will receive: A. $10,000 B. $9,600 C. $9,500 D. $9,400

B. 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 1 full year; therefore the fund is being redeemed during the 2nd year. This means the Contingent Deferred Sales Charge is 4% (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 2, he or she must pay the 4% deferred sales charge, and the investor will receive $10,000 x .96 = $9,600 upon redemption.

Under FINRA rules, a "no load" mutual fund: A. cannot charge a 12b-1 fee B. can charge a maximum annual 12b-1 fee of .25% C. can charge a maximum annual 12b-1 fee of .50% D. can charge a maximum annual 12b-1 fee of .75%

B. FINRA allows a mutual fund to call itself "no load" (as in no sales charge) as long as the maximum annual 12b-1 fee does not exceed .25%. Note, in contrast, that if a fund wishes to advertise itself as a "pure no-load fund" then it cannot charge any 12b-1 fees.

Which of the following statements are TRUE about the Net Asset Value per share for a mutual fund? I The distribution of dividends to mutual fund shareholders affects the Net Asset Value per share II The distribution of dividends to mutual fund shareholders does not affect the Net Asset Value per share III The redemption of mutual fund shares affects the Net Asset Value per share IV The redemption of mutual fund shares does not affect the Net Asset Value per share A. I and III B. I and IV C. II and III D. II and IV

B. If a fund distributes a dividend to shareholders, the Fund shares are reduced by the value of the distribution on the ex date. Redemption of shares has no effect on Net Asset Value per share, because the redemption of each share occurs at the current Net Asset Value that day. The reduction in total net assets is exactly matched by a proportionate reduction in shares outstanding, so Net Asset Value per share is unchanged by the redemption.

A mutual fund sponsor has three different income funds, holding AAA rated debt securities with similar maturities. Assuming that the expense ratios for the funds are identical, which fund listed would have the highest yield from investment income? A. Government Bond Fund B. Corporate Bond Fund C. Municipal Bond Fund D. Any of the above

B. If the securities held in each of the bond funds have similar maturities and the funds have similar expense ratios, the remaining differences affecting yields are credit rating and tax status. Corporates are considered more risky than both governments and municipals, and are fully taxable, so their yield is the highest. Governments are less risky than municipals, but are taxable by the Federal government, so government yields are higher than municipal yields. The order from highest to lowest yield is: Corporates, Governments, Municipals.

A customer is considering the purchase of $5,000 of ABC Growth Fund, to use as the down payment on a new car purchase that will be made in 5 - 6 years. 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: A. purchase Class A shares B. purchase Class B shares C. purchase Class C shares D. divide the purchase equally into $2,500 each for Class A and Class C shares

B. If this customer invested $5,000 in Class A shares, he pays a 5% sales charge and no annual 12b-1 fees for the 5 year investment time horizon. If the customer invested $5,000 in Class B shares, there is no up-front sales charge; but because the customer will redeem after year 5, there will be no redemption fee on these shares. However, the customer must pay .40% in annual 12b-1 fees for 5 years = 2.00% total fees. If the customer invested the $5,000 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 B shares.

Which of the following statements are TRUE regarding money market funds? I The Net Asset Value per share is constant at $1 II The Net Asset Value per share is constant at $10 III As Total Assets in the fund increase, the shareholder has the same number of shares at an increased Net Asset Value per share IV As Total Assets in the fund increase, the shareholder receives more shares at the same Net Asset Value per share A. I and III B. I and IV C. II and III D. II and IV

B. Money market funds are unusual in that the Net Asset Value per share is constant at $1.00. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each. For example, if an investor has 1,000 shares @ $1 ($1,000 total) in the fund, and the assets appreciate by 10%, then the customer will have 1,100 shares at $1 ($1,100 total).

A retired investor seeks safety of principal and current income. All of the following funds would be suitable recommendations EXCEPT: A. Government Bond Fund B. Special Situations Fund C. Money Market Fund D. Insured Corporate Bond Fund

B. Of the choices given, the least safe investment is a Special Situations Fund. Such funds invest in companies in "special situations" such as bankruptcies, to reap capital gains if the company recovers.

