Unit 10 Test

A prospect has primary investment objectives of current income and safety of principal. During the initial public offering of a closed-end government bond fund, an agent explains to the prospect that the fund invests in U.S. government-backed bonds, which are very safe as to principal, and plans to make monthly distributions. Little could therefore go wrong. Taken as a whole, this representation is A) misleading because closed-end fund shares are subject to market pricing B) accurate because the fund offers current income C) misleading because government bonds experience considerable credit risk D) accurate because the fund invests in government bonds

A) misleading because closed-end fund shares are subject to market pricing

Under the Investment Company Act of 1940, mutual funds must send financial statements to shareholders at least A) semiannually B) annually C) quarterly D) monthly

A) semiannually

Last year, the bond market was profitable and ABC Fund had 70% of its assets in bonds. Next year, the fund's managers expect the stock market to do well, and will adjust the fund's portfolio so 60% of its assets will be invested in stock. ABC is probably what type of fund? A) Hedge B) Balanced C) Aggressive growth D) Specialized

B) Balanced

A fund must inform its shareholders of their right to reinvest dividends at NAV A) only at the time of original purchase B) annually C) quarterly D) at the time of each distribution

B) annually

Lifecycle funds embody all of the following characteristics EXCEPT A) the asset allocation of the fund will be adjusted regularly to keep risk and reward balanced optimally, given the time remaining until the target date is reached B) as the fund moves closer to its target date, the portfolio holdings will be adjusted to gradually assume more and more risk C) these funds are usually structured as funds of funds so that the entire composition of the fund portfolio consists of funds offered by the same fund family D) the objective assumes that as an investor nears retirement, the investor's tolerance for risk will diminish

B) as the fund moves closer to its target date, the portfolio holdings will be adjusted to gradually assume more and more risk

In the sale of open-end investment company shares, the prospectus A) must be delivered at, or before, the delivery of the fund share certificate B) must be delivered to the client either before or during the sales solicitation C) must be delivered before the sales solicitation D) is not necessary

B) must be delivered to the client either before or during the sales solicitation

According to the Investment Company Act of 1940, an open-end investment company must compute its NAV A) weekly B) no less frequently than once per day C) annually D) monthly

B) no less frequently than once per day

Which of the following mutual fund portfolio allocations would probably be most suitable for a 40-year-old professional who states that he is an aggressive investor? A) 50% small-cap stocks, 50% U.S. government securities B) 50% corporate bonds, 50% municipal bonds C) 50% small-cap stocks, 25% international stocks and 25% large-cap stocks D) 5% small-cap stocks, 5% international stocks, 90% large-cap stocks

C) 50% small-cap stocks, 25% international stocks and 25% large-cap stocks

If a customer's portfolio is heavily invested in common stock mutual funds, what is the customer's greatest risk? A) Loss of diversification B) Loss of liquidity C) Loss of principal D) Changes in interest rates

C) Loss of principal

All of the following are characteristics typical of a money market fund EXCEPT A) the underlying portfolio consists of short-term debt instruments B) it is offered as a no-load investment C) it has a high beta and is safest in periods of low market volatility D) its net asset value normally remains unchanged

C) it has a high beta and is safest in periods of low market volatility

The fee received by the management company from an investment company depends on the A) type of securities in the fund's portfolio B) profits of the fund C) net assets of the fund D) volume of new shares sold

C) net assets of the fund

In a mutual fund portfolio, it is permissible to buy all of the following EXCEPT A) junk bonds B) index options C) stock on margin D) shares of other mutual funds

C) stock on margin

The price of closed-end investment company shares is determined by A) the Financial Industry Regulatory Authority B) the board of directors C) supply and demand D) the net asset value plus the sales charge

C) supply and demand

All of the following are advantages of investing in mutual funds EXCEPT A) exchange privileges within a family of funds managed by the same management company B) the ability to invest almost any amount at any time C) the ability to have personal control over the investments in the portfolio D) the ability to qualify for reduced sales loads on the basis of accumulation of investment within the fund

C) the ability to have personal control over the investments in the portfolio

All of the following statements concerning investment companies are true EXCEPT A) a diversified company can be either an open-end or a closed-end investment company B) a nondiversified company is any management company not classified as a diversified company C) to be considered a diversified investment company, the company must invest in both equity and debt instruments D) an investment company that invests the majority of its assets in one industry may still qualify as a diversified company

C) to be considered a diversified investment company, the company must invest in both equity and debt instruments

A board of directors member for a mutual fund must serve a minimum term of A) 6 months B) 3 months C) 2 years D) 1 year

D) 1 year

If a mutual fund's net asset value is $9.30 and its sales charge is 7%, its offering price is A) 10.7 B) 9.97 C) 9.95 D) 10

