SIE Review Chapter 3: packaged Products
Which of the following terms are synonymous when talking about open-end funds? A load / sales charge B POP / Bid price C Investment Adviser / Broker Dealer D Net Asset Value/ acquisition price
A load / sales charge When talking about mutual funds, the Fund Sponsor is the Fund Underwriter and the Investment Advisor is the fund portfolio manager. Broker-dealers may join in a selling group to sell these funds, acting as agent only. Public Offering Price (POP) of a fund is the same as the fund's ask price. Net asset Value (NAV) is the fund's redemption price. The "load" is the fund's sales charge.
Shareholders in a management company have the right to vote for all of the following EXCEPT the: A setting of the sales charge B members of the Board of Directors C changing of the investment objective of the fund D selection of the investment adviser
A setting of the sales charge Shareholders in a management company have the right to vote for the Board of Directors; to vote for changes in the investment objective; and to vote annually on the investment adviser. The setting of the sales charge is not decided on by the investors of the fund - it is decided by the Board of Directors and it must comply with FINRA rules.
CLOSED END BOND FUNDS NAV STOCK CLOSE Acco $8.32 $8.13 Acme $9.90 $10.25 Adap. $7.45 $7.50 A customer who places an order to sell 100 shares of Acco Fund will receive: A $813 B $813 less a commission C $832 D $832 less a commission
B $813 less a commission 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 Acco Fund is $8.13. An investor selling 100 shares receives $813 less a commission.
Assets - Liabilities for a mutual fund equals: A Net Worth B Net Asset Value C Net Operating Margin D Net Investment Income
B Net Asset Value The formula for Net Asset Value per share of a mutual fund is the market value of all fund investments (assets) minus any fund liabilities (for example, mutual funds can borrow from banks within limits, so any bank loans would be deducted). This gives Net Asset Value (NAV). Dividing NAV by the number of outstanding shares gives NAV per share.
Which statement is TRUE about variable annuities? A Variable annuities are fixed unit investment trusts B Variable annuities are non-fixed unit investment trusts C Variable annuities are only regulated under state insurance law D Variable annuities are held in the insurance company general account.
B. Variable annuities are non-fixed unit investment trusts A variable annuity is a non-fixed unit investment trust. The trust is an "umbrella vehicle" used to collect payments from annuity contract holders. The trust invests the funds in one type of security only - shares of management companies. These are held in a "separate" investment account; and the performance of the securities in the separate account determines the amount of the annuity to be received. Because the investor bears the "investment risk" in this product, these are non-exempt securities that must be registered under the Securities Act of 1933 and sold with a prospectus; and are defined as an investment company type that is regulated under the Investment Company Act of 1940.
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 $1,039 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. Review
Fund NAV Offering Price Capital $9.01 $9.59 Common $6.37 $6.64 Corporate $7.72 $8.44 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 $1,918 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 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 deposit another $10,000 to buy shares to complete the breakpoint
A portfolio manager realizes a substantial capital loss when selling a large security position that was acquired 2 years ago. Because of this action, the NAV of the fund: A will increase B will decrease C is unaffected D is unstable
C is unaffected Surprisingly, whenever a fund sells a position at a significant loss, there is no reduction in NAV. Why? The position has already been marked to market and the loss is reflected in the fund's NAV each day. 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 now hold more shares, each one worth less than before. But in aggregate, the investment value would not have changed.
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 fund 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.
REITs may be organized as: A general partnerships B management companies C trusts D limited partnerships
C trusts Usually, REITs are formed as "Trusts," which is why they are called "Real Estate Investment Trusts." However, they trade on an exchange or OTC; and are similar in manner to closed end investment companies.
CLOSED END BOND FUNDS VALUE CLOSE Acco. $8.32 $8.13 Acme $9.90 $10.25 Adap $7.45 $7.50 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 $750 plus commission 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.
A mutual fund has a computed Net Asset Value per share of $9.43 and a Public Offering Price of $10.30. The fund has a sales charge percentage of: A 6 1/2% B 7 1/2% C 8 % D 8 1/2%
D 8 1/2% (10.30-9.43)/ 10.30 = .00844 =~ 8.5%
An open end fund has a Net Asset Value of $10 per share. The minimum price at which a share can be purchased is: A $10 B $10 plus a commission C the market price D the market price plus a commission
A $10 Mutual fund (open-end management company) shares are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load." For a "no load" fund, the customer would simply pay Net Asset Value - this is the minimum price for an open-end fund. This contrasts to a closed end fund, where the fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed-end fund share is purchased at the prevailing market price plus a commission.
