Unit 7 (Investment Companies)

The Class B shares of the KAPCO Fund carry a conditional deferred sales charge beginning at 5% and reducing each year after the second by 1% per year until eliminated. An investor making an initial purchase of $10,000 of these shares will pay a sales charge of A) $0 B) $50 C) $100 D) $500

A) $0 No front end load with class B shares

All of the following activities in a customer's mutual fund account may be considered a violation of the Conduct Rules except A) granting discretionary authority to a new registered representative. B) excessive activity in the customer's account. C) switching Class A shares between fund families. D) short-term trading in mutual fund shares.

A) granting discretionary authority to a new registered representative

An investor purchases shares of a mutual fund. Three months later, the fund has a long-term capital gains distribution. How would this be taxed to the investor?

As a long term capital gain It makes no difference how long the investor held the fund shares; this is a distribution of the fund's long-term gains being passed through to the investor. However, when the investor sells his shares, then the holding period of those shares is important for determining long-term or short-term status.

One of your customers is concerned about future inflation. Which of the following mutual fund recommendations is likely to be the most suitable? A) A municipal bond fund B) A common stock growth fund C) A U.S. Treasury bond fund D) A balanced fund

B) A common stock growth fund On this exam, the investment most likely to provide inflation protection is common stock.

When discussing mutual funds with a customer, which of the following statements is not prohibited? A) Buy the shares on record date to receive the dividend. B) Buy shares of different funds in the same fund family, and you may qualify for a breakpoint on the total purchase. C) The income yield of the fund consists of both dividends and capital gains. D) Get a few friends to join with you to form an investment club, and you may qualify for a breakpoint.

B) Buy shares of different funds in the same fund family, and you may qualify for a breakpoint on the total purchase.

An investor with $5,000 to spend could purchase approximately how many shares of a mutual fund with a net asset value per share of $13.00, a sales charge of $1.00 and an underwriter's concession of $0.20? A) 378 shares B) 352 shares C) 357 shares D) 362 shares

C) 357 shares 5,000/14 = 357 shares underwriters concession is part of sales charge

Under the Conduct Rules, the maximum sales charge on any transaction involving an open-end investment company share is A) 9% of the net asset value. B) 8.5% of the net asset value. C) 8.5% of the offering price. D) 9% of the offering price.

C) 8.5% of the offering price.

A young first-time investor wants to put $10,000 of savings in an investment that she wants to see grow over many years. She intends to add to it in small amounts whenever able. A balanced mutual fund and an equity growth fund are chosen. What would be the most suitable share class for this initial investment? A) A shares B) D shares C) B shares D) C shares

C) B shares B class shares have a back-end load (sales charge) only payable when the shares are redeemed, and those sales charges dissipate typically over the first five to seven years, B shares = smaller investments, long time horizons

Which of the following statements regarding a unit investment trust is not true? A) It invests according to stated objectives. B) It is considered an investment company. C) Overall responsibility for the fund rests with the board of directors. D) It charges no management fee.

C) Overall responsibility for the fund rests with the board of directors. UIT has no BOD, only a Board of trustees.

According to Municipal Securities Rulemaking Board (MSRB) rules, can a municipal securities representative give $50 crystal vases to 10 of his favorite clients? A) The representative is not allowed to give gifts to customers. B) He can, but only with written permission from the MSRB. C) Yes, he is permitted. D) No, the aggregate amount exceeds the permissible annual limit.

C) Yes, he is permitted. No aggregate limit

In general, investors pay a commission rather than a sales charge when purchasing shares of A) an open-end investment company. B) a mutual fund. C) a closed-end investment company. D) a front-end load fund.

C) a closed-end investment company. Commissions are paid on securities traded in the secondary market

An investment company registered under the Investment Company Act of 1940 that allows shareholders to sell their shares back to the company at the net asset value per share only at certain specified times is A) a closed-end investment company. B) an open-end investment company. C) an interval fund. D) a unit investment trust.

C) an interval fund.

A mutual fund that charges 12b-1 fees may use the money to cover all of the following except A) printing costs. B) sales fees. C) management fees. D) promotion costs.

C) management fees.

