finra 2
A tax-exempt bond fund may invest in: A) common stock. B) municipal bonds. C) corporate bonds. D) short-term money market instruments.
Answer: B Bond funds will distribute taxable income or dividends unless invested in municipal bonds. Although dividend distributions from a municipal bond fund are tax exempt, capital gains distributions are fully taxable.
Which of the following information should a registered representative obtain from a prospective client to ensure suitable investment recommendations? Professional society memberships. Languages spoken. Liquidity needs. Number of dependents. A) II and IV. B) III and IV. C) I and II. D) I and III.
Answer: B Only information relevant to a prospective customer's investment needs and objectives is required to ensure suitable recommendations.
Closed-end investment companies: continuously issue new shares. generally make a one-time public offering of shares. may issue debt securities. may not issue preferred stock. A) II and IV. B) II and III. C) I and III. D) I and IV.
Answer: B Publicly traded, or closed-end, funds generally make a one- time offering of shares which then trade on the secondary market. Unlike mutual funds, they may issue both bonds and preferred stock.
Customers could pay a commission, rather than a sales charge, for shares of a(n): A) open-end investment company. B) closed-end investment company. C) front-end load fund. D) mutual fund.
Answer: B Sales charges could be paid on all types of open-end funds. Commissions are paid on securities traded in the secondary market, such as closed-end investment company shares.
Potential investment company clients should be advised to investigate a fund by looking at which of the following? Investment policy. Number of shares outstanding. Custodian bank. Portfolio. A) II and III. B) II and IV. C) I and IV. D) I and III. Click for Answer and Explanation
Answer: C Investment policy, track record, portfolio, and sales load should all be researched when assessing a fund. The identity of the custodian bank for the fund, or number of shares outstanding, does not bear on its performance or suitability.
A transfer agent is responsible for all of the following EXCEPT: A) canceling shares. B) issuing new shares. C) safeguarding the physical assets of the investment company. D) distributing dividends and capital gains.
Answer: C The custodian, not the transfer agent, is responsible for safeguarding the physical assets of the investment company.
An investment company share purchased at its NAV that can always be redeemed later at its then-current NAV is a: A) Class C share. B) Class A share. C) Class B share. D) Class D share.
Answer: A Class A shares are purchased at NAV plus sales charge. Class B shares pay the sales charge upon redemption. Class D shares have a level load plus a redemption fee. Class C shares have only a level load (a 12b-1 fee) which is taken from net assets during the year.
In which of the following markets would an investor expect to find closed-end investment company shares traded? A market maintained by the investment company itself. The over-the-counter market. The commodities market. The exchanges. A) II and IV. B) I and II. C) I and III. D) III and IV.
Answer: A Closed-end company shares are like ordinary stock. Once issued, they trade on exchanges or in the over-the-counter market.
A prospect has primary investment objectives of current income and safety of principal. During the initial public offering of a closed-end government bond fund, an agent explains to the prospect that the fund invests in U.S. government-backed bonds, which are very safe as to principal, and plans to make monthly distributions. Little could therefore go wrong. Taken as a whole, this representation is: A) misleading because closed-end fund shares are subject to market pricing. B) accurate because the fund invests in government bonds. C) accurate because the fund offers current income. D) misleading because government bonds experience considerable credit risk.
Answer: A Though parts of the agent's presentation are factually accurate, overall, the statements are misleading, because the value of the fund is subject to unpredictable change. Closed-end funds can, and often do, trade below their net asset value, thus subjecting the customer's principal to risk.
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.
Answer: B A common stock fund will help the couple meet their long-term growth objective.
If an investor wants to invest in the electronics industry but does not want to limit his investments to only one or two companies, which type of fund would be most suitable? A) Hedge. B) Specialized. C) Bond. D) Money market.
Answer: B A specialized or sector fund invests 25% or more of its assets in a particular region or industry.
If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors seeking tax advantages, ABC is a(n): A) corporate bond fund. B) money market fund. C) aggressive growth fund. D) municipal bond fund.
Answer: D Municipal bonds are considered second only to U.S. government securities in terms of safety. Also, interest received from the bonds is generally exempt from federal income tax.
Closed-end investment company shares can be purchased and sold: A) in the secondary market. B) from the closed-end company. C) from the sponsor. D) only over the counter.
Answer: A A closed-end company share is bought and sold in the secondary market.
Which of the following types of mutual funds has capital appreciation as its investment objective? A) Specialized. B) Income. C) Municipal bond. D) Balanced.
Answer: A An objective of high-capital appreciation is most likely realized by a stock fund. A specialized fund is one that invests in stocks of one particular industry or region, and its main objective is capital or price appreciation.
The monies and securities of a mutual fund company are held by the: A) custodian bank. B) investment adviser. C) underwriter. D) transfer agent.
Answer: A The custodian bank holds mutual fund monies and securities.
A FINRA member broker/dealer trading in shares of an open-end investment company may NOT buy shares of the fund: A) at a discount from the public offering price. B) for the purpose of resale at a later date. C) to cover existing orders. D) for the firm's own investment purposes.