A mutual fund has a net asset value per share of $12.00. The maximum offering price per share is: A $13.11 B $13.85 C $14.30 D $14.56
A $13.11 The maximum sales charge on a mutual fund is 8.5% under FINRA rules. Net Asset Value / (100% - Sales Charge %) = $12.00 / (100% - 8.5%)= $12.00/.915 =$13.11
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 - $10K. 7.75% $10K - $25K 7.25% $25K over. 6.5% 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 $2,846 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
A mutual fund offers breakpoints with an LOI and ROA. The breakpoint schedule is: $0-$10k 5.75% $10k-$25k 5.25% $25k-$100k 5.00% On 2/1/XX, the customer invested $6,000 in the fund. On 10/1/XX, the account value has increased to $7,000 and the customer wishes to invest another $5,000 in the fund. The sales charge that will be imposed on the 10/1/XX purchase is: A 5.25% on the $5,000 investment B 5.75% on $4,000 and 5.25% on $1,000 C 5.75% on $3,000 and 5.25% on $2,000 D 5.75% on the $5,000 investment
A 5.25% on the $5,000 investment Mutual fund rights of accumulation (ROA) give the benefit of a breakpoint based upon the accumulated position held in that fund. This customer has invested $6,000 in the fund, a holding now worth $7,000. To the $7,000 accumulated value, the customer wants to add another $5,000 for a total of $12,000. This places the customer at 5.25% in the breakpoint schedule.
Which statement is TRUE about the Investment Company Act of 1940's requirements for management companies? A At least 40% of the Board of Directors must be "non-interested" persons B At least 50% of the Board of Directors must be non-interested C At least 60% of the Board of Directors must be non-interested D At least 75% of the Board of Directors must be non-interested
A At least 40% of the Board of Directors must be "non-interested" persons The Investment Company Act of 1940 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.
Which statement is TRUE about mutual fund "Class A" shares? A Class A shares impose no, or a very low, 12b-1 fee B Class A shares impose a contingent deferred sales charge C Class A shares may not offer breakpoints D Class A shares are referred to as "level loads"
A Class A shares impose no, or a very low, 12b-1 fee 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. Unlike Class B or C shares, Class A shares offer breakpoints. Class C shares are sometimes referred to as "level loads."
Which individuals can join together and qualify for a breakpoint on their aggregate purchases of mutual funds? A Family members in the same household B Members of an investment club C Limited partners who form a partnership to make the purchase D All of the above
A Family members in the same household Unrelated investors cannot "join together" to aggregate their purchases and get the benefit of a breakpoint. However, mutual fund companies will aggregate purchases of immediate family members in the same household and give them the benefit of the breakpoint.
A mutual fund's expense ratio has been increasing over the last 4 years. Which of the following may have caused the increase? A Higher redemptions B Higher sales charges C Higher dividend distributions D Higher capital gains distributions
A Higher redemptions If expenses rise (such as a higher fees), or assets fall (caused by increased redemptions), the ratio will rise. Distributions made by the fund have no bearing on the ratio. The sales charge is not part of the expense ratio.
Which of the following terms apply to publicly traded fund shares? A Negotiable with a one-time stock issuance B Redeemable with a one-time stock issuance C Negotiable with a continuous stock issuance D Redeemable with a continuous stock issuance
A Negotiable with a one-time stock issuance AND MANAGED Publicly traded fund shares (closed-end funds) represent an undivided interest in a portfolio of securities that is managed to meet an investment objective. A publicly traded fund has a 1-time stock issuance and then "closes" its books to new investment and then lists its stock on an exchange. The stock then trades like any other common stock (negotiable), except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is "closed-end" - that is, closed to new investment.
Which of the following customers is allowed a breakpoint on mutual fund purchases? A Participants in a corporate 401(k) plan B Investment clubs C Related individual purchasers only D Investment adviser omnibus accounts Review
A Participants in a corporate 401(k) plan 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. Individuals whether acting alone, or in a family unit, or as part of a corporation's retirement plan are considered to be "one" purchaser and qualify for the breakpoint. An investment adviser (IA) omnibus account is a single account held at a broker-dealer for all of the investment adviser's clients. The investment adviser cannot get a breakpoint based on aggregated purchases for these clients - each IA client is considered to be a separate purchaser.
Which statement is TRUE regarding closed end investment companies? A Shares are issued in a one-time offering and then trade on an exchange or over-the-counter B Shares are issued in a one-time offering and then are redeemable with the issuer C Shares are continually issued and then trade on an exchange or over-the-counter D Shares are continually issued and then are redeemable with the issuer
A Shares are issued in a one-time offering and then trade on an exchange or over-the-counter 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. Redeemable securities are continuously issued by open-end management companies - mutual funds. Review
Which statement is TRUE regarding mutual funds? A That day's closing price is the basis for fund purchase and redemption price computations B That current Nasdaq or NYSE market price is the basis for fund purchase and redemption price computations C The next day's closing price is the basis for fund purchase price computations D The preceding day's closing price is the basis for redemption price computations
A That day's closing price is the basis for fund purchase and redemption price computations An order placed to buy or redeem mutual fund shares is "filled" at that day's closing Net Asset Value, adjusted by any sales charges or redemption fees. Mutual funds do NOT trade and are NOT listed on Nasdaq or the NYSE,
The principal difference between an open end management company and a closed end management company is: A capitalization B management C investment objective D expense ratio
A capitalization Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund's stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange where they trade. Therefore, open-end and closed-end funds are capitalized differently. The expense ratio of a fund measures of the "cost" of running the fund, and applies to both open and closed end funds (the largest component of the cost of running either type of fund is the annual management fee).