Advertisements for the Abstemious Balanced Fund (ABF) describe the investment as a no-load fund. In order to make this claim, the fund must A) not have a 12b-1 charge in excess of 0.75%. B) not have a front-end load in excess of 0.10%. C) not have a conditional deferred sales charge. D) have its first breakpoint no higher than $10,000.

C) not have a conditional deferred sales charge.

The public offering price for a mutual fund, as quoted in the financial press, reflects A) the minimum sales charge the fund distributor collects. B) the average sales charge for the preceding three months. C) the maximum sales charge the fund distributor collects. D) no sales charge because the offering price depends on the quantity purchased.

C) the maximum sales charge the fund distributor collects.

A shareholder invested in a mutual fund and has signed a letter of intent to invest $25,000. Her original investment was $13,000, and her current account value is $17,000. For her to complete the letter, she must deposit A) $27,000. B) $8,000. C) $13,000. D) $12,000.

D) $12,000. Appreciation is not considered investment

According to the Investment Company Act of 1940, a diversified mutual fund may hold, at most, what percentage of a corporation's voting securities? A) 50% B) 5% C) 75% D) 100%

D) 100%

One of your customers has been regularly investing into the shares of an aggressive growth fund. The investor has a long time horizon and does not expect to touch the account for a number of years. In the event of an emergency, federal law would require redemption proceeds forwarded within A) 2 business days (T+2). B) 4 business days (S+2). C) 30 calendar days. D) 7 days.

D) 7 days.

A unit investment trust has 90% of its portfolio invested in high-grade bonds with an average maturity of almost 25 years. If the industry consensus was that long-term interest rates were about to increase sharply, which of the following actions would most likely be taken? A) Ladder the maturities B) Shorten the average maturity by moving into short-term bonds C) Liquidate the long-term bonds and begin to move into cash or cash equivalents D) No action would be taken

D) No action would be taken UIT has no manager

Most business development companies (BDCs) are classified as A) a unit investment trust. B) an exchange-traded fund. C) an open-end investment company. D) a closed-end investment company.

D) a closed-end investment company.

All of the following must register as an investment company under the Investment Company Act of 1940 except A) certificates issued by a face amount certificate company. B) an initial public offering for shares of a closed-end management company. C) a new stock fund created by GHI Mutual Fund Distributors. D) an initial public offering for common shares of Amalgamated Investments, a holding company.

D) an initial public offering for common shares of Amalgamated Investments, a holding company. Holding companies are not included in the definition of investment company under federal law.

A breakpoint sale is defined as the sale of mutual fund shares in an amount A) at or above the dollar amount at which the sales charge is reduced. B) required as the minimum investment in a fund, as specified by the SEC. C) just below the public offering price of the fund. D) just below the dollar amount at which the sales charge is reduced.

D) just below the dollar amount at which the sales charge is reduced.

Nonstatistical factors used in comparing one mutual fund to another would include all of the following except A) reinvestment privileges. B) conversion or exchange privileges. C) withdrawal plan options. D) management fees.

D) management fees. non-statistical = those that cannot be qualified

Investment clubs I. can take advantage of breakpoints on mutual fund purchases. II. cannot take advantage of breakpoints on mutual fund purchases. III. are permitted to purchase new equity issues at the public offering price (POP). IV. are not permitted to purchase new equity issues at the POP.

II. & III.

Which of the following factors would be used in calculating the tax due on a capital gains distribution by a mutual fund? The length of time the fund held the securities and the fund's tax bracket The length of time the investor held the securities and the fund's tax bracket The length of time the investor held the shares and the investor's tax bracket The length of time the fund held the shares and the investor's tax bracket

The length of time the fund held the shares and the investor's tax bracket

When discussing investment companies, the term sales load most commonly refers to the fund's sales charge, expressed as a percentage of the NAV. the fund's sales charge, expressed as a percentage of the public offering price (POP). the commission earned by the broker-dealer making the sale. the 12b-1 fee.

the fund's sales charge, expressed as a percentage of the public offering price (POP).

Your client wishes to invest $50,000 into shares of the ACE Mutual Fund. This morning's financial news indicated that the POP for ACE was $10.86, while the NAV was $10 per share. The client's order is placed at 2:00 pm Eastern time. Based on this information, you could confirm to the client a purchase of A) 5,000 shares. B) nothing yet, as you must wait for the POP to be computed based on the day's close. C) more than 4,604.052 shares, but fewer than 5,000 shares. D) 4,604.052 shares.