Answer: B A broker/dealer may buy shares only to fulfill existing orders or for its own investment account, not for inventory.
All of the following are characteristics typical of a money market fund EXCEPT: A) its net asset value normally remains unchanged. B) it has a high beta and is safest in periods of low market volatility. C) the underlying portfolio consists of short-term debt instruments. D) it is offered as a no-load investment.
Answer: B A money market fund has almost no price volatility, since the underlying portfolio consists of low-beta instruments, and the fund is deliberately managed for low beta.
Which of the following investment company portfolios is supervised rather than managed? A) Real estate investment trust. B) Unit investment trust. C) Regulated open-end fund. D) Closed-end bond fund.
Answer: B A unit investment trust buys securities and holds them until redemption or until a specified future date. The securities in the portfolio are not traded, so no manager is needed. A REIT is not considered to be an investment company.
A registered representative speaking to a customer is explaining registered funds that invest in nonregistered hedge funds. Which of the following statements would NOT be correct? A) To divest of your fund of hedge fund investment, the shares will need to be redeemed by the mutual fund issuer. B) These funds, called funds of hedge funds, eliminate all of the risks associated with hedge funds. C) These funds generally allow purchases with an initial investment that is lower than what would be required to invest directly in a hedge fund. D) Hedge funds are directly available to sophisticated (accredited) investors, while funds of hedge funds allow all investors to invest in hedge funds indirectly.
Answer: B Because the portfolio of the registered fund consists of shares of nonregistered hedge funds, virtually all of the risks associated with hedge funds are transferred to the mutual fund. Funds of hedge funds allow all investors, not just accredited investors, to have access to hedge fund investments, and they are likely to have lower initial investment requirements, making that access even easier. To divest of fund of hedge fund shares, the issuer would have to redeem them from the investor, as is the case with all registered mutual funds.
The price of closed-end investment company shares is determined by: A) the net asset value plus the sales charge. B) supply and demand. C) the Financial Industry Regulatory Authority. D) the board of directors.
Answer: B Closed-end investment company shares trade in the secondary market. Therefore, supply and demand determine price.
Your married customers, ages 48 and 50, have a combined annual income of more than $200,000. They are concerned about the effects of rising inflation, and since they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the most suitable for these customers? A) XYZ Government Income Fund. B) ATF Overseas Opportunities Fund. C) NavCo Tax-Free Municipal Bond Fund. D) ABC Investment-Grade Bond Fund.
Answer: B Investment in an overseas equity fund will provide diversification not necessarily subject to U.S. inflation. The tax-free fund will not provide additional diversification or the best hedge against inflation. A high-grade bond fund will not add diversification.
Which of the following statements describe characteristics of open-end investment companies? Shares are redeemable at net asset value. Shares are always sold by prospectus. Only a limited number of shares are offered. Shares are sold on securities exchanges. A) III and IV. B) I and II. C) I and III. D) II and III.
Answer: B Open-end investment companies must be prepared to redeem shares at net asset value and open-end investment companies continually issue new shares that are sold by prospectus. Unlike open-end investment companies, closed-end investment companies issue a limited number of shares which then trade in the secondary market.
A mutual fund portfolio consists entirely of stocks of companies with either new products just released in the market place or companies holding patents pending. This mutual fund is best described as a: A) combination fund. B) special situation fund. C) dow theory fund. D) index fund.
Answer: B Special situation funds buy securities of companies that are considered to be in a position to benefit from special nonrecurring situations. Those could be; new management, new products, patents pending, takeover or turnaround situations.
A mutual fund invested in bonds with medium-length maturities. As the bonds matured, the fund reinvested the proceeds and purchased long-term bonds with maturities of up to 20 years. What might have happened to the fund if the reinvestment had occurred during a period when interest rates were rising? Decrease in yield. Decrease in income. Increase in yield. Increase in income. A) II and III. B) III and IV. C) I and II. D) I and IV.
Answer: B The longer a bond's maturity, the greater the risk to the investor. As a result, long-term bonds generally pay higher interest rates than medium- or short-term bonds. If a fund replaces medium-term bonds with long-term bonds, the bonds would pay higher interest rates and thus generate more income. Additionally, as interest rates increase, so do yields.
The fee received by the management company from an investment company depends on the: A) type of securities in the fund's portfolio. B) net assets of the fund. C) profits of the fund. D) volume of new shares sold.
Answer: B The management company receives a fee based on the average annual net assets of the fund.
Under the Investment Company Act of 1940, mutual funds must send financial statements to shareholders at least: A) annually. B) semiannually. C) monthly. D) quarterly.
Answer: B Under the Investment Company Act of 1940, mutual funds must provide semiannual and annual reports to shareholders.
When comparing exchange-traded funds (ETFs) to mutual funds, some features available in ETFs that are NOT found in the mutual funds would include the ability to: correlate to a specific index. sell short. be bought and sold on margin. represent an entire portfolio, or basket of securities. A) III and IV. B) II and III. C) I and II. D) I and IV.
