Unit 7 and 8 Series 7

NAV 10+ Sales Charge 0.50 = POP 10.50 NAV +SC=POP Sales charge is always based on the POP not on the NAV if dolalr amt of NAV and sales cahrge as specified the formual to detemrine POP is to divide NAV by 100% minus the sales cahrge % NAV ($10)/ 100%-Sales charge percentage 4.8%= POP $10.50 Because of sales cahrge loaded funds should not be recommended for long terminvesting

A load fund is a mutual fund that comes with a sales charge or commission. The fund investor pays the load, which goes to compensate a sales intermediary, such as a broker, financial planner or investment advisor, for his time and expertise in selecting an appropriate fund for the investor.

Conduit Theory

A means for an investment company to avoid taxation on net investment income distributed to shareholders. If a mutual fund acts as a conduit for the distribution of net investment income, it may qualify as a regulated investment company and be taxed only on the income the fund retains. Syn. Pipeline theory. Triple taxation can be avoided if mutual fund qualfiies under subcahpter M of the IRc if a mutual fund act as a conduit (piepleine) for the distributions of NII, the fund may qualify as a regualted investment company (RIC) This means it is subject to tax only on the amount of NII the fund retains the portio of NII distributed to shareholders escapes taxation at the mutua fund level Watch video on it describes better to avoid taxation under subchapter M a fund must distribute at least 90% of its NII to shareholders the fund then pays taxes only on undistributed amt if fund sitributes 89% it must pay taxes on 100% of NII if distributes 98% of NII fund doesnt pay taxes on 98 only on 2% of retained earnings The concept of mutual fund distributing its net investment (NII) through to shareholders without first paying a tax is kown as the conduit theory regulated companies under subchapter M of the IRS code are allowed to pass-through icome to beenficial owners without a tax at the fund level on the distributed income (known as conduit or flow through of income and taxation) Appreciation or dpereciation of portfo securities is unrealized capital gain or loss if the fund does not sell the securities Therefore shareholders experience no tax consequences when the fund sells the securities, gain or los is realized a realized gain is an actual profit made capital gains distributions are derived from net realized gains that is the fund compares its realized gains and losses to detemrine the net results the distinction between long-term and short-0term is the same as for any investment to avoid an extra level of taxation, the fund can qualify as an RIC by distributing at least 90% of the net gain Asa practical and test relevant matter The fund will only distirbute its long term capital gains because of conduit nature of distirbution the IRS says investos always report these on their tax returns as long term capital gains this is true even if the investor purcahsed the fund shares only a month before the distribution It is becauyse it is s adistirbution otf the funds long term gains a long term capital gains distribution may not be made more often than once epr yr net short term capital gains are distributed along with the dividen they are noted as noqualfief didviend adn are taxed at ordinary income rate

Pass-Through Certificate

A security representing an interest in a pool of conventional, VA, Farmers Home Administration, or other agency mortgages. The pool receives the principal and interest payments, which It passes through to each certificate holder. Payments may or may not be guaranteed.

Letter of Intent (LOI)

A signed agreement allowing an investor to buy mutual fund shares at a lower overall sales charge based on the total dollar amount of the intended investment. A letter of intent is valid only if the investor completes the terms of the agreement within 13 months of signing the agreement. A letter of intent may be backdated 90 days. Syn. statement of intention. one sided contract binding on the fund only cust must complete investment to qualify for reduced sales cahrge if cust invests enough to complete the LOI he received the escrowed shares if not he is given choice to either pay the sales charge difference or have the udnerwriter liquidate enough of the escrowed shares to do so 18k is short of 25k cust signs LOI promising that will qualify for breakpoint in 13 months from date of letter investing addtl 7k within 13 months qualifies the cust for reduced sales char customer is cahrged the appropriate reduced sales charge at the time of initial purchase fund permits cust to sign a LOI as late as 90th day after an addtl purcahse LOI may be backdated up to 90 days to include prior purcahses but may not cover more than 13 months in total a customer who signs the LOI 60 days after purchase has 11 months to complete the letter