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 dividends at NAV and capital gains at NAV If a fund offers an automatic reinvestment provision, both dividend distributions and capital gains distributions are reinvested at Net Asset Value.
The majority of open-end investment companies impose: A front-end load sales charges B no sales load C contingent deferred sales charges D negotiated sales charges
A front-end load sales charges The majority of mutual funds impose a front-end sales load, though competition in the industry has forced most funds to lower the fee below the 8 1/2% maximum allowed by FINRA. Some funds impose a "contingent deferred sales charge," that is imposed when a customer redeems the fund. However, the fee is lowered as the fund is held longer, encouraging investors to keep monies in the fund over the long term. Some funds are no-load. These are money market funds, and funds sold by direct marketers such as Vanguard Corporation.
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 manage the fund 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 manager of an unregistered hedge fund is typically compensated by a fee based on a: A percentage of assets under management plus a percentage of profits B percentage of net investment income only C performance fee based on profits only D performance fee based on exceeding a benchmark index only
A percentage of assets under management plus a percentage of profits The typical hedge fund fee is "2 and 20" - a 2% annual management fee as a percent of assets under management, plus 20% of profits. Hedge fund managers are not subject to the Investment Company Act of 1940 that limits manager's compensation to a percentage of assets under management - no performance fees are allowed. They are structured as private placement limited partnerships that are only available to wealthy accredited investors. They are exempt from securities regulation since the general public cannot invest, except for the anti-fraud rules. Hedge funds started in the 1990s and the managers produced superior returns and were able to charge high fees. Nowadays, most hedge funds are not doing much better than the overall market, and managers are moving towards a performance fee based on return achieved over a benchmark index, as opposed to a fee based on absolute profits (which might be achieved not because of superior investment choices, but because the market simply went up). However, the majority of hedge funds still charge a performance fee based on profits, not a performance fee based on exceeding a benchmark index.
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 portfolio manager can decide to invest in any stock as long as it is included in the Standard and Poor's 500 Index 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. 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.
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. balanced fund 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.
A "specialty" fund is one which invests in: A one geographic area or one type of industry B shares of companies in "special situations" C high growth companies D other mutual funds
A. one geographic area or one type of industry A specialty fund is one which invests in one type of industry or one geographic area. Don't confuse it with a special situations fund which invests in bankrupt companies or companies in takeover situations.
Which is prohibited when selling mutual fund shares? A The sponsor selling shares to a selling group member at a discount from the Public Offering Price B A selling group member selling shares to the public at a discount from the Public Offering price C The sponsor selling shares to a selling group member at Net Asset Value D The sponsor selling shares to the public at Net Asset Value
B A selling group member selling shares to the public at a discount from the Public Offering price Because mutual fund shares are a prospectus offering, the issue must be sold to the public at the Public Offering Price as stated in the prospectus. No discounts are allowed to the public, other than breakpoint formulas in the prospectus. The sponsor can sell shares to a selling group member at less than the Public Offering Price. This is the only way that the selling group member can make a profit on the shares, since the member resells them to the public at POP.
Which of the following can be purchased on margin? A Mutual Funds B Closed End Funds trading on the NYSE C Initial public offerings of Closed End Funds D Annuity Contracts
B Closed End Funds trading on the NYSE New issues are not marginable. Every issue of a mutual fund (open-end management company) share is a "new issue" as is the initial public offering of a closed-end fund. Both are made with a prospectus. However, once closed-end fund shares trade in the market, they are marginable like any other listed stock. Annuities are not negotiable and may not be purchased on margin.
A customer has heard from a relative that he should invest money in a "hedge" fund. The customer asks you to tell him about this type of investment. Which statement about hedge funds is FALSE? A Hedge funds are only suitable for wealthy investors that meet the "accredited investor" definition B Hedge funds are regulated as "mutual funds" under the Investment Company Act of 1940 C Hedge funds typically allow withdrawal of funds once per year D Hedge funds use aggressive investment strategies that entail a high level of risk
B Hedge funds are regulated as "mutual funds" under the Investment Company Act of 1940 Hedge funds are set up as private placements, open only to accredited investors. They are illiquid, since money can only be withdrawn once per year (and usually only with general partner approval). They use sophisticated aggressive investment strategies that are high-risk (but these can also be high-reward). Most hedge funds are now registered with the SEC (as investment advisers), but they are not "regulated" and are not subject to the 1940 Act rules.
Which statement is TRUE when comparing types of management companies? A Open-end funds are publicly traded funds B Open-end funds are mutual funds C Closed-end funds have no management D Closed-end funds are not publicly traded funds since these are closed to the general public
B Open-end funds are mutual funds Management companies are either open-end or closed-end. Either has an investment manager, managing the fund based on a stated investment objective. An open-end management company is a mutual fund. Mutual funds (open-end funds) are "open" to new investment. Shares are issued and redeemed at the end of the day and do not "trade."