Answer: B Unlike mutual fund shares, ETF shares can be traded on margin and sold short. They are similar in that they both represent an entire portfolio or basket of securities and both can have portfolios correlated to a specific index.
All of the following statements regarding a closed-end investment company are true EXCEPT: A) it sells at the market price plus a commission. B) it differs from a mutual fund. C) it may redeem its own shares. D) it is a type of management company.
Answer: C A closed-end investment company does not redeem its own shares. The term "mutual fund" refers to an open-end management investment company that issues redeemable shares.
A fund must inform its shareholders of their right to reinvest dividends at NAV: A) at the time of each distribution. B) only at the time of original purchase. C) annually. D) quarterly.
Answer: C A fund must notify shareholders of their right to reinvest at least annually (usually communicated through the annual report).
Financial information CANNOT be used in a mutual fund prospectus if the information is older than: A) 9 months. B) 12 months. C) 16 months. D) 60 days.
Answer: C A mutual fund prospectus may not contain information that is more than 16 months old.
Which of the following trade actively in the secondary market? Open-end funds. Closed-end funds. Unit investment trusts. REITs. A) I and III. B) III and IV. C) II and IV. D) I and II.
Answer: C Closed-end funds and REITs trade actively in the secondary market. Open-end funds and unit investment trusts do not trade in the secondary market; instead, shares are redeemed by the issuer.
Each of the following situations represents a potential violation by a registered representative EXCEPT: A) recommending investments to be purchased in a joint account while having suitability information on only one of the owners. B) recommending a municipal bond investment over a corporate bond without knowing the client's tax status. C) disclosing material information about an investment to a client. D) recommending a specific investment to a seminar audience of prospective clients.
Answer: C Disclosing material information about an investment is a registered representative's responsibility; all of the other choices are potential violations.
Which of the following statements regarding fixed municipal unit trusts are TRUE? The trust is managed. The trust is not managed. The portfolio can be traded. The portfolio can not be traded. A) I and IV. B) II and III. C) II and IV. D) I and III.
Answer: C Fixed unit trusts are not managed; the portfolio of securities does not change. As bonds mature or are called, the proceeds are distributed pro rata to the unit holders. These units are redeemable by the issuer or its agent.
To make a public offering, a registered investment company must have a minimum net worth of: A) $10 million. B) $100 million. C) 100000. D) $1 million.
Answer: C Investment companies are not required to register an offering with the SEC unless they have a net worth of $100,000.
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) preferred stock fund. C) common stock fund with a low portfolio turnover. D) common stock fund with a high portfolio turnover.
Answer: C Of the choices given, common stock is the only vehicle capable of providing long-term growth. Preferred stock will provide dividends, but it will not provide much growth as it trades like a bond in line with interest rate changes. Of the two common stock funds, the one with the lower portfolio turnover will have lower annual expenses.
The ex-date for a closed-end fund listed for trading on the NYSE is set by: A) FINRA. B) the SEC. C) the NYSE. D) the board of directors of the fund.
Answer: C The ex-dates for closed-end funds (typically 2 business days before the record date) are determined by the exchanges on which they trade. The ex-date for open-end funds (typically the business day following the record date) is determined by the board of directors of the fund.
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) 75%. C) 10%. D) 5%.
Answer: C To be considered a diversified investment company, a mutual fund can own no more than 10% of a target company's voting securities. Additionally, no diversified investment company may invest more than 5% of its portfolio in a single company's securities.
The prospectus of the ABC Fund contains the phrase "will have at least one-quarter of common stock investments in the field of business machines." The ABC Fund is: A) a balanced fund. B) a diversified fund. C) a growth and income fund. D) a specialized fund.
Answer: D A fund that, as part of its investment policy, makes a commitment to invest 25% or more of its assets into a particular economic or geographical sector is a specialized fund. A balanced fund invests in a balance of bonds and common and preferred stocks. A diversified fund does not invest more than 5% of the fund's assets in any one issuer. A growth and income fund may invest in many industries, seeking both dividends and capital gains.
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) An index fund. B) An income fund. C) A growth and income fund. D) A growth fund.
Answer: D A growth mutual fund invests in stocks that are growing rapidly and stresses capital appreciation rather than income. The key is that the growth and appreciation are synonymous.
An open-end investment company may do all of the following EXCEPT: A) continuously offer shares. B) borrow money. C) redeem shares. D) issue bonds.
Answer: D A mutual fund may not issue any senior securities, although it may purchase almost any type of security for its portfolio.
Which of the following may be done only with the approval of the shareholders of an investment company? A change from diversified to nondiversified status. The purchase of particular bonds on the open market. Personnel changes in the transfer agent's organization. A change in the fund's objectives. A) I and III. B) II and III. C) II and IV. D) I and IV.
Answer: D 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.
Mutual fund shares represent an undivided interest in the fund, which means that: A) investors can only purchase full shares. B) the fund can only hold securities of certain companies . C) the number of shares outstanding is limited to a predetermined maximum. D) each investor owns a proportional part of every security in the portfolio.