Which statement is TRUE regarding ETFs (Exchange Traded Funds)? A. The purchaser of an ETF is not required to receive a disclosure document because the shares are purchased in the secondary market B. The purchaser of an ETF is required to receive either a prospectus or a Product Description summarizing key information about the ETF C. The purchaser of an ETF is required to receive an Offering Memorandum because a public offering of securities is being made D. The purchaser of an ETF is required to receive an Official Statement, at, or prior to, settlement of the transaction

B. Regarding Exchange Traded Funds (ETFs), the shares trade in the secondary market like any other stock. However, any purchaser is required to be delivered either a prospectus (similar to that for a mutual fund) or a Product Document summarizing key information about the ETF and the details of where a prospectus can be obtained. The basic idea here is that the customer is buying the equivalent of an exchange traded index-mutual fund; and even though technically each purchase is not a "new issue" like the purchase of a mutual fund, the customer must still receive a disclosure document. An Offering Memorandum is the disclosure document used for a Regulation D private placement. An Official Statement is the disclosure document used for a new municipal bond issue.

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

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.

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

B. The sales charge that is imposed when a customer initially purchases fund shares is known as a "front-end load sales charge."

A customer has purchased $5,000 of a mutual fund. Over the past 5 years, the fund has appreciated to $14,000. At this point, the customer wants to buy another $5,000 of the fund. In the prospectus, the breakpoint schedule is: 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 % On the $5,000 purchase, the customer will pay a sales charge of: A. 8½% B. 7½% C. 6½% D. 5½%

B. Since this fund starts with the maximum sales charge of 8 ½%, it must offer rights of accumulation. Funds charging the maximum sales charge are required to do so under FINRA's Conduct Rules. To determine the breakpoint for the customer, the new purchase amount is added to the current value of the customer's holdings in the fund. $14,000 current value plus $5,000 purchase = $19,000 total holding after the new purchase. This places the customer between the 2nd tier ($10K - $20K), so the sales charge imposed on the $5,000 additional purchase is 7 ½%.

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

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 client sells $49,000 of various stocks and wishes to use the proceeds to buy a mutual fund that has breakpoints at $10,000 intervals. Which statement is TRUE? A. The customer must sign a letter of intent to reach the $50,000 breakpoint B. The customer should be informed that investing an additional $1,000 will provide the benefit of a breakpoint C. The customer should be informed that the sales charge earned by the representative will be lower if the breakpoint is reached D. No additional disclosures are required to be made to the customer

B. If a customer is "close" to a breakpoint, it is a violation to not make the customer aware that putting in the additional funds to reach that level will result in a lower sales charge. If the disclosure is not made, the registered representative has committed a violation known as a "breakpoint sale."

When an investor places an order to sell a mutual fund, the investor receives the: A. market price at that moment B. NAV at that day's close C. NAV at the next day's open D. a negotiated price

B. Mutual fund shares do not trade. They are redeemable with the sponsor. An order to sell is filled at that day's closing NAV (Net Asset Value).

The provisions of the Investment Company Act of 1940 include: which of the following? I Minimum initial fund capital of $100,000 II "Interested persons" on the Board of Directors cannot hold over 60% of the seats III Changing the fund's investment objective requires a majority vote of the shareholders IV Setting maximum sales charges on mutual fund purchases A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

C. The Investment Company Act of 1940 requires that the minimum capital to start a fund is $100,000; that no more than 60% of the Board of Directors be "interested parties" - that is, they are affiliated with the sponsor, custodian, transfer agent, or firms in the selling group; and that the fund have a stated investment objective that can only be changed by majority vote of the shareholders. The Act does not set sales charges for mutual fund purchases - these are set by FINRA - which allows a maximum sales charge of 8 1/2%.

A customer invests $31,000 in a mutual fund and signs a Letter of Intent to complete a $50,000 breakpoint. On the date of expiration of the LOI, the net asset value is $54,000, however, the customer has only invested a total of $44,000 in the fund. What should the representative do? A. Nothing, since the account value is over $50,000 B. Distribute the amount in excess of the $50,000 LOI requirement C. Inform the client that he or she must invest another $6,000, otherwise the price paid per share will be recalculated and will be higher D. Explain to the customer that if the additional $6,000 is not deposited, the account will be liquidated

C. The Letter Of Intent (LOI) provision operates separately from Rights of Accumulation and takes precedence over Rights of Accumulation. Because of this, the customer must deposit new money in the dollar amount required by the LOI to get the lowered sales charge. Since the customer has deposited $44,000 of the $50,000 required by the LOI already, the remaining $6,000 must be deposited to retain the reduced sales charge. If this is not done, the price paid per share will be recalculated using a higher sales charge level, resulting in the customer owning fewer shares.

