unit 8 Investment Companies
dollar cost averaging 1. If prices decline, the fixed investment amount will purchase 2. If the prices rise, the fixed investment amount will purchase
1. a greater quantity of the security. 2. less of the security,
Mutual fund can call themselves no-load as long as they do not have a
12b-1 charge that exceeds .25%. In addition, there cannot be any front-end load.
A letter of intent must be met with dollars invested within
13 months
Which of the following investments would likely have a lock-up period?
A principal-protected fund - Principal-protected funds guarantee that the investor's return will never be less than the original investment
All of the following might be found in a money market fund's portfolio except A) common stock. B) negotiable CDs. C) T-bills. D) banker's acceptances.
A) common stock.
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 common shares of Amalgamated Investments, a holding company. C) a new stock fund created by GHI Mutual Fund Distributors. D) an initial public offering for shares of a closed-end management company.
B) an initial public offering for common shares of Amalgamated Investments, a holding company. holding companies are not included in the definition of investment companies
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?
Class B shares
Which of the following trade actively in the secondary market? Open-end funds Closed-end funds Unit investment trusts Real estate investment trusts (REITs).
Closed-ended funds real estate investment trusts
One of your clients was at a recent social gathering and heard a friend talking about a recent investment in an interval fund. How would you describe this investment?
It is a closed-end investment company where, at certain specified intervals, investors are able to sell their shares back to the company at net asset value.
mutual fund sells at
NAV + sales charge
the sales charge is computed as a percentage of the
POP not NAV
Unrealized gain in a mutual fund portfolio does which of the following? Increases the dividends paid to shareholders Represents the undistributed income and the growth in market value of securities held in the portfolio Is realized by shareholders only when they redeem their shares Has no effect on shareholders until the annual long-term capital gains distribution is paid
Represents the undistributed income and the growth in market value of securities held in the portfolio Is realized by shareholders only when they redeem their shares
An investor purchases 100 shares of a bond ETF at a price of $50 per share on September 5, 2019. On November 1, 2019, and February 1, 2020, the fund distributes a $0.50 per share dividend. On May 11, 2020, the investor sells all the shares at $57 per share. What are the 2020 tax consequences of the sale?
ST CAP gain of $700
Which of the following types of mutual funds has capital appreciation as its investment objective? A) Income B) Municipal bond C) Balanced D) Specialized
Specialized
An investor purchases $1,000 of the XYZ Growth Fund on a Tuesday. The order is time-stamped at 2:45 pm ET. When will the investor's price per share be determined
That day based on the market close - The NAV must be calculated at least once each business day at market close (4:00 pm ET)
Which of the following statements regarding exchange-traded funds (ETFs) are true? The SEC has classified them as mutual funds. The SEC has classified them as a type of open-end fund. They have operating costs and expenses that are higher than most mutual funds. They have operating costs and expenses that are lower than most mutual funds.
The SEC has classified them as a type of open-end fund. They have operating costs and expenses that are lower than most mutual funds.
Under the Investment Company Act of 1940, which of the following statements regarding the renewal provisions of an investment adviser's contract
The contract must be terminable upon no more than 60 days' notice. B) The renewal must be approved by either majority vote of the board or majority vote of the outstanding shares, as well as majority vote of the noninterested members of the board. D) The renewal must state the adviser's compensation.
A money market mutual fund would be least likely to invest in which of the following assets? A) Repurchase agreements B) Bank certificates of deposit C) U.S. Treasury bills D) U.S. Treasury notes
U.S. Treasury notes (2-10 year maturity) - MM instruments typically don't invest in securities that mature over 397 days
If a married couple with a long-term growth objective is considering a mutual fund, and they are concerned about the fund's annual expenses, they should select A) a long-term corporate bond fund. B) a common stock fund with a high portfolio turnover. C) a preferred stock fund. D) a common stock fund with a low portfolio turnover.
a common stock fund with a low portfolio turnover.
An investment adviser representative may describe dollar cost averaging to a customer as
a funding technique that will cause the average cost per share to be less than the average price per share.
In general, investors pay a commission rather than a sales charge when purchasing shares of
closed-end investment company
A front-end sales load is defined as
the difference between the public offering price and the net asset value of a mutual fund share.
Net asset value (NAV) per share for a mutual fund can be expected to decrease if
the fund has made dividend distributions to shareholders.
The Investment Company Act of 1940 requires that mutual funds provide their shareholders with reports
twice per year
An unmanaged portfolio is a characteristic of
unit investment trust
Money market mutual funds are highly recommended for those who
have a specific need for funds within the next six months to a year
Probably the most significant difference between a business development company (BDC) and any other investment company registered under the Investment Company Act of 1940 is that a BDC
makes available significant managerial assistance to the investments in their portfolio.
The result of dollar cost averaging is to
obtain a lower average cost per share than average price per share.
If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor?
purchasing power risk
A Money market consists of
short-term, high-quality debt securities.