Answer: D Each mutual fund shareholder owns an undivided interest in the investment company's portfolio. Because each share represents one class of voting stock, the investor's interest in the fund is reflected by the number of shares owned.
If an investor is in a low tax bracket and wishes to invest a moderate sum to gain some protection from inflation, which of the following would you recommend? A) Municipal unit investment trust. B) Money market mutual fund. C) GNMA fund. D) Growth mutual fund.
Answer: D Growth funds invest chiefly in common stock. Historically, common stock provides greater protection from inflation than debt securities do.
All of the following terms apply to municipal unit investment trusts EXCEPT: A) regulated. B) registered. C) redeemable. D) managed.
Answer: D Municipal UITs buy bonds and hold them until redemption or call. The bonds are not actively traded so the portfolio is not managed but is overseen by a trustee.
n the sale of open-end investment company shares, the prospectus must be delivered: A) within 7 days of request. B) before the sales solicitation . C) at or before redemption. D) to the client either before or during the sales solicitation.
Answer: D Potential mutual fund customers must receive a prospectus before or during the sales solicitation.
The management fees paid by an investment company are part of: A) the custodial fees. B) the sales load. C) the underwriting agreement. D) the operating expense of the fund.
Answer: D The management fees paid by an investment company are part of the operating expenses of the fund. Custodial fees are also part of the operating expenses. A sales load is a selling cost contained within the underwriting agreement.
Under the Investment Company Act of 1940, redemption payments for mutual fund shares must be made within how many days? A) 5. B) 10. C) 15. D) 7.
Answer: D Under the Investment Company Act of 1940, if a customer tenders mutual fund shares for redemption, payment must be made within 7 calendar days, unless the NYSE is closed on other than a weekend or holiday, or the SEC grants an exception.
An investment adviser's contract must be approved by: A) the FINRA district committee. B) the fund's board of directors or outstanding shares. C) FINRA's National Adjudicatory Council. D) the SEC.
Answer: B An investment adviser's contract is approved annually by the board of directors or by a majority vote of the outstanding shares.
After a mutual fund's tenth year, performance statistics must show results for each of the following periods EXCEPT: A) 5 years. B) 10 years. C) 3 years. D) 1 year.
Answer: C Mutual fund performance statistics must show results for 1, 5, and 10 years, or the life of the fund, whichever is shorter.
Exchange traded funds: pass on capital gains to investors annually. can be bought and sold throughout the trading day. have high expense ratios. have low expense ratios. A) I and IV. B) II and III. C) II and IV. D) I and III.
Answer: C Noted advantages of Exchange Traded Funds (ETFs) are that they have low operating costs and thus low expense ratios and can be bought and sold throughout the trading day.
Which of the following are functions of an investment company's custodian bank? Safekeeping of portfolio securities and cash. Providing portfolio advice regarding transactions. Maintaining asset records for the fund. Safekeeping of customer securities. A) II and III. B) II and IV. C) I and III. D) I and IV.
Answer: C The custodian bank performs bookkeeping and clerical functions and retains the fund's cash and securities for safekeeping. The adviser offers portfolio advice and management services. The custodian provides for safekeeping of fund securities, not investors' securities.
The transfer agent of a mutual fund: redeems shares. sells shares. holds custody of fund securities. handles name changes of mutual fund ownership. A) II and III. B) II and IV. C) I and IV. D) I and III.
Answer: C The transfer agent redeems shares of a mutual fund at the price calculated after receiving a request for redemption. The transfer agent also handles the transfer of account ownership for such transactions as an inheritance or gift.
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.
Answer: D A unit investment trust has no board of directors; rather, it has a board of trustees. A UIT must follow a stated investment objective (as must any investment company) and does not charge a management fee because it is not a managed portfolio.
Under the Conduct Rules, the maximum sales charge on any transaction involving an open-end investment company share is: A) 8.5% of the net asset value . B) 9% of the net asset value. C) 9% of the offering price. D) 8.5% of the offering price.
Answer: D Open-end investment companies (mutual funds) are limited to a maximum sales charge of 8.5% of the offering price.
If a registered representative is comparing two mutual funds for a customer, which of the following comparisons would NOT be permissible? A) Comparing an equity growth fund to a money market fund with the intention of convincing an investor to purchase the growth fund. B) Comparing diversified growth funds from two different fund families. C) Comparing two equity funds with slightly different investment objectives, even if the differences and their consequences are carefully explained. D) Comparing a long-term bond fund to a shorter-term bond fund to demonstrate the trade-offs that exist between risk and return.
Answer: A A characteristic of money market funds is that they deliberately avoid growth. Thus, for the growth investor, a comparison of a money market fund to a growth fund is an unfair comparison.
All of the following statements concerning investment companies are true EXCEPT: A) to be considered a diversified investment company, the company must invest in both equity and debt instruments. B) a nondiversified company is any management company not classified as a diversified company. C) an investment company that invests the majority of its assets in one industry may still qualify as a diversified company. D) a diversified company can be either an open-end or a closed-end investment company.