Which statements are TRUE regarding mutual fund expense ratios? I The expense ratio will rise if the fund raises its management fee II The expense ratio will rise if the fund incurs higher administrative costs III The expense ratio will rise if the fund experiences large investment inflows IV The expense ratio will rise if the fund experiences large redemptions A. I and II only B. III and IV only C. I, II, and IV D. I, II, III, IV

C. The formula for the expense ratio is: Expense Ratio = fund operating expenses / Total net assets If expenses rise (such as a higher management fee or administrative costs), or assets fall (caused by increased redemptions), the ratio will rise. Large investment inflows would increase total net assets, causing a decline in the ratio.

Which of the following funds MUST be closed end? A. NAV - $20.00 /Purchase Price - $20.00 B. NAV - $20.00 /Purchase Price - $20.50 C. NAV - $20.00 /Purchase Price - $19.50 D. NAV - $20.00 /Purchase Price - $20.25

C. The minimum purchase price for an open-end (mutual) fund is net asset value. The fund cannot be sold for less than this amount. It may be sold for more with a sales charge not exceeding 8 1/2% of the offering price. Closed-end funds trade in the market. The market may value the fund at NAV, at a discount to NAV or at a premium to NAV. Therefore, the only fund that can sell at a discount to NAV is a closed-end fund.

A mutual fund has the following breakpoint schedule: Purchase Amount Sales Charge $0 - $10,000 6% $10,001 - $25,000 5% $25,001 - $50,000 4% Which single purchase amount is a "breakpoint sale"? A. $1001 B. $11,001 C. $24,001 D. $26,001

C. A "breakpoint sale" might sound like a good thing, but it is not! It is selling a mutual fund to a customer in an amount that does not give the customer the benefit of the breakpoint. If a customer wishes to invest $24,001 in this fund, he or she should be told that another $1,000 invested will result in a lowering of the sales charge. If the customer does not have the extra $1,000 right now, then a letter of intent should be signed for the additional $1,000 purchase, which gives the customer another 13 months to get the benefit of the breakpoint.

A registered investment adviser has $100,000 from a client to invest in a broadly diversified mutual fund. The fund prospectus has the following breakpoint schedule: $0 - $49,999 5.0% $50,000 - $149,999 4.5% $150,000 - $249,999 4.0% $250,000 - $499,999 3.5% What is the sales charge that will be paid on the investment? A. 5.00% B. 4.75% C. 4.50% D. 4.00%

C. A breakpoint is a reduced sales charge that is paid on a large dollar purchase of a mutual fund. The breakpoint schedule is found in the fund prospectus. This fund lowers the sales charge to 4 1/2% for purchases of $50,000 - $149,999.

In order to be regulated under Subchapter M of the IRS Code, at least how much of the Net Investment Income must be distributed to the mutual fund shareholders? A. 70% B. 80% C. 90% D. 100%

C. A fund that distributes at least 90% of Net Investment Income to shareholders is "regulated" under Subchapter M of the Internal Revenue Code and pays no tax on the distributed amount.

Which statement is TRUE about ETNs? A. ETNs are backed by a portfolio of securities that track a recognized stock index B. ETNs are registered investment companies under the Investment Company Act of 1940 C. ETNs have both credit risk and market risk D. ETNs are principal protected and government guaranteed

C. An ETN is an Exchange Traded Note. It is a structured product created by an investment bank. These are "bond-like" investments that have a typical 7-year life. They give an annual return that is tied to the performance of a benchmark stock index, subject to a cap and a floor. They are not ETFs - there are no physical securities backing the product and they are not an investment company type. They are simply backed by the credit of the issuing bank - if the bank fails, so does the ETN. ETNs are listed and trade, though trading is generally thin. This minimizes marketability risk, but note that ETNs still have market risk - their price can fall in the market.

A customer has signed a Letter of Intent to complete a breakpoint for a $60,000 purchase of mutual fund shares. The customer has purchased $50,000, and the NAV of the position is currently $60,000. In order to complete the breakpoint, you should tell the customer to: A. do nothing - the breakpoint is completed B. sell $10,000 of the fund shares and use the proceeds to buy another $10,000 of the fund C. deposit another $10,000 to buy shares to complete the breakpoint D. donate $10,000 of the fund shares to a charity of the fund's choice to complete the breakpoint

C. Asset appreciation does not count towards completing a breakpoint, so Choice A is a false and misleading statement. The client contractually agreed to buy $60,000 of fund shares (within 13 months) under a Letter of Intent to get a lower sales charge. If the customer does not deposit the full $60,000, then the sales charge is recomputed to a higher percentage, based on how much the customer actually purchased. So the customer must deposit another 120,000 to complete the breakpoint. If the customer were to take the capital gains distribution as cash and use that money to buy additional shares to complete the breakpoint, then the customer would have to pay a sales charge (which would be lower because the breakpoint is being completed). But the customer must understand that if the capital gains distribution were simply reinvested, that would occur at NAV and there would be no sales charge. Not completing the breakpoint and the resulting fractional bump-up in sales charge would be less costly to the customer than the sales charge that would be imposed on the additional purchase (usually - there can be exceptions here). Thus, Choice B is an inappropriate recommendation. Choice C is the right thing to do. The customer must deposit the remaining $10,000 to complete the breakpoint. Choice D is basically garbage.