TIPS (Treasury Inflation Protected Securities)

An inflation-indexed bond issued by the U.S. Treasury with maturities of 5, 10, and 20 years. They are standard coupon bonds with one difference: The outstanding principle is adjusted for inflation. issued with fixed interest rate but principal amt is adjusted semiannuallyy by an amt equal to change in Consumer price index CPI, the standard mesaurement of inflation these notes are sold at lower interest rates than conventiaoonal fixed rate treasury notes because of their adjustable nature TIPS are exempt from state and local income taxes on interest income generated but they are subject to federal taxation in any yr where then prinicpal is adjsuted for inflation, that increase is considered reportable income for that yr even though the increase will not be received until the note matures same phantom income mentioned with zero coupon bonds

3 types of investment companies

Face Amount Certificate, Unit Investment Trust (UIT), Management Company

No load funds

Fund doesn't cahrge any type of slaes load No laods may cahrge fees such as redmeption fees redemption fee is deducted from redemption proceeds jsut like sales cahrge however it isn't considered to be a sales laod Sales loads are usually cahrged when an investor is going in and out of a fund too frequently a fund is also permitted ot pay its annual operating expenses and still call itself no load however combined amt of funds 12b-1 fees or seperate shareholder service fees cant exceed 0.25% of the funds avg annual net assets

UIT (Unit Investment Trust)

Investment company company set us as trust, with trustees instead of BOD. It creates a portfolio of debt or equity security to match its investment needs then it sells those funds as reedemable interest. it is an unmanaged investment co it doesnt have BOds it doesnt employ an investment adviser and it doesnt actively manage portfolio UIT issues only reddemable securities known as units or shares of benefiical interest, each of which represents an undidved inrerest in a portfolio of specified securities once specified total is raised trustees use investors money to purchase securites designed to meet stated objective of UIT once compiled portf remains fixed UIT solely invested in muni bonds where trust liquidates after final bond in portfolio matures aslso equity trusts where becauses tock doesnt mature portfolio is liquidated at a predetemrined date and proceeds are distributed to unit holders or reinvested into a new trust at investors option UITS are sold by prospectus under invest comp act 1940 trustees must maintain secondary markets in the units thus allowing unit holders the ability to redeem their units at NAV some ETFs are org as UITs and trade on exchanges or Nasdaq

Class B shares

No front end do impsoe abck end for early redemption of shares also asset absed 12b-1 fee which is greater than thsoe imposed for Class A shares imposed a CDSC contingent deferred sales cahrge or abck end load CDSC normally declines and eventually is eliminated over time once CDSC is elimated almost all Class B shares convert into Class A shares When they convert they will be cahrged the same (lower) asset-based 12b-1 fee as the Class A shares Class B shares don't impose a sales cahrge at time or purhcase so unlike class A share, 100% of invested dollar are invested 1 CDSC 5% 2 4% 3 3% 4 2% 5 1% 6+ 0% can be converted into Class A shares now

GNMA

Private lednidng institutions approved by GNMA originate eleigible loans and pool them into securities, known as pass through certificates and sell the GNMA mortgage backed securities (MBS) to invesots lending institutions include mortgage companies commerical banks thrift institutions of all sizes as well as state hosuing finance agencies Giinnie Mae guarantees only MBS backed by single and multifamily home laons insured by govt agencveis, prmiarily Fed housing assoc (FHA or dept of veterans afffairs VA like the principal on a single mortgage the prinicpal represented by a GNMA cert constantly decreases as the mortgages are paid down gurantees timely payment of interest and princiap; GNMAs offer slighlty higher interest than comparable treasury secruities

Market Cap 300 mil share outstanding company with share price of 50 would have market cap of 15 bil and would be considered alrge cap stock large cap funds= amrket cap over 10 bil these funds more stable and less volatile in a turbulent markt

Shares outstanding x current market price

T Notes issued denoms $100- 5 Mil T-notes mature at par, or they can be refunded if it is refunded the govt offers the investor a new security with a new interest rate and maturity date as an alternative to a cash payment for the maturing note