The investment adviser performs which of the following functions? A Sending dividend and capital gains distributions to shareholders B Selecting the securities to be purchased in the portfolio of investments C Setting the objective of the fund D Selecting the brokers to sell the fund shares
B Selecting the securities to be purchased in the portfolio of investments The investment adviser manages the fund within its stated objective, deciding which securities to buy into the portfolio; and which securities to sell from the portfolio. The objective is set by the fund's Board of Directors. The paying agent (usually the custodian bank) sends payments. The fund distributor selects the brokers that will sell that fund's shares.
An investment that does not require periodic rebalancing and which does not require the investor to actively change asset allocations over the investment time horizon is a(n): A Specialty Fund B Target Date Fund C Managed Index Fund D Hedge Fund
B Target Date Fund A Target Date Fund starts with a more aggressive asset allocation and then moves to a safer and safer asset mix as the target date approaches. Investment might start with growth stocks, then shift to a balance of stocks and bonds, and finally shifts into money market instruments as the "target date" approaches. Basically, it puts investing on "autopilot" over the client's investment time horizon.
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 The customer should be informed that investing an additional $1,000 will provide the benefit of a breakpoint 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."
A investor has signed a letter of intent and backdated the document 2 months. Which statement is TRUE regarding the mutual fund purchase? A The letter of intent may only be backdated 30 days, so any purchases in the first month won't count toward the total invested B The letter of intent must be completed within the next 11 months in order to obtain the breakpoint C The letter of intent must be completed within the next 12 months in order to obtain the breakpoint D The letter of intent must be completed within the next 13 months in order to obtain the breakpoint
B The letter of intent must be completed within the next 11 months in order to obtain the breakpoint 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. Since the client has already "used up" 2 months, he or she has 11 more months to buy the additional shares.
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 The purchaser of an ETF is required to receive either a prospectus or a Product Description summarizing key information about the ETF 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.
An income fund would likely invest in all of the following securities EXCEPT: A Debentures B Treasury STRIPS C Preferred Stock D High Yield Bonds
B Treasury STRIPS 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. Treasury STRIPS would not be chosen as an investment because they only pay interest at maturity - they are zero-coupon Treasury obligations (that have been "stripped" of coupons). There is no current income from these securities.
A customer has $24,000 to invest in mutual fund shares. The registered representative advises the customer to invest $8,000 on ABCD fund; $8,000 in DEFF fund; and $8,000 in XYZZ fund; to give the customer complete diversification and reduce risk. These 3 funds all have different sponsors. This action is: A appropriate for the customer B a violation known as a breakpoint sale C a violation known as spinning D a violation known as interpositioning
B a violation known as a breakpoint sale Dividing customer purchase amounts will deny the customer the benefit of the breakpoint. This is a violation known as a breakpoint sale. The entire amount should be invested in one fund or one fund family to give the customer the lowest possible sales charge. Since mutual funds hold diversified portfolios, the argument that splitting the purchases further increases diversification, and thus will reduce risk, is dubious.
The advantage of a limited partnership business structure as opposed to a corporate business structure is that limited partnerships: A are taxed at lower tax brackets than corporations B allow for "flow through" of gain and loss, while corporations do not C limit liability of owners while corporate shareholders have unlimited liability D have a better "track record" for economic success than corporations
B allow for "flow through" of gain and loss, while corporations do not The advantage of the partnership form of business is that the partnership itself is not a taxable entity; income and loss from the partnership "flows-through" onto the individual partners' tax returns. Thus, any net income is taxed once; and any net loss is included on the partner's tax return. In contrast, a corporation must compute net income or loss at the corporate level; and must pay tax on any income. The only way for the shareholder to receive a portion of the net income is for the corporation to pay a dividend, which must be included on the shareholder's tax return; and which is taxed again! Any net losses remain at the corporate level - they cannot be distributed to shareholders. Limited partnerships themselves are not taxable, making Choice A incorrect. Both limited partners and corporate shareholders have limited liability. Finally, partnerships do not have a better chance of economic success than a business formed as a corporation.
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 asset appreciation 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 now hold more shares, each one worth less than before. But in aggregate, the investment value would not have changed.
All of the following statements are true regarding money market funds EXCEPT: A typical maturities of securities held in the portfolio are 30 days or less B fund dividends are not taxable if reinvested in additional shares C money market funds are typically sold without a sales charge D money market funds impose management fees
B fund dividends are not taxable if reinvested in additional 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. Fund dividends are taxable, whether or not they are automatically reinvested in additional fund shares. Money market funds usually do not have sales charges but all funds impose management fees.
A general partner differs from a limited partner in a Direct Participation Program because a: A general partner cannot assume a management role while a limited partner can B general partner assumes unlimited liability while a limited partner can only lose the amount invested C general partner can have a larger ownership interest than a limited partner D general partner cannot receive flow through of income and loss while a limited partner can
B general partner assumes unlimited liability while a limited partner can only lose the amount invested Any limited partnership must have at least 1 general partner and 1 limited partner. There can be multiples of each. The general partner is the manager of the venture, receives management fees, and assumes unlimited liability. The limited partner is the passive investor, similar to a stockholder. The limited partner cannot have a management role and can only lose the amount invested. If the limited partner financed part of the investment with a "recourse loan" (where the lender has recourse to the partner personally to repay the debt if the partnership cannot), then the limited partner is potentially liable for this as well.