If a regulated mutual fund pays out a dividend and capital gains distribution, which the shareholder has automatically reinvested, which statement is TRUE? A. The dividend is taxable B. The capital gain is taxable C. Both the dividend and the capital gain are taxable D. Neither the dividend nor the capital gain are taxable

C. Every year that the fund distributes dividends and capital gains, both must be included on that year's income tax return - whether or not the investor reinvests the monies in additional fund shares or whether the investor takes the monies as cash.

ETFs are: A. non-negotiable B. redeemable C. traded on exchanges D. traded over-the-counter

C. Exchange Traded Funds, as the name says, trade on stock exchanges. Most are AMEX (now renamed the NYSE American) listed, but there are ETFs on the NYSE and NASDAQ as well.

A mutual fund sponsor has three different income funds, holding AAA rated debt securities with similar maturities. Assuming that the expense ratios for the funds are identical, which fund would have the lowest yield from investment income? A. Government Bond Fund B. Corporate Bond Fund C. Municipal Bond Fund D. Any of the above

C. If the securities held in each of the bond funds have similar maturities and the funds have similar expense ratios, the remaining differences affecting yields are credit rating and tax status. Corporates are considered more risky than both governments and municipals, and are fully taxable, so their yield is the highest. Governments are less risky than municipals, but are taxable by the Federal government, so government yields are higher than municipal yields. The order from highest to lowest yield is: Corporates, Governments, Municipals.

Which of the following statements are TRUE regarding a Standard and Poor's 500 Index fund? I The portfolio manager can decide to invest in any stock as long as it is included in the Standard and Poor's 500 Index II The portfolio manager must change the composition of the fund if the stocks included in the index are changed III The fund must weight its investments in the same manner as the Standard and Poor's 500 index is weighted IV The management fee for such a fund is typically lower than for an actively managed fund A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

C. Index funds attempt to "shadow" the performance of a designated index, such as the Standard and Poor's 500 index; or the Value Line Index. Such funds match their composition and weighting every day to match the designated index. Because no research is done to select stocks for the fund, the management fees are lower than for actively managed funds. It is false that the portfolio manager can invest in any stock in the Standard and Poor's 500 index, since the fund must match the composition of the index as a whole.

A mutual fund that invests primarily in Treasury Bills and other short term debt obligations is a(n): A. income fund B. government securities fund C. money market fund D. growth fund

C. Money market funds invest in short term money market instruments, such as Treasury Bills, commercial paper and banker's acceptances. An income fund invests in longer maturity bonds and preferred stocks which give higher yields than money market debt. A government securities fund invests in government securities only - T-Bills, T-Notes and T-Bonds.

Which statements are TRUE regarding money market funds? I Money market funds are typically sold without a sales charge II Money market funds typically do not impose management fees III Fund dividends are not taxable if reinvested in additional shares IV Typical maturities of securities held in the portfolio are 30 days or less A. I and II B. III and IV C. I and IV D. II and III

C. Money market funds usually do not impose sales charges but all funds impose management fees. Fund dividends are taxable, whether or not they are automatically reinvested in additional fund shares. The reason why these funds are called "money" funds is that the securities held in the portfolios have very short maturities (less than 30 days) and turn over into cash quickly.

A new customer wishes to open an account at your firm by purchasing $5,000 of DEF mutual fund shares. He informs you that he has previously invested $30,000 in the fund at another broker-dealer. As the registered representative handling the account, you should tell the customer that: A. to qualify for the breakpoint, he must buy the shares from the other broker-dealer B. he must transfer the account from the other broker-dealer in order to qualify for the breakpoint C. he qualifies for a breakpoint sales charge reduction on the $5,000 purchase D. cannot qualify for a breakpoint sales charge reduction on the $5,000 purchase

C. Mutual fund breakpoints are calculated based on amounts invested with a given fund sponsor - it makes no difference which broker-dealers were used to make the fund share purchases. The breakpoints are not calculated based on how much of a fund is purchased through a given broker-dealer.

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

C. Open end mutual funds are purchased at the offering price, which is inclusive of any sales charges. This is a new issue prospectus offering, so no commissions are involved. The customer pays the offering price of $9.59 per share x 200 shares = $1,918.00.

