Unit 3 - Investment Companies Part 3

An investor in Class B shares with a 7 year contingent deferred sales charge liquidates shares four years after purchase. The CDSC is: A)deducted from next computed NAV when those shares are redeemed. B)deducted from the higher of the original cost or the NAV when those shares are redeemed. C)ignored because the investor held those shares more than 50% of the 7-year period. D)deducted from the lower of the original cost or the POP when those shares are redeemed.

A)deducted from next computed NAV when those shares are redeemed. If there is a 7-year CDSC, a redemption after four years will incur a charge. the sales charge is deferred until you sell, and the amount is contingent upon when you sell. When you sell, you receive the NAV minus the back-end load. It might start at 5% and drop to zero after 7 years. A mutual fund prospectus for a fund with B-shares will show you the declining back-end load.The actual amount of the back-end charge is based upon either the lower of the next computed NAV or the original purchase price (per the prospectus). Current NAV is the most common.

A front-end sales load is defined as the: A)difference between the public offering price and the net asset value of a mutual fund share. B)commissions paid on the purchase or sale of securities . C)concessions allowed on the purchase or sale of securities. D)fee paid to the investment adviser.

A)difference between the public offering price and the net asset value of a mutual fund share. A sales load is the difference between the public offering price and the net asset value per share of the fund.

Open-end investment company shares normally go ex-dividend: A)the day after the record date. B)on the record date. C)five days after the record date. D)two days before the record date.

A)the day after the record date. An investor purchasing open-end investment company shares on the record date becomes a shareholder of record on that date and is entitled to the dividend declared. Orders received after the pricing of shares on the record date would be processed the next day and would purchase shares ex-dividend.

An open-end investment company may engage in which of the following activities? A)Borrowing of money from banks. B)Issuance of senior securities. C)Reissue of redeemed shares. D)Purchase of securities on margin.

A)Borrowing of money from banks. An open-end investment company is permitted to borrow money from financial institutions, provided an asset-to-debt ratio of 3:1 (300%) is maintained. Open-end companies only issue one class of security (common stock) and therefore, are not permitted to issue senior securities (preferred stock or bonds), buy securities on margin, or re-issue shares that have been redeemed. Redeemed shares must be canceled.

Which of the following statements regarding an open-end investment company that operates pursuant to a 12b-1 plan are TRUE? I-Shareholders are charged for sales expenses involved in the distribution of new fund shares. II-The 12b-1 charges may not exceed .25%. III-The plan can be terminated by a majority vote of the shareholders only. IV-Fees are deducted quarterly from a mutual fund's assets. A)I and IV B)I and III C)II and III D)II and IV

A)I and IV Mutual funds may not act as distributors for their own fund shares except under Section 12b-1 of the Investment Company Act of 1940. A 12b-1 fee may not exceed .75% and is deducted each quarter from a mutual fund's assets to cover the costs of marketing and distributing the fund to investors. The 12b-1 plan may be terminated at any time by a majority vote of the noninterested directors OR a majority vote of outstanding shares.

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. A)II and III. B)I and IV. C)II and IV. D)I and III.

A)II and III. Mutual funds may only issue redeemable common stock, no preferred stock or bonds. Like corporate stockholders, mutual fund shareholders have a number of rights, including the right to elect the board of directors, which sets policies for the fund. However, the shares can only be purchased in the primary market and then redeemed with the fund.

Where would an investor find a complete list of holdings for a particular mutual fund? A)Semi-annual or annual report B)Omitting prospectus C)Statement of additional information (SAI) D)Statutory prospectus

A)Semi-annual or annual report A statutory prospectus will list investment objectives but not holdings. The SAI contains additional information about the fund and includes further disclosure regarding operations but not a list of holdings. A complete list of holdings will be found as of the date of publication of semi-annual and annual reports.

Your married customers, both 34 years old, have one daughter, age 4. They want to begin accumulating the money required to send their daughter to one of the nation's top universities in 14 years. In addition, they have not yet begun to accumulate money for their retirement. Which of the following mutual funds is the most suitable for these customers? A)LMN Government Income Fund. B)ATF Capital Appreciation Fund. C)NavCo Cash Reserves Money Market Fund. D)NavCo Growth & Income Fund.

