Chapter 14: Types and Characteristics of Pooled Investments
If a client prefers mutual fund investments in companies that primarily generate capital appreciation to companies that pay a steady dividend, what type of mutual fund and associated investment objective would you recommend?
A growth fund
Which sales charge is based on NAV per share?
Redemption fee
A review of the prospectus of an open-end investment company reveals that its portfolio consists entirely of negotiable CDs, Treasury bills, and commercial paper. This is probably
a money market fund Money market funds hold money market instruments like negotiable CDs, Treasury bills, and commercial paper.
An investor reading the open-end investment company section of today's The Wall Street Journal sees that Bull in the Teashop Fund has a NAV of $10.65 and an offering price of $11.15. He knows that he would have received which of the following if his redemption order had been received by the fund prior to yesterday's market close?
$10.65, less redemption fee, if any An investor redeeming his shares will receive the NAV less any redemption fee that may be described in the prospectus. Investors redeeming through the fund are not charged a commission.
Which of the following are characteristics of a money market mutual fund? Shares are offered without a sales charge. There is a redemption fee. All purchasers must receive a copy of the prospectus. The letter of intent must be signed within 16 months.
1. Shares are offered without a sales charge 3. All purchasers must receive a copy of the prospectus
Which of the following may be done only with the approval of the shareholders of an investment company? 1.A change from diversified to nondiversified status 2.The purchase of particular bonds on the open market 3. Personnel changes in the transfer agent's organization 4. A change in the fund's objectives
1. and 4. Any substantive change in an investment company's form, structure, investment objective, or business operation must be approved by a majority vote of the outstanding shares. Bond purchases are left to the fund's portfolio manager, and the transfer agent is trusted with its organization's personnel changes.
An investment company that invests in common stock, preferred stock, and bonds would most likely be classified as
A balanced fund Balanced funds spread the risk of their investments among different types of securities, such as common stock, preferred stock, and bonds. Growth funds concentrate more on growth than balance. As a result, they will have a higher concentration of common stock. Income funds will consist mostly of bonds and some preferred stock. Finally, sector funds will focus on specific industries or technologies.
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 letter of intent An investor who signs a letter of intent stating she will invest a specified amount over a 13-month period may be eligible for breakpoints. Breakpoints entitle investors to reduced sales charges.
How often must an investment company file reports with the SEC as required by the Investment Company Act of 1940?
Annually
When advising an investor on the purchase of mutual funds, the registered representative should instruct the client to compare open-end mutual funds with the same objective for all of the following EXCEPT A)portfolio turnover B)liquidity C)services offered D)costs
B) Liquidity Shares in an open-end investment company (mutual fund) are liquid. By federal law, all mutual funds are required to redeem shares at their net asset value within 7 days and, therefore, that should not be a consideration in comparing mutual funds with the same objective. Sales loads, management fees, and operating expenses reduce an investor's return. Most of these fees continue throughout the holding period and have a significant impact on performance. Portfolio turnover is significant as gains in the portfolio will likely all be short-term gains, which are usually taxable to the investor at a higher rate than long-term capital gains. Services that mutual funds offer include retirement accounts, investment plans, check-writing privileges, telephone transfers, conversion privileges, withdrawal plans, and others.
In a mutual fund portfolio, you might find all of the following EXCEPT A) covered calls B) short stock C) junk bonds D) index options Explanation
B) Short stock
One way for an accredited investor with an aggressive stance to reduce the overall risk in his portfolio is by A) purchasing U.S. Treasury bills B) purchasing a hedge fund C) purchasing insured bank CDs D) selling uncovered calls
B) purchasing a hedge fund Although the T-bills and the CDs will reduce the overall risk, they are not the best answer because the question is dealing with an aggressive investor. One of the reasons HNW clients buy these funds is for the diversification offered by adding an asset subclass to their portfolios.
The dollar amount of purchase at which sales charges are reduced in the purchase of open-end investment company shares is known as
Breakpoint
A mutual fund's computed NAV on April 24 is $100 per share. On April 25, the portfolio realized gains of $2 per share, and enjoyed $1 per share in unrealized appreciation. What would the NAV be on April 26 assuming an unchanged market? A) $100 per share B) $102 per share C) $101 per share D) $103 per share
C) 101 per share A mutual fund's net asset value per share (NAV) is the fund's total assets minus total liabilities (net asset) divided by the number of shares outstanding. The major asset is the fund's portfolio. Portfolio securities are carried at their value as of the close of the markets (4PM ET). As a result, unrealized appreciation (and depreciation) are part of the NAV. Therefore, when that gain (or loss) is realized, paper profit (or loss) is now real and there is no change to total assets. In the subject question, the realization of the $2 per share gain has no effect, but, the new $1 in unrealized appreciation increases the NAV by that amount.