A customer has purchased $25,000 of a mutual fund. Over the past 5 years, the fund has appreciated to $46,000. At this point, the customer wants to buy another $15,000 of the fund. In the prospectus, the breakpoint schedule is: 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 % On the $15,000 purchase, the customer will pay a sales charge of: A. 7 ½% B. 6 ½% C. 5 ½% D. 5%

C. Since this fund starts with the maximum sales charge of 8 ½%, it must offer rights of accumulation. Funds charging the maximum sales charge are required to do so under FINRA's Conduct Rules. To determine the breakpoint for the customer, the new purchase amount is added to the current value of the customer's holdings in the fund. $46,000 current value plus $15,000 purchase = $61,000 total holding after the new purchase. This places the customer in the 4th tier ($45K - $65K), so the sales charge imposed on the additional $15,000 purchase is 5 ½%.

A customer has signed a Letter of Intent (LOI) to buy $25,000 of XYZ mutual fund to qualify for a breakpoint that reduces the sales charge from 7% to 6%. The customer deposits $15,000 into the fund over the next 13 months. At the end of 13 months, the NAV is $20,000. How much does the customer have to deposit to complete the LOI? A. 0 B. $5,000 C. $10,000 D. $15,000

C. The Letter Of Intent (LOI) provision operates separately from Rights of Accumulation and takes precedence over Rights of Accumulation. Because of this, the customer must deposit new money in the dollar amount required by the LOI to get the lowered sales charge. Since the customer has deposited $15,000 of the $25,000 required by the LOI already, the remaining $10,000 must be deposited to retain the reduced sales charge. After the LOI is completed, the additional NAV from the asset appreciation is added to the account balance, and establishes a new higher base level ($25,000 deposited plus $5,000 asset appreciation = $30,000) from which the sales charge will be calculated on any future purchases.

A customer has $35,000 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 - 10,000 8.5% $10,001 - 25,000 7.25% $25,001 - over 6.5% How many shares of the fund can the customer purchase? A. 3,315 B. 3,398 C. 3,474 D. 3,746

C. The customer is purchasing enough ($35,000) to qualify for a 6 ½% sales charge. To compute the new lowered offering price, the formula is: Ask Price = Bid(NAV) / 100% - Sales Charge % 9.42 / 1 - .065 9.42 / .935 = 10.075 New Price $35,000 / 10.075 = 3,474 Shares

The net asset value of a mutual fund is $15.00 and the ask price is $16.40. The fund has the following breakpoint schedule: Purchase Amount Sales Charge $0 - $10,000 8.5% $10,001 - $25,000 7% $25,001 - over 6.25% A customer wishes to invest $20,000 in the fund. How many shares can be purchased? A. 200 B. 1,220 C. 1,240 D. 1,333

C. The customer is purchasing enough of the fund to qualify for a 7.00% sales charge. To compute the new offering price with the reduced sales charge, the formula is: Ask Price = Bid(NAV) / 100% - Sales Charge % 15 / 1-.07 15/.93 = 16.13 New Price $20,000 / $16.13 = 1240 Shares purchased.

The primary function of the custodian bank is to: A. manage the fund B. set the investment objective for the fund C. safekeep the assets of the fund D. prepare the financial statements of the fund

C. The primary function of the custodian bank is to safekeep the assets of the fund. The custodian bank can also perform the clerical functions of transfer agent and paying agent. The custodian bank does not manage the fund - this is performed by the investment adviser to the fund. The custodian bank does not set the investment objective of the fund - this is initially set by the sponsor. The financial statements of the fund are prepared by the outside accountants

Which of the following statements are TRUE about the expense ratio of a mutual fund? I The lower the ratio, the less efficient the fund is II The lower the ratio, the more efficient the fund is III The higher the ratio, the less efficient the fund is IV The higher the ratio, the more efficient the fund is A. I and III B. I and IV C. II and III D. II and IV

C. The ratio really represents that portion of the fund's return on net assets that is eaten up by expenses. The lower the ratio, the greater the residual income for investors making the fund more efficient.

To impose the maximum sales charge, under FINRA rules, mutual funds must offer investors which of the following benefits? I Breakpoints II Plan Completion Insurance III Rights of Accumulation IV Letter of Intent A. I and II only B. III and IV only C. I, III and IV D. I, II, III, IV

C. To impose the maximum sales charge of 8 1/2%, FINRA requires funds to give investors specified breakpoints (lowered sales charges for large dollar purchases), a letter of intent option (once the letter is signed, the investor has 13 months to complete a breakpoint), and rights of accumulation (the investor's accumulated position counts towards completion of a breakpoint). There is no requirement for the sponsor to offer plan completion insurance, which is often included in variable annuity contracts; and which funds the annuity for a beneficiary if the contract holder dies prematurely.