B)ATF Capital Appreciation Fund. These customers require maximum capital appreciation. Their long-term time frame allows them to ride out the stock market fluctuations. The best investment for them is the stock mutual fund that concentrates solely on achieving long-term growth rather than generating current income.

Which of the following statements regarding unrealized gain in a mutual fund portfolio are TRUE? I-It affects the mutual fund's shares' value. II-It is taxable as of the year it takes place. III-It is treated as part of the mutual fund's net investment income. IV-It is realized by shareholders when they redeem their shares. A)II and III. B)I and IV. C)I and III. D)II and IV.

B)I and IV. Unrealized gains in portfolio securities result from the assets' appreciation in value and is reflected in an appreciation of the mutual fund shares themselves. A shareholder may cash in on this appreciation only by selling the shares and realizing the gain. Capital gains are never treated as net investment income.

Under what circumstances may an open-end investment company act as its own distributor? A)If the fund invests in government securities only. B)If the fund is established under Section 12b-1. C)Under no circumstances. D)A fund may act as its own distributor at any time.

B)If the fund is established under Section 12b-1. Mutual funds may not act as distributors for their own fund shares except under Section 12b-1 of the Investment Company Act.

A customer would like to know which of the following mutual funds has the highest potential for capital growth. Which would you choose? A)Long-term bond fund. B)Small-cap technology stock fund. C)Blue-chip preferred stock fund. D)Blue-chip growth stock fund.

B)Small-cap technology stock fund. Bond funds and preferred stock funds offer income and little, if any, potential for growth. A blue-chip stock fund offers conservative growth potential. A technology fund invests in risky stocks and has the highest potential for growth. The customer should be aware that high growth potential also carries high risk.

An investor owns $10,000 of shares in ABC bond fund. Due to a change in his financial situation, he wishes to exchange the bond fund shares for shares in ABC's aggressive growth fund. Which of the statements below correctly describes the tax consequences of this action? A)The exchange is taxable and the customer is also subject to a new sales charge on the aggressive growth fund shares. B)The exchange is considered a taxable event that must be recognized in the current year. C)The exchange is not taxable. D)Ordinary income taxes are due on any appreciation realized on the bond fund shares.

B)The exchange is considered a taxable event that must be recognized in the current year. The IRS considers this exchange to be a sale and repurchase. Any gain or loss on the bond fund shares must be recognized in the current year. Any share appreciation is classified as a capital gain and subject to taxation at capital gains rates. Because the exchange is made within the same family of funds, no new sales charge is applicable.

When an agent explains mutual funds to a prospective investor, which of the following statements may be made? A)Mutual funds must make payment within 7 days of a redemption request and guarantee a return of the original investment. B)The redemption value of mutual fund shares fluctuates according to the fund's portfolio value. C)A fund always redeems shares at NAV, with little chance of a financial loss. D)Mutual fund shares are liquid and may be switched from fund to fund without tax liability.

B)The redemption value of mutual fund shares fluctuates according to the fund's portfolio value. Mutual fund redemption values fluctuate according to the value of the securities in the portfolio. The tax liabilities associated with mutual fund switching may not be glossed over. While the redemption rules of the Investment Company Act of 1940 do make mutual funds easily redeemable, investors are not guaranteed to receive an amount equal to the original investment.

If GEM Fund has an NAV of $8.50 and a POP of $8.20, it is A)a face-amount certificate company B)a closed-end investment company C)a no-load mutual fund D)an open-end investment company

B)a closed-end investment company GEM Fund must be a closed-end investment company because the offering price is less than the NAV (GEM Fund is selling at a discount from its NAV).