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) Corporate bond fund B) Money market fund C) Common stock fund D) Municipal bond fund
C) Common stock fund
Charles wishes to preserve his capital and generate income with moderate risk by investing in mutual funds. Which of the following mutual fund types would probably least meet these investment objectives? A) A bond fund B) A balanced fund C) Technology funds D) An income fund
C) Technology fund - high risk
A hedge fund and a traditional mutual fund are similar in that A) both use long and short positions, swaps, and arbitrage B) both typically have low initial investment requirements C) their portfolio managers are required to adhere to the fund's stated objective D) both offer performance incentives to the fund manager
C) Their portfolio managers are required to adhere to the fund's stated objective.
Early in the year, an investor purchased shares of the GEMCO Fund at $10.40 per share when the net asset value per share was $9.53. Just before the last trading day of the year, this investor liquidated the position at $10.60 per share when the net asset value per share was $10.77. From this, you can discern that GEMCO Fund is A) a unit investment trust B) an open-end investment company C) a closed-end investment company D) a face-amount certificate company
C) a closed end investment company It is only the closed-end investment company where shares trade at a premium or discount to the NAV per share.
Investors with a short time horizon most likely will invest in which class of mutual fund shares?
Class C 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; it goes the other way.
What can you tell about these investment companies from the information below? NAV ASK Company A 12.34 12.85 Company B 15.45 14.90 A) Company A must be open-end; Company B must be closed-end. B) Company A is closed-end and Company B is open-end. C) Company A can be either open-end or closed-end; Company B must be closed-end. D) Company A and Company B can be either open-end or closed-end.
Company A can be either open-end or closed-end; Company B must be closed-end. All open-end investment companies sell at NAV plus sales charge (if any). Therefore, the asking price can never be less than the NAV. Closed-end company asking prices are determined by supply and demand, so their prices are independent of the fund's NAV.
An investor interested in obtaining the benefit of professional portfolio management has been tracking a particular investment company for the past several months. In so doing, it becomes obvious that the market price of the shares moves in direct relation to the computed NAV. This investor must be following A) a balanced fund B) a money market fund C) a closed-end fund D) an open-end fund
D) An open-end fund Because closed-end funds trade in the secondary markets, their price is determined by supply and demand. On the other hand, open-end investment companies (mutual funds) always trade based on their NAV. Although money market funds are open-end, the market price of their shares doesn't move. Additionally, when the exam uses an adjective to describe a fund (balanced, common stock, etc.), it is always an open-end company (mutual fund).
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) Mutual fund shares are liquid and may be switched from fund to fund without tax liability. C) A fund always redeems shares at NAV, with little chance of a financial loss. D) The redemption value of mutual fund shares fluctuates according to the fund's portfolio value.
D) 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 liquid, investors are not guaranteed to receive an amount equal to the original investment.
One way in which closed-end management investment companies differ from open-end investment management companies is that A) they are federal covered securities B) their portfolio may contain common stock, preferred stock and debt securities C) they were in existence prior to 1940 D) they trade at a price independent of their net asset value
D) they trade at a price independent of their net asset value (NAV)
When investing in mutual funds, each of the following is a sales charge EXCEPT A) a front-end load B) a back-end load C) a CDSC D) 12b-1 fees
D)12b-1 Fee 12b-1 fees are not defined as sales charges because they are not a function of buying or selling your shares. These fees are asset-based, generally charged quarterly, and come out of the NAV. Front-end loads and back-end loads (CDSCs) are charged either when you buy the fund (front end) or sell your shares (back-end).
If a customer's portfolio is heavily invested in common stock mutual funds, what is the customer's greatest risk?
Loss of principal
To calculate the amount to be received on redemption of open-end investment company shares, which of the following would be used?
NAV minus Redemption fee The mutual fund will redeem shares at the NAV. Redemption fees or deferred sales loads, if any, are subtracted from the proceeds sent to the investor.
According to the Investment Company Act of 1940, an open-end investment company must compute its NAV:
No less than once a day
Pricing of a closed-end fund is determined by
Supply and demand for the shares Shares of closed-end funds are traded in the secondary market where prices are determined by supply and demand. The NAV of a closed-end fund is computed and not determined by the market price or trading price. Closed-end funds do not have sales charges but do have commission charges added to the market price.
Hedge funds do not offer the same _____ like mutual funds
Transparency
Louis owns an investment that is an unmanaged portfolio in which the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the investment portfolio terminates. This statement best describes which type of investment?
Unit Investment Trust (UIT) A unit investment trust (UIT) is a type of investment company whose units are sold in the secondary market and is generally unmanaged, or passively managed as the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the UIT terminates.