The maximum annual 12b-1 fee permitted under FINRA rules is: A. .25% B. .50% C. .75% D. 1.00%

C. 12b-1 fees are permitted under SEC Rule 12b-1. If a fund adopts a 12b-1 plan it may charge its existing shareholders for the cost of soliciting new investment to the fund. For example, if you see a television or web advertisement for a mutual fund, it is being paid for by 12b-1 fees. The "cost" of soliciting new investment also includes compensation to registered representatives selling the fund shares. The maximum annual 12b-1 fee is .75% of net assets per year under FINRA rules.

A fund which invests in companies in bankruptcy or takeover situations is known as a: A. speculative fund B. high yield fund C. special situations fund D. specialty fund

C. A Special Situations Fund invests in companies in "special situations" such as bankruptcies or takeovers, to reap capital gains if the company recovers. Do not confuse a special situations fund with a specialty fund. A specialty fund is one that invests in one industry or geographic area.

The Value Line Index fund consists of: A. all issues traded on the New York Stock Exchange B. only issues rated in the top 2 ratings by the Value Line Investment Survey C. all companies included in the Value Line Investment Survey D. small capitalization issues not listed on the New York Stock Exchange

C. Index funds attempt to "shadow" the performance of a designated index, such as the Standard and Poor's 500 index; or the Value Line Index. Such funds match their composition and weighting every day to match the designated index - thus, the Value Line Index Fund would include all stocks included in the Value Line Investment Survey, which is the basis of the index.

An investor in a "Ginnie Mae" mutual fund assumes all of the risks EXCEPT: A. Fluctuation of Net Asset Value B. Reinvestment Risk C. Credit Risk D. Prepayment Risk

C. Since Ginnie Maes are backed by the full faith and credit of the U.S. Government, there is no credit risk (as is the case with direct Government obligations). Since Ginnie Mae only issues mortgage backed pass-through certificates, in periods of declining interest rates, prepayment risk exists. Homeowners tend to prepay their "old" high rate mortgages when rates have declined by refinancing at the new lower rates. When these prepayments are reinvested by the fund, the monies earn lower current rates, so reinvestment risk is also present. As with any mutual fund (other than a money fund which has a constant $1 per share NAV), there is the risk that NAV can decline - which would occur if interest rates rise, forcing Ginnie Mae certificate values down.

Which statements are TRUE under FINRA rules? I The maximum 12b-1 fee is .25% II The maximum 12b-1 fee is .75% III The 12b-1 fee is imposed as a 1-time up front charge IV The 12b-1 fee is imposed annually as a charge against fund net assets A. I and III B. I and IV C. II and III D. II and IV

D. 12b-1 fees are permitted under SEC Rule 12b-1. If a fund adopts a 12b-1 plan it may charge its existing shareholders for the cost of soliciting new investment to the fund. For example, if you see a television or web advertisement for a mutual fund, it is being paid for by 12b-1 fees. The "cost" of soliciting new investment also includes compensation to registered representatives selling the fund shares. The maximum annual 12b-1 fee is .75% of net assets per year under FINRA rules. If a fund imposes a 12b-1 fee, FINRA limits to maximum up-front sales charge to 7.25% instead of 8.50%.

Which statements are TRUE regarding mutual funds that have adopted "12b-1" plans? I Acceptance of the plan requires a majority vote of the outstanding shares; the Board of Directors; and the disinterested members of the Board II Discontinuance of the plan requires majority vote of the outstanding shares or the disinterested members of the Board III Mailings to prospective purchasers of the fund are an acceptable "12b-1" charge IV Expense ratios for funds that have adopted 12b-1 plans can be expected to be higher than for similar funds without 12b-1 fees A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

D. 12b-1 plans allow a mutual fund to charge, as an expense to the existing shareholders, the cost of advertising and soliciting for new customers. The theory behind such plans is that the advertising will attract more assets to the fund (more shareholders), and as the fund's size increases, the expense ratio (ratio of all fund expenses to total net assets) should decrease for all shareholders. The reality is that, for most funds which have adopted 12b-1 plans, expenses have risen faster (due to the selling expense costs charged to shareholders) than asset size, and expense ratios have increased. To adopt such a plan, majority vote of the outstanding shares; the Fund's Board of Directors; and the disinterested members of the Board is required. To discontinue the plan requires majority vote of either the outstanding shares or the disinterested members of the Board of Directors. Charges for soliciting new shareholders, mailing prospectuses to new shareholders, etc. are allowed 12b-1 charges.