The highest fee in a money market fund is typically the: A registration and tax fee B management fee C custodian fee D audit fee
B management fee The largest fee in any type of mutual fund is the management fee.
All of the following statements are true regarding the sponsor of a mutual fund EXCEPT the sponsor: A establishes the fund B manages the fund C is also known as the fund underwriter D registers the fund with the Securities and Exchange Commission
B manages the fund The sponsor of a mutual fund establishes the fund and registers the fund with the SEC before the security can be sold. The sponsor is also known as the fund underwriter. As part of the requirements of the Investment Company Act of 1940, the sponsor hires a custodian bank to safekeep the assets of the fund; hires an investment adviser to manage the fund; and signs up a selling group to sell the fund
A customer asks the following; "One of my neighbors was talking about his investment in an ETF (Exchange Traded Fund) and said that it is tax-efficient. Is this true?" The registered representative should respond that: A the tax treatment of all investment companies is the same, regardless of whether the investment company is a mutual fund or an exchange traded fund B mutual funds are obligated to distribute capital gains to their shareholders once a year, which are taxable; whereas exchange traded funds are not under this obligation, so capital gains taxation generally occurs when the shares are sold C exchange traded funds are obligated to distribute capital gains to their shareholders once a year, which are taxable; whereas mutual funds are not under this obligation, so capital gains taxation generally occurs when the shares are redeemed D capital gains distributed by mutual funds are always taxed as short-term, whereas the tax treatment of capital gains on exchange traded fund shares depends on the holding period of the shares
B mutual funds are obligated to distribute capital gains to their shareholders once a year, which are taxable; whereas exchange traded funds are not under this obligation, so capital gains taxation generally occurs when the shares are sold Mutual funds distribute dividends and short term capital gains to shareholders as often as they wish. They are obligated to distribute long-term capital gains once per year. Thus, a mutual fund shareholder will have an annual tax bill on appreciated securities held by the fund because of this annual distribution requirement. In contrast, exchange traded funds are not obligated to distribute long-term capital gains annually. Thus, as shares appreciate in the exchange traded fund, the NAV per share appreciates, but there is no annual tax bill on the appreciation. The tax is due when the appreciated shares are sold. Thus, ETFs are said to be "tax-efficient."
The expense ratio of a mutual fund is a measure of: A profitability B operating efficiency C liquidity D stability
B operating efficiency 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.
All of the following terms apply to mutual fund shares EXCEPT: A continuously issued B tradeable C redeemable D non-negotiable
B tradeable Mutual fund shares do not trade; they are non-negotiable. The shares are redeemed by the fund at Net Asset Value. The fund continuously issues and redeems its shares.
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 $24,001 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.
The maximum annual 12b-1 fee permitted under FINRA rules is: A .25% B .50% C .75% D 1.00%
C .75% 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 customer has purchased $5,000 of a mutual fund. Over the past 5 years, the fund has appreciated to $22,000. At this point, the customer wants to buy another $5,000 of the fund. In the prospectus, the breakpoint schedule is: $0-10k 8 1/2% $10k-$20k 7 1/2% $20k-$45k 6 1/2% $45k-$65k 5 1/2% On the $5,000 purchase, the customer will pay a sales charge of: A 8 ½% B 7 ½% C 6 ½% D 5 ½%
C 6 ½% 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. $22,000 current value plus $5,000 purchase = $27,000 total holding after the new purchase. This places the customer between the 3rd tier ($20K - $45K), so the sales charge imposed on the $5,000 purchase is 6 ½%.
The net asset value 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-$10k 7 3/4% $10k-25k 7 1/4% $25k-over 6 1/2% A customer wishes to invest $15,000 in the fund. How many shares can be purchased? A 937 B 968 C 973 D 980
C 973 The customer is purchasing enough of the fund to qualify for a 7.25% sales charge. To compute the new offering price with the reduced sales charge, the formula is: NAV / (100%- Sales Charged %) = $14.30 / (100%-7.25%) 14.30/.9275 = $15.41 $15,000 purchase amount / $15.41 price per share = 973 shares purchased
When must a mutual fund prospectus be delivered to a customer? A At, or prior to, discussing the investment with the customer B At, or prior to, taking a purchase order from a customer C At, or prior to confirmation of the purchase D At, or prior to, settlement of the purchase
C At, or prior to confirmation of the purchase The basic rule on prospectus delivery is that the prospectus must be delivered "at, or prior to, confirmation." When a customer buys a security that requires a prospectus delivery (a new issue), in the "good old days," a confirmation was generated detailing the purchased security and amount due, a prospectus was included in the envelope, and this was mailed by "snail mail" to the customer. When the customer opened the envelope, the prospectus was included with the confirmation, meeting the rule's requirements. The SEC has modernized the prospectus delivery rule for stock and bond offerings, allowing an electronic prospectus to be sent to the customer's e-mail address. However, the mutual fund rule still requires a paper "profile prospectus" sent to the customer with the confirmation, with the full paper prospectus being available electronically if requested.