D) 10

Letters of intent may be backdated up to how many days? A) 30 B) 120 C) 60 D) 90

D) 90

Which of the following funds would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection? A) S&P 500 Index fund B) A small-cap growth fund C) An international index fund D) A large-cap growth fund

D) A large-cap growth fund

If an investor is in a low tax bracket and wishes to invest a moderate sum to gain some protection from inflation, which of the following would you recommend? A) Municipal unit investment trust B) GNMA fund C) Money market mutual fund D) Growth mutual fund

D) Growth mutual fund

The prospectus of the ABC Fund contains the phrase "will have at least one-quarter of common stock investments in the field of business machines." The ABC Fund is A) a growth and income fund B) a diversified fund C) a balanced fund D) a specialized fund

D) a specialized fund

The monies and securities of a mutual fund company are held by the A) underwriter B) transfer agent C) investment adviser D) custodian bank

D) custodian bank

All of the following statements regarding a closed-end investment company are true EXCEPT A) it differs from a mutual fund B) it is a type of management company C) it sells at the market price plus a commission D) it may redeem its own shares

D) it may redeem its own shares

If an open-end investment company wishes to change its investment objective, it may only do so with a A) two-thirds vote of the outstanding shareholders B) majority vote of the outstanding shareholders C) unanimous vote of the board of directors D) majority vote of the outstanding shares

D) majority vote of the outstanding shares

All of the following statements regarding money market funds are true EXCEPT A) investors can buy and sell shares quickly and easily B) investors pay a management fee C) dividends accrue daily D) specified rates are guaranteed

D) specified rates are guaranteed

All of the following would qualify as management companies EXCEPT I. face amount certificate companies II. unit investment trusts III. closed-end investment companies IV. open-end investment companies

I and II

A customer wishes to invest $800,000 in the Ajax Fund, an open-end company with a long-term growth objective. In order to take advantage of breakpoints, you recommend that the customer purchase A) Class A shares B) Class B shares C) Class C shares D) Class A or Class C shares

A) Class A shares

Which of the following statements regarding 12b-1 fees is TRUE? A) These fees are charged against the assets of the fund to defray distribution expenses. B) These fees are charged to customers who redeem their shares within six months of purchase. C) These fees are assessed on Class-B shares only. D) These fees are assessed on Class-A shares only.

A) These fees are charged against the assets of the fund to defray distribution expenses.

Each of the following situations represents a potential violation by a registered representative EXCEPT A) disclosing material information about an investment to a client B) recommending investments to be purchased in a joint account while having suitability information on only one of the owners C) recommending a municipal bond investment over a corporate bond without knowing the client's tax status D) recommending a specific investment to a seminar audience of prospective clients

A) disclosing material information about an investment to a client

Your customer is asking if either exchange-traded funds (ETFs) or exchange-traded notes (ETNs) might be suitable investments for his portfolio. The customer makes several statements regarding his understanding of the products but only one of them is accurate. Which is it? A) Exchange-traded funds (ETFs) have a fixed coupon rate that I should expect to realize when they mature. B) Exchange-traded notes (ETNs) are equity securities because they trade on exchanges. C) If I want to sell my shares of an exchange-traded fund (ETF) I have to wait until the next price is calculated to value the portfolio of securities. D) Exchange-traded notes (ETNs) are issued by financial institutions and therefore I should be concerned about the credit worthiness of the issuer.

D) Exchange-traded notes (ETNs) are issued by financial institutions and therefore I should be concerned about the credit worthiness of the issuer.

Which of the following statements describe characteristics of open-end investment companies? I. Shares are redeemable at net asset value. II. Shares are always sold by prospectus. III. Only a limited number of shares are offered. IV. Shares are sold on securities exchanges.

I and II

A customer is interested in an exchange-traded fund (ETF). With regard to the trading of ETFs, the customer should be aware that I. ETFs can be purchased throughout the trading day II. ETFs use forward pricing, the same as mutual funds do III. real-time quotes are available for ETFs IV. the NAV calculated at the end of the day, plus a sales charge, will equal the trading price

I and III

Closed-end investment companies I. continuously issue new shares II. generally make a one-time public offering of shares III. may issue debt securities IV. may not issue preferred stock

II and III

If a customer purchases shares in a municipal bond fund, which of the following statements are TRUE? I. Dividends are taxable. II. Dividends are not taxable. III. Capital gains distributions are taxable. IV. Capital gains distributions are not taxable.

II and III

Mutual funds are like other types of corporations in which of the following ways? I. They may issue equity and debt. II. The board of directors makes policy decisions. III. Shareholders have ownership rights. IV. Their shares trade in the secondary market.

II and III