A growth fund is a mutual fund that: A. invests in securities found in one industry or geographic area B. allocates investment among common stocks, preferred stocks, and bonds of companies in various industries C. sells futures on market indices and uses short sales to limit risks of long positions D. invests solely in the common stocks of companies that exhibit higher than average gains in earnings

D. A growth fund is one that invests solely in the common stocks of companies that exhibit faster than average gains in earnings; which should be reflected in an increasing share price.

A 200% Leveraged Inverse Dow Jones Industrial Average Index ETF would be expected to move: I up 50% in price when the DJIA moves down 100% II up 100% in price when the DJIA moves down 50% III down 50% in price when the DJIA moves up 100% IV down 100% in price when the DJIA moves up 50% A. I and III B. I and IV C. II and III D. II and IV

D. A leveraged ETF uses borrowing (margin) and options to magnify price movement as compared to the reference index. An inverse ETF is one that uses short and options to move opposite to the market. A leveraged inverse ETF combines both. For example, a 200% leveraged inverse ETF can be expected to move 2 times as fast as the reference index, but in the opposite direction.

CLOSED END BOND FUNDS Fund Net Asset Value StockClose NAV Change Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to buy 100 shares of Acme Fund will pay approximately: A. $990 B. $1,025 C. $990 plus a commission D. $1,025 plus a commission

D. Closed-end funds are listed on an exchange and trade like any other stock. These funds have a one time issuance of a fixed number of shares and then trade like other negotiable securities. A customer who buys will pay the current market price plus a commission. The last price for Acme Fund is $10.25, so 100 shares will cost $1,025 plus a commission.

CLOSED END BOND FUNDS Fund Net Asset Value Stock Close NAV Change Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to buy 100 shares of Adap Fund will pay approximately: A. $745 B. $750 C. $745 plus commission D. $750 plus commission

D. Closed-end funds are listed on an exchange and trade like any other stock. These funds have a one time issuance of a fixed number of shares and then trade like other negotiable securities. A customer who buys will pay the current market price plus a commission. The last price for Adap Fund is $7.50, so 100 shares will cost $750 plus a commission.

Which statement is FALSE about Exchange Traded Funds (ETFs)? A. ETFs are registered under the Investment Company Act of 1940 B. ETFs are typically structured as open-end management companies C. ETFs hold the underlying shares of companies included in a stock index D. ETFs permit individual investors to buy creation units

D. 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. Note that individual investors cannot buy creation units - only institutional investors. Because new shares can be created, these are registered as open-end funds under the Investment Company Act of 1940. Since ETFs are securities, they are regulated by the SEC and FINRA.

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

D. If a fund wishes to change its investment objective, this action requires majority vote the shareholders of the fund.

CLOSED END BOND FUNDS Fund Net Asset Value StockClose NAV Change Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to sell 100 shares of Acme Fund will pay approximately: A. $990 B. $990 plus a commission C. $1025 D. $1,025 plus a commission

D. If closed-end fund shares are sold, the investor gets the current market price less a commission paid for executing the trade. The last price for Acme Fund is $10.25. An investor selling 100 shares receives $1,025 less a commission.

A customer invests $1,000 in a money market fund. If the fund's assets appreciate by 10%, the customer will have: A. 100 shares @ $11.00 each B. 110 shares @ $10.00 each C. 1,000 shares @ $1.10 each D. 1,100 shares @ $1.00 each

D. Money market funds are unusual in that the Net Asset Value per share is constant at $1.00. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each. For example, if an investor has 1,000 shares @ $1 ($1,000 total) in the fund, and the assets appreciate by 10%, then the customer will have 1,100 shares at $1 ($1,100 total).

All of the following are Exchange Traded Funds EXCEPT: A. DIAs B. SPDRs C. QQQs D. ADSs

D. SPDRs (Standard and Poor's 500 Index - symbol = SPY), DIAmonds (Dow Jones Industrial Average Index - symbol = DIA), and QUBES (NASDAQ 100 Index - symbol = QQQ) all are exchange traded index funds. An ADS is an American Depositary Share - the means by which a foreign issuer offers its securities in the United States.