Answer: A A diversified investment company could be either a closed-end company or an open-end company. There is no requirement for a diversified company to have both equity and debt in its portfolio. An investment company can follow the 75-5-10 diversification formula and still invest within one industry (e.g., a technology fund).
If a mutual fund's objective is income, it would NOT hold which of the following securities in its portfolio? A) Income bonds. B) U.S. T-notes. C) Preferred stock. D) Corporate bonds.
Answer: A A fund designed to generate current income for its shareholders would not hold an income bond, also known as an adjustment bond. Income bonds pay interest only if the issuer has enough earnings to do so. They are often issued by companies coming out of bankruptcy. As a result, these bonds tend to trade like zeroes.
If a customer's portfolio is heavily invested in common stock mutual funds, what is the customer's greatest risk? A) Loss of principal. B) Changes in interest rates. C) Loss of diversification. D) Loss of liquidity.
Answer: A A mutual fund with a portfolio of common stock is subject to market risk. If the market falls, the value of the fund's shares also fall, subjecting the owner to loss of principal.
All of the following are redeemable securities EXCEPT: A) REITs. B) mutual funds. C) unit investment trusts. D) variable annuities.
Answer: A A redeemable security has no secondary market. To sell (redeem) a redeemable security, the investor must go back to the issuer or its agent. REITs trade in the secondary markets either on exchanges or OTC.
A stock mutual fund wishes to advertise itself as diversified. To be able to do so, the fund must invest: A) All of these. B) at least 75% of its assets in securities other than its own. C) no more than 5% of its assets in any one target company. D) so that it holds no more than 10% of the voting stock of any one company.
Answer: A All of these choices comprise the 75-5-10 rule for diversified investment companies under the Investment Company Act of 1940. At least a minimum of 75% of the total assets must be invested in securities other than those of the investment company. Of the assets invested, no more than 5% of the funds total assets can be in any one company nor can the percentage ownership of any one company be more than 10%.
If the value of securities held in a fund's portfolio increases, and the amount of liabilities stays the same, the fund's net assets: A) increase. B) decrease. C) stay the same. D) are more liquid.
Answer: A An appreciation in value of fund assets, without a corresponding increase in liabilities, leads to an increase in the fund's net asset value (total assets minus liabilities equals net assets).
A mutual fund must, at a minimum, provide which of the following periodic reports to shareholders? Audited annual reports. Unaudited annual reports. Audited semiannual reports. Unaudited semiannual reports. A) I and IV. B) I and III. C) II and III. D) II and IV.
Answer: A An investment company must send an unaudited report to shareholders at least semiannually and an audited report of its financial condition at least annually.
SEC regulations for securities issued by investment companies prohibit which of the following? Closed-end funds from issuing preferred stock. Open-end funds from issuing preferred stock. Closed-end funds from issuing bonds. Open-end funds from issuing bonds. A) II and IV. B) I and III. C) I and IV. D) II and III.
Answer: A Closed-end funds may issue more than one class of security, including debt issues and preferred stock. Open-end funds may issue only one class of security: redeemable, voting common stock; they may not issue senior securities.
A customer is interested in an exchange-traded fund (ETF). With regard to the trading of ETFs, the customer should be aware that: ETFs can be purchased throughout the trading day. ETFs use forward pricing, as all mutual funds do. real-time quotes are available for ETFs. the NAV calculated at the end of the day, plus a sales charge, will equal the trading price. A) I and III. B) I and IV. C) II and III. D) II and IV.
Answer: A ETFs can be traded throughout the trading day. Changing price quotes are available in real time as investors buy and sell. Although ETFs have an NAV that is calculated on the basis of the portfolio holdings, the trading price is determined by supply and demand in the open market, with customers paying commissions.
Each of the following is a characteristic of money market funds EXCEPT: A) High beta . B) Portfolio of short-term debt instruments . C) Offered without a sales load . D) Stable NAV.
Answer: A Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and bankers acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1 per share). Beta is a measure of volatility; money market funds have low betas.
The capital structure of an open-end investment company can include: A) one issue of common stock and limited bank borrowing. B) preferred and common stock with no bank borrowing allowed. C) only debt issues with no bank borrowing allowed. D) preferred stock, common stock, and bonds.
Answer: A Open-end investment companies may only issue redeemable common stock. Preferred stock, bonds, and other forms of senior securities are not allowed. Bank borrowing is allowed subject to certain limitations.
Which of the following mutual funds should an investment adviser representative recommend to a corporate client whose objective is current income with moderate risk? A) Preferred stock fund. B) Aggressive growth fund. C) Money market fund. D) High-yield bond fund.
Answer: A Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high, rather than a moderate, degree of risk.
In the sale of open-end investment company shares, the prospectus: A) must be delivered to the client either before or during the sales solicitation. B) is not necessary. C) must be delivered before the sales solicitation . D) must be delivered at, or before, the delivery of the fund share certificate.
Answer: A The sale of mutual fund shares requires that the client receive the prospectus before, or during, a sales solicitation.