What are the consequences of Grandpa giving $50,000 of stock to his granddaughter? I-Grandpa is responsible for any gift tax due. II-The granddaughter reports $50,000 as ordinary income. III-The granddaughter gets a stepped up cost basis to the fair market value on the date of the gift. IV-The granddaughter's cost basis in the stock remains the same as grandpa's cost basis. A)II and III B)II and IV C)I and IV D)I and III

C)I and IV The donor (grandpa) is responsible for any gift taxes on the gift. The gift is not taxable to the recipient. The granddaughter maintains the original cost basis as the donor's cost basis.

A client of yours has chosen to invest in a principal-protected fund. Which of the following disclosures must be made to your client? I-Greater potential for loss. II-Potential 5 to 10 year lock-up period. III-Must be an accredited investor. IV-Additional costs. A)I and IV. B)I and III. C)II and IV. D)II and III.

C)II and IV. As the old saying goes, "you don't get something for nothing." In exchange for the guaranteed that you can't lose principal, there is a cost. In additional, to protect the fund against short-term market corrections, these funds require that your investment be held a minimum of 5 to 10 years.

Which of the following statements regarding money market mutual funds is TRUE? A)They issue high-quality short-term debt instruments. B)Shareholders may not have check writing privileges. C)Shares are purchased at net asset value. D)As interest rates rise, the net asset value declines.

C)Shares are purchased at net asset value. Money market mutual fund shares are always purchased at NAV—there are none with a sales load. While their portfolio consists of high-quality short-term debt instruments, they do not issue debt instruments themselves. Check writing privileges are a primary feature adding to the liquidity of these shares.

A 12b-1 fee may be used for all of the following EXCEPT: A)promotional expenses. B)sales literature costs. C)custodial fees. D)advertising.

C)custodial fees. 12b-1 fees are used to facilitate share distributions. Each of the choices listed fits this criterion except custodial fees.

When comparing a mutual fund with a growth objective to one that calls itself a value fund, you would explain to your clients that the value fund could be reasonably expected to: A)only offer Class A shares. B)generate larger capital gains. C)have higher dividend yields. D)sell at a discount to the NAV.

C)have higher dividend yields. Value funds focus on companies whose stocks are currently undervalued (earnings potential is not reflected in the stock price). As a result, the dividend yields tend to be higher than growth funds. If one is looking for capital gains, it is more likely that the growth fund will provide them. The management style has no impact on share classes and no mutual funds ever sell at a discount to the NAV - that is only true of closed-end funds.

Mutual fund performance statistics for funds that are seven years old must show results for each of the following periods EXCEPT: A)five years. B)seven years. C)six months. D)one year.

C)six months. Mutual fund performance statistics must show results for one, five, and ten years, or the life of the fund, whichever is shorter.

All of the following statements are true of both a growth stock and a growth stock mutual fund EXCEPT: A)dividends are probably not high. B)a share might grow or diminish in value, depending on the business success of the issuer. C)the value of a share is a market price, determined by supply and demand. D)a share is an equity security.

C)the value of a share is a market price, determined by supply and demand. Growth stock values are determined by supply and demand on the open market, but the value of a mutual fund share is its net asset value, which is simply calculated.

Which of the mutual funds listed below would be likely to have the lowest volatility? A)XYZ Growth fund. B)ABC Technology fund. C)XYZ Value fund. D)ABC Money Market fund.

D)ABC Money Market fund. Money market funds are managed specifically to achieve low volatility.

Investors with a short time horizon most likely will invest in which class of mutual fund shares? A)Class A shares, then convert to Class B shares B)Class A shares C)Class B shares D)Class C shares

D)Class C shares Class C shares may be less expensive than Class A or B shares for investors with a short time horizon. The front-end load on Class A shares and the back-end load on Class B shares makes them unattractive for short-term investors. A shares do not convert to B shares.

The XYZ mutual fund company is introducing a new fund with an investment objective of appreciation in share price by means of capital gains. The portfolio will consist of a mix of both value stocks and growth stocks. This is most likely a: A)preferred equity income fund. B)balanced fund. C)utility income fund. D)blend/core fund.

D)blend/core fund. One of the distinguishing features of blend/core funds is that they contain both growth and value stocks.