Which statement is TRUE regarding BDCs? A BDCs are not publicly traded and invest in securities of publicly traded companies B BDCs are not publicly traded and make direct investments in privately-held companies C BDCs are publicly traded and make direct investments in privately-held companies D BDCs are publicly traded and invest in securities of publicly traded companies
C BDCs are publicly traded and make direct investments in privately-held companies A BDC is a Business Development Company. It is a registered investment company under the 1940 Act that is listed and trades like any other stock. Instead of investing in securities, it makes "private equity" investments in privately-held start-up companies. Because the investments are "start-up" companies that may never "make it, these are fairly risky investments, but they potentially offer a superior return in compensation for this.
If a regulated mutual fund pays out a dividend and capital gains distribution, which the shareholder has automatically reinvested, which statement is TRUE? A Only the dividend is taxable B Only 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 Both the dividend and the capital gain are taxable 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.
All of the following securities are redeemable EXCEPT: A Common stock mutual funds B Bond mutual funds C Corporate debentures D Series HH bonds
C Corporate debentures Mutual funds - common stock and bond funds - are redeemable securities which do not trade. Savings bonds (Series EE and HH) sold by the U.S. Government are redeemable securities. There is no trading in these issues. To "cash out," they are redeemed with an agent for the Government - a bank or savings and loan. Corporate debentures are negotiable (tradeable) - they cannot be redeemed with the issuer. They trade OTC and on exchanges.
An income fund would likely invest in which of the following securities? A Common stocks B ADRs C Debentures and Preferred stocks D Income bonds
C Debentures and Preferred stocks 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. (ADRs are simply a means for U.S. investors to indirectly purchase foreign common shares.) Income bonds would not be chosen as an investment because they only pay interest if the corporation has enough income; otherwise no payment is made.
When comparing an ETN to an ETF, which statement is TRUE? A Both ETNs and ETFs are a type of investment company offering B ETF and ETN liquidations are based on closing NAV C ETNs are a debt instrument D Most ETFs are highly illiquid while ETNs are highly liquid
C ETNs are a debt instrument 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. There are no physical securities backing the ETN. The ETN is listed on an exchange, so it is liquid. An ETF is an Exchange Traded Fund. It is an investment company that owns an underlying portfolio of securities. The shares of the ETF are listed and trade like any other stock. The liquidation value of either is based on the prevailing market price at the time of sale.
Fund Operating Expenses / Total Net Assets is the formula for a mutual fund's: A Current Ratio B Profitability Ratio C Expense Ratio D Portfolio Turnover Ratio
C Expense Ratio The expense ratio of a mutual fund measures the proportion of investment return on assets that is consumed by expenses. The lower the ratio, the more "efficient" the fund is. The expense ratio is: Expense Ratio = Fund Operating Expenses / Total Net Assets
To impose the maximum sales charge, mutual funds must offer investors all of the following benefits EXCEPT: A Letter of Intent B Breakpoints C Family of Funds D Rights of Accumulation
C Family of Funds 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).
All of the following are defined as investment companies under the Investment Company Act of 1940 EXCEPT: A Management Company B Unit Investment Trust C Hedge Fund D Face Amount Certificate Company
C Hedge Fund A hedge fund is not defined under the Investment Company Act of 1940 as an "investment company" since these products are generally sold as private placements to accredited investors.
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 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 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.
No load funds do not impose any of the following fees EXCEPT: A Front end sales charge B Redemption fee C Management fee D Contingent deferred sales charge
C Management fee A pure "no-load" fund does not impose sales charges of any kind to buy into the fund; nor to redeem shares. However, all mutual funds charge an annual management fee, which is an annual expense against the fund's investment income.
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 Municipal Bond Fund 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.
All of the following statements are correct regarding the ex date for a mutual fund EXCEPT: A The date is set by the Board of Directors of the Fund B The ex-date is the date on which the fund's NAV per share is reduced for any distributions C The ex-date is ratified by FINRA D The ex-date is usually set at the business day following the record date
C The ex-date is ratified by FINRA 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 1 business day prior to record date does NOT apply because there is no trading of mutual fund shares. For mutual funds, the ex-date is the morning of the business day following the record date.
A retired investor seeks monthly income along with preservation of capital and minimum risk. Which of the following funds would be a suitable recommendation? A Special situation fund B Specialty fund C U.S. Government securities fund D Growth fund
C U.S. Government securities fund The gains are expected to be so large on the successful turnarounds that the shareholders will enjoy capital gains. Such funds have no or little income. Similarly, the principal objective of a growth fund is capital gains; not income. Specialty funds invest in one industry or geographic area; and the lack of diversification increases risk. Since this customer wants minimum risk, these are not suitable recommendations.