Last year, the bond market was profitable and ABC Fund had 70% of its assets in bonds. Next year, the fund's managers expect the stock market to do well, and will adjust the fund's portfolio so 60% of its assets will be invested in stock. ABC is probably what type of fund? A) Balanced. B) Hedge. C) Specialized. D) Aggressive growth.
Answer: A This fund is invested in both stock and bonds; it is a balanced fund. The percentage invested in the two types of securities is adjusted to maximize the yield obtained; percentages are seldom fixed and are usually at the discretion of the investment adviser.
The primary objective of a particular mutual fund is the payment of dividends, regardless of the market's current state. Capital growth is a secondary objective. Which of the following industry groups would be appropriate for the fund's portfolio? A) Public utilities. B) Aerospace. C) Computer technology. D) Consumer appliances.
Answer: A Utilities are defensive industries; they tend to pay dividends consistently.
Which of the following is true regarding a "summary section" and a "statement of additional information" for management investment companies? A) Neither are required to be in the prospectus of a mutual fund. B) A statement of additional information (SAI) need not be included in the prospectus of a management company. C) A summary section need not be included in the prospectus of a mutual fund. D) Both must be included in the prospectus of a management company.
Answer: B A statement of additional information (SAI) need not be in a prospectus but available for both open and closed-end investment companies. It consists of information not necessarily needed to make an informed purchase decision but still useful to the investor. The SEC however mandates that "enhanced disclosure" in the form of a summary section be included in the prospectus of open-end investment companies (mutual funds). It must be written in plain language and the SEC mandates the order of, and the items to be addressed in the summary.
All of the following are advantages of investing in mutual funds EXCEPT: A) the ability to qualify for reduced sales loads on the basis of accumulation of investment within the fund. B) the ability to have personal control over the investments in the portfolio. C) exchange privileges within a family of funds managed by the same management company. D) the ability to invest almost any amount at any time.
Answer: B Control over the investments in the portfolio is given to the investment manager, not to the individual investors.
All of the following events will affect the NAV per share of a mutual fund EXCEPT: A) The fund pays dividends to its shareholders. B) Wholesale redemption of fund shares . C) Changes in the market value of the fund's portfolio of securities . D) The fund receives cash dividends on the securities in its portfolio .
Answer: B Dividends paid and received by the fund directly affect NAV. Changes in the portfolio value affect NAV because the securities are marked to market daily. While share redemption will reduce total net asset value, the number of shares outstanding decreases in proportion, so the NAV per share stays the same.
When discussing mutual funds with a customer, each of the following statements are prohibited EXCEPT: A) Buy the shares on record date in order 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.
Answer: B Most funds provide a combination privilege, allowing investors to aggregate purchases made in different funds in the same family to qualify for a breakpoint. The income yield of a mutual fund includes dividends only. A group of friends is not eligible for a breakpoint (investment clubs are not eligible). "Selling dividends" is a prohibited practice because of the immediate tax liability incurred with the dividend and share price adjustment that results after the dividend distribution.
If a customer purchases shares in a municipal bond fund, which of the following statements are TRUE? Dividends are taxable. Dividends are not taxable. Capital gains distributions are taxable. Capital gains distributions are not taxable. A) II and IV. B) II and III. C) I and III. D) I and IV.
Answer: B Municipal bond funds distribute federally tax-free dividends, but any capital gain distribution is subject to taxation. The tax preferential treatment of municipal bonds is limited to the interest income earned, not the gains.
In a mutual fund portfolio, it is permissible to buy all of the following EXCEPT: A) shares of other mutual funds. B) stock on margin. C) index options. D) junk bonds.
Answer: B Mutual funds may not purchase securities on margin because, in the event of a margin call, they have no recourse to investors' funds. A fund is not prohibited from buying options, low-quality bonds, or any other mutual funds.
According to the Investment Company Act of 1940, an open-end investment company must compute its NAV: A) annually. B) no less frequently than once per day. C) weekly. D) monthly.
Answer: B Mutual funds must calculate the value of fund shares at least once per business day; funds may calculate the value more often and will disclose this fact in the prospectus.
If an open-end investment company wishes to change its investment objective, it may only do so with a: A) unanimous vote of the board of directors. B) majority vote of the outstanding shares. C) majority vote of the outstanding shareholders . D) two-thirds vote of the outstanding shareholders .
Answer: B The Investment Company Act of 1940 requires the fund to have a clearly defined investment objective. The only action that can be taken to change the investment objective is a majority vote of the outstanding shares (shares vote, not shareholders).
If your great-grandmother is interested in safety, liquidity, and tax-free income, which of the following would you recommend? A) Income bonds. B) Exploratory oil and gas pool. C) Insured short-term municipal bond fund. D) High yield income fund.
Answer: C High-yield income funds usually invest in low-rated bonds; income bonds do not pay interest unless the board of directors declares a payment. An insured short-term municipal bond mutual fund is relatively safe, very liquid, and provides income free from federal tax.
A board of directors member for a mutual fund must serve a minimum term of: A) 3 months. B) 6 months. C) 1 year. D) 2 years.
Answer: C Mutual fund board of directors members must serve a term of at least 1 year, and cannot serve more than 5 years without being reelected.