T Notes are issued quoted and traded as perentrage fo apr in 1/32 98.01 bid means 98 1/32 % of 1000 or $980.3125 98.02 bid means 98 2/32% of $1000 or 980.6250

T bonds issued dneoms min $100- 5mil mature 10 yrs atleast from dat eof issued T bonds quoted 1/32 too T notes and T bonds are priced at a percentage of pat T bills notes bonds are all issued in book entry form

T note quote 101.20 = 101 20/32 = 101=1010 5/8 *10= 6.25 1016.25

Breakpoint Sale

The sale of mutual fund shares in an Amount just below the level at which the purchaser would qualify for reduced sales charges. This violates the Conduct Rules of FINRA Are prohibited

Class c shares level load

Typically has a one year , 1% CDSC, .75% 12b-1 fee, and a .25% shareholder service fee. These fees never goes away. ( appropriate for those investors that have short time horizon) because fees are realtively high and never go away are commonly referred to as having a level load Class C shares are approprate for investors who hgave short time horizons because they becoem quite expensive is owned for more than 4 yrs

Treasury Receipts

Zero coupon bond created by brokerages. B/D buy treasury securities and place them in trust at a bank and sell seperate "receipts" against the principal. *Not backed by the U.S. Government The treasury securities held in trust colalteralize the treasury receipts each treasury reci[pt is priced at a discount from the payment amt like a zero coupon bond

Expense Ratio

all mutual funds have expenses espenses aren't considered a cost of purcahsing the fund a fund's expense ratio expresses the management fees and operating expenses as percentage of the fund's net assets all mutual funds, load and no load, have expense ratios Expense ratio is calc by didving annual operating expenses by avg dollar value of fund's assets under management sales cahrge is not considered an expense when calulating a fund's expense rato expense ratio 1.72% means that fund spend $1.72 per year for every $100 of invested assets Typically more aggressive funds have higher expense ratios aggresive growth fun d suusally eespnese ratio higher AAA bond fund because more trading occurs in the growth funds portfolio that increases commison expe becaus eport manager is generally maing more decisions, the managemnt fee tends to be higher

Dollar cost ave

allows the indidivual to prchase more shares when prices are low and fewer shares when prices are high in fluctuating market and over time the avg cost per share is lower than avg price of the shares however dollar cost avg doesnt guarantee profits in a declining market ecause prices may continue to decline for some time investor buys more of sinking investment if decingng invest $600 every month regarldess if price is up down or same avg price per share is the sum of prices paid divided by number of investments 114/4= 28.50 avg cost per share is total amt spent didvided by number of shares purchases 2400/90= 26.67 This lower cost is because of automatically purchasing more shares when the price was low and fewer shares when the price was high Avg cost is 1.83 per share less than the avg price dolalr cost avg invloves investing a fixed amt of money every period regardless of market price fluctuion if market price of shares is up fewer shares are purcahsed and down more share are purchased over time if markt fluctuaes dollar cost avging willl achivea lowe avg cos per share than avg price per share a frew question on the exam relates a particpiant in a 401lk plan regualrly investing in an index mutual fund as an example of dolalr cost avg dollar cost avg merely results in a lwoer cost pers hare than the avg price epr share

12B-1 Asset based fees

asset based distribution fees named after SEC rule that allows them used as fees to cover costs of marketing and distributing the funds to investors 12b-1 fees are also used to compensate registered reps for servicing an act (trailer commissions) but shouldnt be confused with sales cahrfes Fee is deducted quarterly as apercentage of the fund's avg total NAV Max 12b-1 fee is 0.75 percent for distribution and promotion FINRA permits funds to chrge addtl 0.25% as a service fee that makes total 1.0% of which only 0.75% of which is 12b-1 fee Fee must reflect the anticiapted elvel of distribution services

STRIPS (Separate Trading of Registered Interest and Principal Securities)

certain treasury issues that are suitable for stripping into interest and principal components although the securities underlying are us govt direct obligations, major banks and dealers perform the actual seperation and trading (seperation stripping into interest and principal components) as zero coupon bonds they have minimal reinvestment risk