Aggregation to qualify for a breakpoint is NOT available to: A a group of family members in the same household that aggregates investment funds B a single individual who has an accumulated position in a fund and who is making an additional purchase C an investment club that purchases different mutual funds within the same fund family D an individual who purchases funds with different investment objectives in the same fund family
C an investment club that purchases different mutual funds within the same fund family Unrelated persons cannot group together to take advantage of a breakpoint, so these are not available to investment clubs or investment partnerships. However, all members of a "household" can group together for a breakpoint. Mutual fund sponsors apply the breakpoint sales charge reductions to all funds purchased within that fund's family. It is not based solely on the purchase of an individual fund. Finally, under rights of accumulation (ROA), an individual's accumulated holding counts towards a breakpoint when the next purchase is made.
A fund that distributes at least 90% of its Net Investment Income to shareholders is termed a(n): A income fund B registered fund C regulated fund D tax exempt fund
C regulated fund 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 amou
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 safekeep the assets of the fund 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 financial statements of the fund are prepared by the outside accountants.
Mutual funds financial statements are sent to shareholders: A monthly B quarterly C semi-annually D annually
C semi-annually Mutual funds send their financial statements (describing how the fund performed) to shareholders semi-annually.
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 special situations fund 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.
A customer has signed a Letter of Intent to buy at least $50,000 of a mutual fund in return for getting a lowered sales charge. The customer has already invested $40,000, and the customer notices on his account statement that the current NAV of the position is $52,000. The fund is going to make a distribution of the $12,000 capital gain. The registered representative recommends that the customer take the capital gain as cash and use the proceeds to buy shares of the fund to finish the breakpoint. This suggestion by the registered representative is inappropriate because it was not disclosed that: A the breakpoint has already been completed by the asset appreciation in the account B customers can only complete breakpoints with money that is not obtained from mutual fund share liquidations C the capital gain would be automatically reinvested at NAV if not taken in cash while the purchase of the shares would occur at POP including a sales charge D if the capital gain were automatically reinvested, there would be no tax due, but if the capital gain is taken in cash, it is taxable
C the capital gain would be automatically reinvested at NAV if not taken in cash while the purchase of the shares would occur at POP including a sales charge. Asset appreciation does not complete a breakpoint for a client. The client contractually agreed to buy $50,000 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 $50,000, then the sales charge is recomputed to a higher percentage, based on how much the customer actually purchased. So the customer must deposit another $10,000 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). Regarding taxes, whether the capital gain is taken as cash or reinvested, it is taxable.
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 1,100 shares @ $1.00 each 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).
Under FINRA rules, the maximum sales charge that may be imposed on a mutual fund purchase is: A 5% of the Net Asset Value B 5% of the Public Offering Price C 8 1/2% of the Net Asset Value D 8 1/2% of the Public Offering Price
D 8 1/2% of the Public Offering Price 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.
Which statement is FALSE regarding ETFs (Exchange Traded Funds)? A ETFs are available on international stock indexes B ETFs are available on narrow-based stock indexes C ETFs are available on bond indexes D ETFs are available on individualized stock portfolios
D ETFs are available on individualized stock portfolios 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 available based on sector indexes; narrow-based stock indexes; broad based stock indexes; bond indexes and international stock indexes. Note that there is no such thing as an ETF based on an individualized stock portfolio. The whole point of an ETF is to create a negotiable security that benchmarks a recognized index.
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 permit individual investors to buy creation units 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.
During a period of rising interest rates, which investment would be profitable? A 2X (Leveraged) S&P 500 Index ETF B Inverse (Short) S&P 500 Index ETF C 2X (Leveraged) 20+ Year Treasury ETF D Inverse (Short) 20+ Year Treasury ETF
D Inverse (Short) 20+ Year Treasury ETF If market interest rates rise, both stock and bond prices are negatively impacted. However, fixed income security prices fall more than stock prices. Furthermore, the longer maturity and lower coupon issues fall the fastest as market interest rates rise. An inverse ETF, also called a short ETF, profits when prices drop. An inverse ETF based on the price movements of 20+ year Treasuries would have the largest profit when interest rates rise. This type of ETF has shorted 20+ year Treasuries in the hopes that prices will drop and the positions can be covered (bought back) for a profit. If market interest rates rise, this is exactly what should happen.
The minimum price at which a closed end fund share can be purchased is: A Net Asset Value B Net Asset Value plus a commission C Market Price D Market Price plus a commission
D Market Price plus a commission A closed end fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed end fund share is purchased at the prevailing market price plus a commission. This contrasts to mutual fund (open end management company) shares that are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge (if the fund imposes a "sales load").
Which statement is TRUE regarding the federal tax treatment of a "regulated" mutual fund investing solely in municipal securities? A Investors have federal tax liability on the interest income received from the fund since the distribution is coming from a fund which is a corporate entity B Investors have federal tax liability on the interest income received from the fund unless the dividends are deemed qualified C Any capital gains distributions are tax-free to investors as long as the fund distributes at least 90% of Net Investment Income D Neither the investment company nor investors have federal tax liability on income but capital gains distributions will be taxable.
D Neither the investment company nor investors have federal tax liability on income but capital gains distributions will be taxable. 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. Capital gains on municipal bonds are taxable - it is only the interest income which is free of federal income tax. Therefore, any capital gains distributions made a fund investing solely in municipal securities are taxable.