Mutual funds are like other types of corporations in which of the following ways? They may issue equity and debt. The board of directors makes policy decisions. Shareholders have ownership rights. Their shares trade in the secondary market. A) I and IV. B) II and IV. C) II and III. D) I and III.
Answer: C 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.
A prospectus must be delivered to customers in all of the following transactions EXCEPT the sale of a: A) new issue of registered common stock. B) unit investment trust. C) publicly or exchange traded fund (ETF) in the secondary market. D) mutual fund.
Answer: C Publicly or exchange traded funds (closed-end funds) trading in the secondary market do not require the delivery of a prospectus.
Your customer is asking if either exchange-traded funds (ETFs) or exchange-traded notes (ETNs) might be suitable investments for his portfolio. The customer makes several statements regarding his understanding of the products but only one of them is accurate. Which is it? A) If I want to sell my shares of an exchange-traded fund (ETF) I have to wait until the next price is calculated to value the portfolio of securities. B) Exchange-traded notes (ETNs) are equity securities because they trade on exchanges. C) Exchange-traded notes (ETNs) are issued by financial institutions and therefore I should be concerned about the credit worthiness of the issuer. D) Exchange-traded funds (ETFs) have a fixed coupon rate that I should expect to realize when they mature.
Answer: C The only accurate statement is the one expressing that (ETNs) are issued by financial institutions and therefore the credit worthiness of the issuer should be a concerning factor. ETNs are debt instruments not equity instruments. ETNs have a final payment at maturity based on the return of a single stock, a basket of stocks or an equity index. ETF prices fluctuate based on the value of the securities within the fund portfolio throughout the trading day and therefore are not forward priced like open-end mutual fund shares are.
Investment company shareholders must receive financial reports at least semiannually. All of the following are true regarding these reports EXCEPT A) a valuation of all securities in the IC portfolio as of the date of the balance sheet provided in the report must be included B) a statement of all compensation paid to the board of directors (BOD) must be included C) the report is regulated under FINRA's rules regarding communications with the public D) one of the semiannual reports must be audited
Answer: C The reports are required to be supplied to IC shareholders under the Investment Company Act of 1940. They are prepared and distributed by the investment companies. Unless forwarded by broker/dealers to their customers, the semiannual reports would not be regulated under FINRA's communication with the public rules for broker/dealers.
When speaking to a customer about exchange-traded funds (ETFs), a registered representative could CORRECTLY state that these funds: A) cannot be bought on margin. B) cannot be purchased using traditional limit or stop orders. C) do not have the same potential tax consequences as mutual funds, such as annual capital gains distributions. D) can be purchased only by paying a sales charge added to the NAV.
Answer: C With ETFs, portfolio turnover rate is minimized because they do not have to buy and sell shares within their portfolio to accommodate shareholder purchases and redemptions. This can affect the potential tax consequences of annual capital gains and losses. They can be traded like other exchange products by use of traditional stock trading techniques and are priced by supply and demand. Customers pay commissions, not sales charges.
Which of the following funds would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection? A) S&P 500 Index fund. B) An international index fund. C) A small-cap growth fund. D) A large-cap growth fund.
Answer: D A large-cap growth fund is the most appropriate choice for a moderate-risk client because large capitalization stocks are generally less volatile than small-cap stocks and provide long-term capital growth. This is a more appropriate choice than the index fund because there is no stock selection there, only investing to parallel the index.
A mutual fund's expense ratio is found by dividing its expenses by its: A) public offering price. B) income. C) dividends. D) average annual net assets.
Answer: D A mutual fund's expense ratio is calculated by dividing its expenses by its average annual net assets.
The principal underwriter of an open-end investment company is also known as the: A) dealer. B) trustee. C) registrar. D) sponsor.
Answer: D A mutual fund's underwriter is also known as the sponsor or distributor of the fund.
Which of the following mutual fund portfolio allocations would probably be most suitable for a 40-year-old professional who states that he is an aggressive investor? A) 50% corporate bonds, 50% municipal bonds. B) 50% small-cap stocks, 50% U.S. government securities. C) 5% small-cap stocks, 5% international stocks, 90% large-cap stocks. D) 50% small-cap stocks, 25% international stocks and 25% large-cap stocks.
Answer: D A portfolio of small-cap stocks as well as one with international stock is generally considered to be one with the higher risk levels associated with an aggressive investor. Comparatively, the remaining choices would be too conservative for an aggressive investor.
All of the following could be a redeemable security under the Investment Company Act of 1940 EXCEPT a(n): A) security that pays out each investor's proportionate share of the company's assets. B) investment company security sold as a continuous initial public offering. C) security issued by an open-end investment company. D) security sold on an exchange at the market price buyers and sellers have established.
Answer: D A redeemable security is purchased from and redeemed by the security's issuer. A security that can be traded on a secondary market is not redeemable. Open-end shares are redeemable securities, closed-end shares are not.
If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as a: A) growth fund. B) utilities fund. C) closed-end company. D) unit investment trust.