B) nothing yet, as you must wait for the POP to be computed based on the day's close.

A married couple owns Class A shares of the KAPCO Balanced Fund. The older of the pair has an individual account with a current value of $10,000. The other individual's account is valued at $20,000, and they have a JTWROS account valued at $12,000. KAPCO offers rights of accumulation and has breakpoints at $25,000 (4%), $50,000 (3%), and $100,000 (2%). How much will the sales charge be if they invest an additional $15,000 into the JTWROS account? A) $300 B) $450 C) $530 D) $600

B)$450 Sum all of joint accounts (20,000 + 12,000 + 10,000) = 42,000 42,000 + 15,000 = 57,000 =3% breakpoint 15,000 * (.03) = 450

You overhear the phone conversation of another registered representative discussing the purchase of exchange-traded fund (ETF) shares as opposed to mutual fund shares with a customer. The registered representative makes several statements, but one of them is incorrect. Which of the following is false? A) "I know that you like to sell short sometimes, which you can do with ETF shares." B) "Remember that you can't buy mutual fund shares on margin, but you can for ETF shares." C) "Just like mutual funds, ETFs use forward pricing, so when you place an order, it will be executed at the next calculated NAV for the fund." D) "Unless an ETF makes a capital gains distribution, you don't have to be concerned with tax consequences until you sell your shares."

C) "Just like mutual funds, ETFs use forward pricing, so when you place an order, it will be executed at the next calculated NAV for the fund." ETFs can be traded intraday

A client wants to purchase Class A shares of the Pass & Stow Balanced Fund. This morning's quotes show the shares quoted at POP $10.00 and NAV $9.50. At noon, the order is placed when all the market indices are notably up. If the market remains up and the closing quotes show the NAV of the fund is up $0.38, how much will the customer pay for 500 shares? A) The customer will pay $4,940. B) It is unknown how much the customer will pay. We must wait for the POP to be computed based on the day's closing price. C) The customer will pay $5,200. D) The customer will pay $5,190.

C) The customer will pay $5,200. 1. 9.5/10 = .95 2. 9.5+.38 = 9.88 3. 9.88/.95 = 10.4 10.4 * 500 = 5200 Mutual funds use forward pricing. That means the public offering price and the redemption price are based on the close of the market on the day the order is entered. After this order was entered, the NAV, as of the close, was up $0.38 from the previous day. That makes the NAV per share $9.88 ($9.50 +0.38). We know that Class A shares carry a 5% sales charge. The previous POP was $10, and the NAV was $9.50. That $0.50 difference divided by the POP of $10.00 equals 5%. Because the customer is buying, we need the purchase price. We compute the new POP by dividing the NAV of $9.88 by 0.95, and that equals a POP of $10.40 per share. Multiply that by 500 shares to arrive at the correct answer of $5,200.

An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for three years from now. Meanwhile, he would like to generate some income on the money with as little risk and as little expense as possible. Which of the following recommendations is likely to be the most suitable for this customer? A) Class A shares of the MNO High-Yield Bond Fund B) Class B shares of the ABC Investment-Grade Bond Fund C) Class B shares of the XYZ Growth Fund D) Class C shares of the ABC Investment-Grade Bond Fund

D) Class C shares of the ABC Investment-Grade Bond Fund No front end charge, and no CDSC after a short time, probably one year.

Net asset value (NAV) per share for a mutual fund can be expected to decrease if A) the fund has experienced a net redemption of shares. B) the issuers of securities in the portfolio have made dividend distributions. C) the securities in the portfolio have appreciated in value. D) the fund has made dividend distributions to shareholders.

D) the fund has made dividend distributions to shareholders. If dividends are distributed to shareholders, the fund's assets decrease, and their per-share value will decline accordingly.

An investor who initially makes a small investment in a mutual fund may have the advantage of a lower sales charge on investments made over a 13-month period through a breakpoint letter. a Class A letter. a letter of intent (LOI). a sponsor's letter.

a letter of intent (LOI). Investors who sign an LOI stating they will invest a specified amount over a 13-month period are eligible for a reduced sales load if they invest enough to reach the breakpoint within that time. Breakpoints entitle investors to reduced sales charges.