Which of the following statements are TRUE regarding mutual funds and the ex dates for mutual fund distributions? I Mutual fund shares trade over-the-counter II Mutual fund shares do not trade III The ex date for a mutual fund is set by FINRA IV The ex date for a mutual fund is set by the fund's Board of Directors A. I and III B. I and IV C. II and III D. II and IV

D. Since mutual funds do not trade, the Board of Directors sets the ex-date (reduction date) for fund distributions.

At the market opening, a customer purchases 200 shares of an S&P 500 2X ETF at $50 per share. At the end of that day, the S&P 500 Index increases by 10%. The next day, the index declines by 5%. What will be the market value of the 200 share position? A. $10,000 B. $10,450 C. $10,500 D. $10,800

D. Since this ETF is "2x," it is an ETF that moves in the same direction as the market, but it moves twice as fast The customer starts with 200 shares at $50, or a $10,000 position. At the end of the first day, because the index rises by 10%, this position will rise by 20% to $12,000 value ($10,000 x 1.2). At the end of the second day, because the index goes down by 5%, the ETF value will decline by 10%. $12,000 x .90 = $10,800.

Which of the following statements are TRUE regarding the Federal tax treatment of a "regulated" mutual fund investing solely in municipal securities? I Investors have a Federal tax liability on the interest income received from the fund II Investors have no Federal tax liability on the interest income received from the fund III The investment company has Federal tax liability on the undistributed income that it retains IV The investment company has no Federal tax liability on the undistributed income that it retains A. I and III B. I and IV C. II and III D. II and IV

D. Since this mutual fund invests solely in municipal securities, there is no Federal tax liability on the interest income received (remember, the interest income from municipal securities is exempt from Federal income tax). Under the "conduit" theory, any payment distributed by the fund to shareholders retains the same character and is free from Federal income tax. Similarly, undistributed income retained by the fund would not be taxed, since it consists solely of tax free municipal interest income.

The formula for the expense ratio of a mutual fund is: A. Net Investment Income / Distributions to Shareholders B. Net Investment Income - Distributions to Shareholders C. Total Expenses - Total Net Assets D. Total Expenses / Total Net Assets

D. The expense ratio is found by taking Total Expenses / Total Net Assets. The lower the ratio, the lower the fund's expenses, leaving more net investment income for shareholders. Thus, the ratio measures the fund's efficiency.

Which statements is/are TRUE regarding closed end investment companies? I The portfolio of investments is managed II The initial offering of shares is made under a prospectus III Shares trade in the secondary market at prevailing market prices A. I only B. III only C. II and III D. I, II, III

D. The initial offering of closed-end investment company shares is made under a prospectus. Then the shares are listed on an exchange and trade like any other stock. The shares are not redeemable; they are negotiable. The portfolio of investments is managed by an investment adviser - remember, this is type of management company under the Investment Company Act of 1940.

Which of the following statements are TRUE regarding the mutual fund letter of intent? I The letter of intent can be backdated 30 days II The letter of intent can be backdated 90 days III The letter of intent must be completed within 12 months in order to obtain the breakpoint IV The letter of intent must be completed within 13 months in order to obtain the breakpoint A. I and III B. I and IV C. II and III D. II and IV

D. The letter of intent to receive a breakpoint can be backdated 90 days. The letter can extend for a maximum time period of 13 months, inclusive of the 90-day backdating.

A customer buys $10,000 of Government Bond Fund shares from Acme Investors, a fund sponsor and broker-dealer. Acme is the sponsor for a variety of funds within the Acme "family." The ACME family has an "exchange feature" at NAV. The customer decides to exchange his Government Bond Fund shares for Growth Fund shares within the same family. All of the following statements are true EXCEPT the: A. customer's yield will decrease B. customer will have greater capital appreciation potential C. customer will have a tax event D. customer will pay a sales charge

D. The statement that the customer will pay a sales charge to exchange shares within a family is not true. This fund family has an "exchange feature" at NAV, which means that shares of one fund can be redeemed and reinvested in shares of another fund within the family without any sales charge. For the customer exchanging Government Bond Fund shares for Growth Fund shares, a tax event has occurred. It would be expected that the customer's yield will decrease but that capital gains will increase, since he or she is moving from an "income" fund to a "growth" fund.

Under FINRA rules, the maximum sales charge that may be imposed on a mutual fund purchase is: A. 5% of Net Asset Value B. 5% of the Public Offering Price C. 8 1/2% of Net Asset Value D. 8 1/2% of the Public Offering Price

D. Under FINRA rules, the maximum sales charge that may be imposed by a mutual fund is 8 1/2% of the Public Offering Price. Note that in the real world, competition among funds has forced sales charges well below this maximum permitted level. Note that the maximum is a percentage of all dollars invested; it is not a percentage of Net Asset Value.