Answer: D A unit investment trust issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed, it is not traded.
An investment company that holds which of the following does NOT meet the definition of a diversified investment company under the 1940 Investment Company Act? A) 80% of its assets in securities of 50 health care companies. B) 8% of a given corporation's voting stock in its portfolio. C) 4% of its assets invested in stock of a major publicly held corporation. D) 33% of its assets in securities issued by a small-cap new issue.
Answer: D An investment company that has invested 33% of its assets in any issue, small-cap or not, exceeds the limits set in the 75-5-10 test. This test requires that 75% of the assets be invested in securities issued by companies other than the investment company (regardless of the type of companies) so that no more than 5% of total assets are invested in any one company, and no more than 10% of an outside corporation's voting securities are owned by the investment company.
A broker/dealer selling open-end investment company shares will be required to return its entire selling concession if the principal underwriter has to repurchase those shares from a customer within how many business days of trade date? A) 15. B) 30. C) 60. D) 7.
Answer: D Any concession earned by the member selling the shares must be returned to the principal underwriter of the fund if the shares are redeemed within 7 business days of purchase.
All of the following would qualify as management companies EXCEPT: face amount certificate companies. unit investment trusts. closed-end investment companies. open-end investment companies. A) I and III. B) II and IV. C) III and IV. D) I and II.
Answer: D As defined in the Investment Company Act of 1940, closed- and open-end funds are subclassifications of management companies (actively managed portfolios). Face amount certificate companies and unit trusts are separate investment company classifications and do not have managed portfolios.
The net asset value of an international bond fund can be expected to increase if: interest rates rise abroad. interest rates fall abroad. the U.S. dollar strengthens. the U.S. dollar weakens. A) I and III. B) I and IV. C) II and III. D) II and IV.
Answer: D If interest rates fall, bond prices will rise, thus increasing the NAV of a bond portfolio. If the U.S. dollar weakens, the value of other currencies will rise. This would also increase the NAV for a portfolio of international bonds.
All of the following statements regarding money market funds are true EXCEPT: A) investors pay a management fee. B) dividends accrue daily. C) investors can buy and sell shares quickly and easily. D) specified rates are guaranteed.
Answer: D Interest on money market instruments is not guaranteed or specified. Money market funds are typically no-load funds with no redemption fee, but investors do pay a management fee. The dividends earned on an investor's shares are accrued daily.
Investment clubs: can take advantage of breakpoints on mutual fund purchases. cannot take advantage of breakpoints on mutual fund purchases. are permitted to purchase new equity issues at the POP. are not permitted to purchase new equity issues at the POP. A) I and III. B) I and IV. C) II and IV. D) II and III.
Answer: D Investment clubs are not considered restricted persons under the rules regarding sales of a new issue, and therefore are eligible to purchase new equity issues. Note that if a registered representative (a restricted person) were a member of an investment club, the club would be prohibited from buying a new equity issue. Investment clubs are never permitted to take advantage of breakpoints available on mutual fund purchases.
Lifecycle funds embody all of the following characteristics EXCEPT A) these funds are usually structured as funds of funds so that the entire composition of the fund portfolio consists of funds offered by the same fund family B) the asset allocation of the fund will be adjusted regularly to keep risk and reward balanced optimally, given the time remaining until the target date is reached C) the objective assumes that as an investor nears retirement, the investor's tolerance for risk will diminish D) as the fund moves closer to its target date, the portfolio holdings will be adjusted to gradually assume more and more risk
Answer: D Lifecycle or target date funds are managed in such a way as to lessen the amount of risk associated with the portfolio as it gets closer to its target date, which is usually the anticipated time of retirement for the fund investor.
Closed-end investment company shares may be: traded in the secondary markets, including the exchanges and OTC markets. sold in the OTC primary market only. redeemed by the closed-end investment company. traded by institutional investors. A) I and II. B) II and III. C) III and IV. D) I and IV.
Answer: D Once a closed-end investment company has distributed shares, those shares are traded in the secondary market by both individual and institutional investors.
A retired customer was unhappy with the low yields paid by her CDs. In their first meeting, her registered representative recommended Class B shares of a long-term government bond fund, emphasized the safety of government bonds, and provided her with a prospectus. After signing a statement saying she had read and understood the prospectus, the customer invested all of her money in the fund. A year later, interest rates rose and the value of the fund declined. Having assumed the fund was government guaranteed, she was upset and became increasingly so when she learned that the deferred sales charge could cause her to lose additional money if she were to redeem her shares. Which of the following statements is TRUE? A) Since no one can predict interest rate moves, and the customer had read the prospectus, the bond fund was an appropriate investment. B) Because the fund invests in government bonds, it is government guaranteed and is therefore just as safe as a CD. C) Because her money was originally in a single investment, it was suitable to move her funds into another single investment. D) The representative should have fully explained the features, charges, price fluctuations, and other characteristics of a bond fund before having the customer make such a substantial investment commitment.
Answer: D This customer is used to low-risk investments. The prospectus must not only be supplied, but the risks fully explained as well.