Dollar cost averaging (DCA) will always result in a lower cost per share than the price paid per share
the same amount must be invested at each specified interval. the price per transaction does not remain the same.
Class B shares are sold without a front-end load, so
there are no breakpoints and no letter of intent (LOI)
SEC rules require that open-end management companies distribute dividends to their investors from the firm's
net investment income
Most mutual funds operate as regulated investment companies. This means that
they qualify for special tax treatment under Subchapter M of the Internal Revenue Code.
For a mutual fund that collects a 12b-1 fee, which of the following statements are true? The fund may use the money to pay for mailing sales literature. Advertising materials must always state that the fund is no load. The fund may use the money to pay for commissions on portfolio transactions. The fund's prospectus must disclose the fee.
- The fund may use the money to pay for mailing sales literature. - The fund's prospectus must disclose the fee. - 12b-1 fees may be used only to cover promotional and other distribution expenses
Class c shares
- have no upfront sales charges - and no CDSC after a short time,
Under the conduit theory of taxation, which of the following statements are true?
A fund is not taxed on earnings it distributes if it distributes at least 90% of its net investment income. Investors are taxed on earnings they receive in cash.
When an investor purchases Class A shares of a mutual fund in their brokerage account at a FINRA member firm, the sales charge is apportioned to all of the following except A) the registered representative making the sale. B) the mutual fund. C) the member firm underwriting the offering of the shares. D) the broker-dealer holding the account.
B) the mutual fund.
If a couple has a long-term growth objective and is willing to accept a reasonable amount of risk, which of the following mutual funds is most suitable for them? A) Municipal bond fund B) Common stock fund C) Money market fund D) Corporate bond fund
B) Common stock fund - A common stock fund will help the couple meet their long-term growth objective.
A client invests $2,200 in an open-end investment company and signs a letter of intent for a $10,000 breakpoint. If he deposits $11,000 six months later, which of the following statements is true?
He will receive a reduced load on $13,200 worth of shares
A mutual fund's unrealized loss last month results in which of the following? Lower net asset value (NAV) per share Lower dividend payments to shareholders Reduction in the proceeds payable to shareholders who liquidate their shares Higher tax liability to shareholders
Lower net asset value (NAV) per share Reduction in the proceeds payable to shareholders who liquidate their shares
The practice of dollar cost averaging requires the investor to
buy a security in a falling market and buy it in a rising market.
Exchange-traded funds (ETFs)
can be bought and sold throughout the trading day. have low expense ratios
Most mutual funds have elected to comply with Subchapter M of the Internal Revenue Code. Complying means
distributing to shareholders at least 90% of the fund's net investment income.
When calculating net investment income, an investment company includes
dividends plus interest minus operating expenses.
Which of the following investments would be the least appropriate for a customer's IRA?
inverse EFT - IRAs are long-term investments while inverse ETFs are suitable for those with a short time horizon.
An open-end investment company that does not distribute at least 90% of its net income
is liable for federal taxes on its net income.
The Investment Company Act of 1940 prohibits a closed-end management investment company from pursuing all of these activities except A) taking short positions in securities. B) holding more than 3% of another investment company's outstanding shares. C) paying dividends. D) buying securities on margin.
paying dividends.
An investor wants to invest $200,000 in the banking industry sector. The investor would like to use leverage and make this purchase in a margin account. Additionally, she stresses wanting to avoid year-end tax statements showing capital gains liabilities. You would suggest which of the following as suitable, given the investor's criteria? A) A money market fund holding short-term bank notes B) Stocks in the three largest U.S. banks C) A bank sector mutual fund D) A bank sector exchange-traded fund (ETF)
A bank sector exchange-traded fund (ETF) - The investor's criteria eliminates mutual funds as suitable. Mutual funds make annual capital gains distributions for which the owner incurs a tax liability, and mutual funds cannot be purchased on margin. Conversely, an ETF will rarely make a capital gains distribution, and because they trade like all exchange-traded products, they can be purchased on margin, making them more suitable for this investor. Buying only a few select bank stocks is not a good representation of the entire sector.
Your customer is interested in a leveraged fund and makes the following statements about leveraged funds to you. Which of the statements is not true? A) These funds sometimes use derivatives products to achieve their stated goals. B) There are no unusual risks associated with these funds, other than those incurred with any index tracking fund. C) The funds attempt to return a multiple of the return of a benchmark index they are tracking, perhaps two or three times. D) Some leveraged funds are exchange-traded products.
B) There are no unusual risks associated with these funds, other than those incurred with any index tracking fund. there are unusual risks
Which combination of the following statements regarding the investment strategy known as dollar cost averaging is true? Invests the same dollar amount each period over a length of time Purchases the same number of shares each period over a length of time Lowers average cost per share over a length of time (assuming share price fluctuations) Invests the same dollar amount each period to protect the investment from loss of capital
Invests the same dollar amount each period over a length of time Lowers average cost per share over a length of time (assuming share price fluctuations)
A municipal securities dealer informed XYZ municipal bond fund that it was the leading retailer of XYZ shares and that, in return, XYZ should employ the dealer in effecting more transactions for the fund's portfolio. Which of the following statements regarding the request is true?