Which statement is TRUE about closed end funds? A Net Asset Value is the same as the market price B Net Asset Value is higher than the market price C Net Asset Value is lower than the market price D Net Asset Value can be higher, lower, or the same as the market price
D Net Asset Value can be higher, lower, or the same as the market price Because closed-end funds trade like stocks, the fund's pricing is reflective of investor's sentiment towards the fund. The fund can trade at a discount to Net Asset Value when investors become disenchanted with the fund. This will occur if the fund gives an inferior return. Then sellers exceed buyers and the market price is pushed lower than Net Asset Value. When buyers exceed sellers, and the fund gives a superior return relative to the market rate of return for similar investments, the ask price is pushed higher. Thus, closed-end funds can trade at NAV; below NAV; or above NAV.
What is a characteristic of a Unit Investment Trust? A High portfolio turnover B Disclosure of the identity of the investment adviser C Board of directors overseeing investments D Securities that are redeemable with the sponsor
D Securities that are redeemable with the sponsor Unit Investment Trusts (UITs) create a fixed portfolio, transfer it into a trust, and then sell units of the trust (typically $1,000 amounts) that are sold to investors. For that $1,000 investment, the client gets a piece of a diversified portfolio. Once the trust is created, the portfolio does not change. There is no investment adviser and no management fees. There is no Board of Directors (as is the case with a mutual fund) - rather there is a Board of Trustees. The true statement is that the securities are redeemable. There is no trading. The sponsor will buy back trust units from clients that wish to sell. These "slightly used" units are then resold to other investors by the sponsor.
A customer switches from a growth fund to an income fund within the same "family of funds." Which statement is TRUE? A No tax liability is incurred because this is treated as a "wash sale" B No tax liability is incurred because this is treated as a "like kind exchange" of assets C Tax must be paid on any amount by which the NAV of the new fund exceeds the old fund's NAV D The sale results in a "taxable event" on which tax on any gain is due, and the purchase establishes a new cost basis
D The sale results in a "taxable event" on which tax on any gain is due, and the purchase establishes a new cost basis When the shares of one fund are sold, unless the monies are reinvested in the same fund, (resulting in a non-taxable "like-kind" exchange), capital gains tax is due on the sale proceeds versus the cost basis in the shares. The purchase of the new (different) shares results in a new cost basis.
What determines the purchase price of a share of a closed-end management company? A The Board of Directors of the company B The next computed NAV after the order is received C The current bid price in the market where the security trades D The supply and demand for the shares in the market
D The supply and demand for the shares in the market When an order is placed to buy any share in the market, the customer pays the ask price. When a customer places an order to sell, the customer receives the bid (lower) price. Since this is an order to buy in the market, it is not filled at the bid - rather, it is filled at the ask price. So this becomes a economics question - what determines the price of anything in a marketplace - supply and demand!
All of the following are major tax benefits of real estate limited partnerships EXCEPT: A The real estate can be depreciated, even if its market value is increasing B The property being purchased can be financed with a mortgage, reducing the cash downpayment C Interest on loans is fully deductible D When the real estate is sold, all profits are taxed at preferential short term rates
D When the real estate is sold, all profits are taxed at preferential short term rates The major tax benefits of real estate programs are numerous. Once property is ready for occupancy, it can be depreciated over a straight line basis over a 27 1/2 year life (for residential property). Each year, a depreciation deduction is allowed, even if the market value of the property is rising. The amount of cash needed to purchase the property is reduced if a mortgage is obtained from a lender. Interest on the mortgage is fully deductible. Finally, when the property is sold, there is the possibility of having a long term capital gain which would be taxed at a lesser rate than a short term gain.
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 invests solely in the common stocks of companies that exhibit higher than average gains in earnings 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.
All of the following statements about investment company securities are correct EXCEPT: A open end fund shares are redeemable B closed end fund shares are negotiable C fixed unit investment trusts are redeemable D non-fixed unit investment trusts are negotiable
D non-fixed unit investment trusts are negotiable Unit trust interests are also "redeemable" securities, because the trust sponsor makes a market in trust units, and will buy them back from the purchaser. Then the trust sponsor will resell that "slightly used" trust unit to someone else. There is no "trading" of trust units, however. Non-Fixed UITs are the structure for variable annuity contracts. The trust is an "umbrella vehicle" used to collect payments from annuity contract holders. The trust invests the funds in one type of security only - shares of management companies. These are held in a "separate" investment account; and the performance of the securities in the separate account determines the amount of the annuity to be received. These are non-negotiable securities
All of the following terms apply to index ETFs EXCEPT: A benchmarked B passively managed C marginable D redeemable
D redeemable Almost all ETFs are based on a benchmark index. They mirror the composition of the index, so they are "passively" managed and have low management fees. An actively managed fund is one where the investment adviser chooses which securities to buy and sell. Active management comes with higher management fees. There are only a very few actively managed ETFs - almost all are passively managed. They trade like any other stock and are not redeemable. They can be purchased on margin and they can be sold short, like any other stock.