FAC - Face Amount Certificate

contract between an investor and issuer, issuers agrees to pay back the funds at set date and in return an investor provides them with these funds at either incrementally or at a lump sum -If the investor gives them at lump sum then its known as a fully faced amount certificate. few of these kinds today

investment companies

corp or trust through which investors may acquire an interest in large diversified porf of securities by pooling their funds with other invesots fundsa and butins shares or units of the fun beleive professional money manager should be able to outperform the avg investor in the market

BDC (Business Development Company)

created by congress purpose to create a vehicle to aid in promotion and development of small businesses is a closed end company regulated under invest act 1940 Atleast 70% of its assets must be invested in ":eligible" assets so doesnt have same flexibilty as regular closed-end funds Eligible portfolio company includes any issuer that doesnt have any class of securities listed on a national securities exchange Exception for issuers with a cllass of securities listed on anational exchange if they have an aggregate market value of outstanding voting and non-voting common equity of less than $250 mil most significant dif between closed end and BDC is that with respect to eligible assets, the BDc must make available signicicant managerial assistance BDC in addition to being a investment co is also an operating company

Family of funds

many sponsors offer exchange or conversion privilde within thief family of funds mutual fund family aka a fund complex is wehn a single sponsor or distributor offers more than one fund many cases a dozen funds with dif objective in same fund complex there are ven a few with more than 100 funds Exchange priviledges allow an investor to convert an investment in one fund for an equal investment in another fund in the saemm family without incurring an addtl sales cahgre purchase growth fund at age 40 now that is 62 and retirment approached needs somethine more conservative The shares of XYZ growth fund can be exchanged for shres of XYZ income fund at no expense any gain or loss from redemption of shares must be reported for tax purposes TO have exchange take place with no load the following rules apply purchase may not exceed the proceeds generated by redemption of the other fund the redemption may not invlove a refund of sales charge the sales personleel and dealer must receive no compensation of any kind form the reinvestment Exchanges within family of funds is a taxable event

Denominations of Agency Securities

min usually 10k with incerements of 5k

Combination priviledge

mutual fund company freq offers more than one fund and refers to these multiple offerings as its family of funds an investor seeking a reduced sales charge may be allowed to combine seperate investments in two or more funds within the same family to reach a breakpoint

Farm credit system

national network of lending institutions that provides agricultural financaing and credit system is privately owned, govt sponsored they are abcked by abnks of FCS funds are made avaialable through nationwide entwork banks 68 Farm credit ledning institutions FCA farm credit admin a govt agency oversees the system Federal Land banks, Federal Intermediate Credit Banks, Banks for Cooperatives federal fCS issues discount notes, floating rate bonds and fixed rate bodnds maturities range 1 day - 30 yrs proceeds from the sale of securities are used to provide farmers with real estate loand rural home mortgage loands and crop isnurance

Rights of Accumulation (ROA)

permits a reduced sales charge on new purchases when the total value of already-held shares plus the additional amount to be invested exceeds the sale charge breakpoint allow the invesot to use prior share appreciation and reinvestment to qualify for breakpoints Rights of accumulation don't impose time limits Cust may qualify for reduced sales chargewhen total value of shares previously purchased plus the new purcahse exceeds a breakpoint amt mutual fund generally bases the quanity of securites owned on the higher of current NAV or the total of purchases made to date 5k grows to 10k and invests another 15k original sales charge 6.5 percent is now 5.5 percent since 25k breakpoint

FINRA Rule 2341

prohibits firms from selling mutual funds if their sales charges are deemed "excessive." • 8.5% of the POP (public offering price) • The rule imposes various limits on both front-end and deferred sales charges depending on whether the fund imposes an ongoing asset-based sales charge or service fee, such as a Rule 12b-1 fee, and whether the fund offers rights of accumulation or quantity or "breakpoint" discounts. • Rule 2341(d) also limits ongoing fund service fees and other ongoing asset-based sales charges.