It is not permissible because it violates the MSRB anti-reciprocal rule. - An investment company must select a dealer to execute its portfolio transactions based on services provided. It is a violation of the anti-reciprocal rule (Municipal Securities Rulemaking Board Rule G-31) for an investment company to choose a firm to trade its portfolio based solely on sales of units or shares of the fund.
Unit investment trusts differ from mutual funds in which two of the following ways? UITs have an expiration date; mutual funds do not. UITs generally have higher management fees than mutual funds. The portfolio of a UIT is fixed while that of a mutual fund changes as the managers look for investment opportunities. UIT units are not redeemable while shares of mutual funds are.
UITs have an expiration date; mutual funds do not The portfolio of a UIT is fixed while that of a mutual fund changes as the managers look for investment opportunities.
An investor mentions the term level load fund shares to a registered representative. The investor is referring to
class C shares - charges never fluctuate. Shares are purchased at net asset value (no front-end load),
An individual participates in the 401(k) plan offered by the employer. Every two weeks, 4% of the employee's salary is deferred into the plan. The contributions are made into several different mutual funds. This practice is using
dollar cost averaging. In a fluctuating market, this will always provide the lowest average cost per share.
Leveraged index funds can be exchange-traded funds (ETFs). can never be exchange-traded funds. can be inverse or reverse funds. can never be inverse or reverse funds.
- can be exchange-traded funds (ETFs). - can be inverse or reverse funds.
Which of the following statements regarding a unit investment trust is not true? A) It invests according to stated objectives. B) It charges no management fee. C) It is considered an investment company. D) Overall responsibility for the fund rests with the board of directors.
Overall responsibility for the fund rests with the board of directors. - no board of directors has a board of trustees
When speaking to a customer about exchange-traded funds (ETFs), a registered representative could accurately state that these funds
do not have the same potential tax consequences as mutual funds, such as making capital gains distributions annually. - Customers pay commissions, not sales charges.
Recent years have shown an enormous growth in the sales of exchange-traded funds (ETFs). Some of the benefits of using ETFs in your clients' portfolio would include
greater tax efficiency than most comparable mutual funds.
The investment adviser of the GEMCO Special Situations Fund would find which of the following companies least attractive for the fund's portfolio? A) GHI Technologies, whose new microchip devices have caught the attention of the largest manufacturer in the field B) JKL Transportation Services, a company preparing to report a profit for the first time in four years C) ABC Corporation, whose shareholders have just reelected the current board of directors D) DEF Pharmaceuticals, whose application for approval of a new disease-fighting drug will likely be approved by the FDA
C) ABC Corporation, whose shareholders have just reelected the current board of directors - A special situations fund looks for special situations. Those are defined as management changes, turnaround situations (loss to profit), or new developments. A company reelecting the existing board of directors is not sending a message of something special going on.
Your mutual fund has sent you a Form 1099, listing some long-term capital gains on which you must pay taxes. You are concerned that the 1099 is in error because you have owned your shares for only four months. Which of the following statements is true?
The 1099 is correct because in this case, the holding period to be considered is that of the investment company, not yours. - The investment company designated the gains as long term because the company held the securities for more than a year before selling them. The holding period on your shares is relevant only if you redeem your shares for a gain.
If an investor has received dividends and capital gains distributions on mutual fund shares she has held for four months, she will pay
capital gains rates on capital gains distributions and ordinary income rates on dividends.
In general, investors pay a commission to purchase and are charged a commission when selling which of the following investment companies?
closed end fund
class B 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. Until they disappear completely, - B shares are generally most suitable for smaller investments (where taking advantage of breakpoints would not be a factor) made with a longer investment time horizon such as this one.
All of the following events will affect the net asset value (NAV) per share of a mutual fund except A) the fund receives cash dividends on the securities in its portfolio. B) changes in the market value of the fund's portfolio of securities. C) the fund pays dividends to its shareholders. D) wholesale redemption of fund shares.
wholesale redemption of fund shares
Gerry Logan has been managing his own securities portfolio for the past 15 years. His returns have been about the same as the S&P 500, and as he gets older, he does not want to have to spend the time and effort to keep up the performance. Logan is currently 55 years old and has sufficient discretionary income and savings that enable him to take moderate risks. He is of the belief that his own experience proves that you can't beat the market. Which of the following would you suggest for him?
50% into an S&P 500 index fund (or ETF), 30% into an international index fund and 20% into an investment-grade bond fund - Index funds (or ETFs) are appropriate investment vehicles for investors who believe that active management does not produce returns above the cost. Investing in the S&P 500 would give him returns comparable to what he has enjoyed in the past. However, in recognition of his advancing age, it would appear prudent to diversify by placing some of the money into the international sphere and a portion into the safety of high-grade debt securities.
Mutual fund Class B shares assess Mutual fund class A shares assess
deferred sales load front end sales load
net investment income =
gross investment income - expenses
