INVESTMENT COMPANIES
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
$12,000. Appreciation is not considered. 8d
An attractive investment for a customer with a very high risk tolerance might be a leveraged ETF. One your firm recommends is the QUID 3x leveraged ETF. You decide to track its performance for several days during a period of high market volatility. The starting date value is $50 per share. Day one ends with the specified index down 3%. Day two sees the index rise by 4%. One the third and final day, the index declines by 1%. The value of the QUID share is now
$49.43 The 3x leverage will multiply the index movement by a factor of three. $50 x 91% (3% drop x 3 = 9%) x 112% (4% up x 3 = 12%) x 97% (1% drop x 3 = 3%) and that rounds to $49.43. LO 8.h
Mutual Funds must provide reports to their shareholders on
2 times per year. Annually Audited Report Semi Annual Un-audited Report 8j
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? A Short-term capital gain of $700 B Short-term capital gain of $700, interest income of $50 C Short-term capital gain of $700, dividend income of $50 D Short-term capital gain of $600
A Short-term capital gain of $700 DIVIDEND IS A DISTRACTOR Buying at $50 per share in September and selling at $57 per share the next May is a $700 capital gain over a period of less than one year. LO 8.i
Class A shares of the JILCO Fund are offered to the public at net asset value per share plus a sales charge of 4.25%. If the next computed net asset value per share is $39.39, an investment of $10,000 will acquire A 253.871 shares. B 243.072 shares. C 265.816 shares. D 243.546 shares.
B 243.072 shares. The numbers are $39.39 ÷ 95.75% which equals $41.14 per share. Then, divide the $10,000 purchase by the POP of $41.14 to arrive at 243.072 shares. 8d
An aggressive investor is willing to risk $25,000 to align with his bearish outlook on the overall market. He notes liquidity being important if he needs to divest quickly, and risk taken needs to be commensurate with the upside potential. Which of the following would align most suitably with these objectives? VERY IMPORTANT
Broad-based market inverse index fund Keyword is "upside potential". Looking for the inverse relationship between the index and the market. 8h
A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in A a long-term government bond fund. B a large-cap growth fund. C an intermediate-term, high-grade corporate bond fund. D an intermediate-term government bond fund.
C an intermediate-term, high-grade corporate bond fund. In all these cases, liquidity should not be a problem because mutual funds have a seven-day redemption requirement. However, interest rate risk increases as the maturities lengthen, so the intermediate-term portfolios offer that benefit, albeit at a slight reduction in income. The high-grade corporate bonds will offer a greater return with slightly more risk than the government bonds. If the question had said the investor wished to minimize risk, then the government bond fund would have been a better selection. 8g
Given the current business climate, an investor believes that a number of industries will be going through a consolidation over the next two to three years. Willing to invest $30,000 in the opportunity to profit if the consolidation occurs, which of the following would be the most suitable recommendation?
Special situation fund Specific to mergers and acquisitions in ONE industry. 8g
A client with a stated objective of speculation has just invested in a 3x leveraged ETF. The ETF's value was $50 per share. On the first day, the ETF earned 2% and the next day it earned 4%. On the third day, there was a 6% decline. What is the current value after the third day? A $49.86 B $50.00 C $55.80 D $48.68
D $48.68 A 3x leveraged fund moves in the same direction as the ETF's value, but is multiplied by 3 times. Day 1 earned 2%, the ETF's value increase by 6% (3x2), or $3 ($50x6%) which equals $53. The next day it increased by 12% (3x4%), or $6.36, to $59.36. On the final day, the drop was 18% (3x6%), or $10.68 equal $48.68 8.h
Net Investment Income NII
Dividends + interest - expenses
A balanced fund consists of both
Equities and Debt instruments 8g
Two customers in their 20s, married only a few years, should select which investment for their IRAs?
Growth-oriented mutual funds 8G
Investment Companies do not include
Holding companies
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
INTERVAL FUND The unique characteristic of an interval fund is that at certain specified intervals, shareholders are able to sell their shares back to the fund at NAV 8b
According to Municipal Securities Rulemaking Board (MSRB) rules, can a municipal securities representative give $50 crystal vases to 10 of his favorite clients?
If each gift meets the $100 annual gift limitation, then they are permitted.
ETF Risks Include
Index Risk Tracking Risk
If general interest rates increase, the interest income of an open-end bond fund will do which of the following?
KEYWORD: INTEREST INCOME It will Increase. The question states that interest rates are increasing. As that new money is received, the fund's manager will be able to invest in bonds offering that higher return. This will cause the income of the fund to increase.
A mutual fund's unrealized loss last month results in which of the following?
Lower net asset value (NAV) per share Reduction in the proceeds payable to shareholders who liquidate their shares 8c
UIT Risks Include
Market Risk Interest Rate Risk
Mutual Fund Risks include
Market Risk Interest Rate Risk Expense Risk Tenure
REDEEM AT THE
NAV NET ASSET VALUE 8C
What is the time limit for Rights of Accumulation ROA
No time Limit It's the LOI that has a time limit - 13 months. 8d
If two customers wish to combine their purchases of a mutual fund to take advantage of the fund's breakpoints, you should advise them that they may
Not do so, two customers two customer CANNOT combine their purchases to take advantage of a fund's breakpoints. That would be considered an Investment Club and that is not allowed for breakpoints. 8d
In the event of an emergency, federal law would require redemption proceeds forwarded within
One of the provisions of the Investment Company Act is that redemption requests must be honored within 7 days. 8i
Mutual Funds are
Open End Investment Companies
Your customer owns a leveraged ETF, having a performance goal of 200% of the underlying index. When purchased two weeks ago, the ETF was priced at 50. If the index was up 10% the first week and down 20% the second week, what is the value of the ETF today if it performed as it was intended to?
Priced at 50 when purchased, after the first week's 10% increase in the index, the 2× leveraged ETF would be up 20% (20% × 50 = 10 point increase) to 60. After the second week's 20% decline in the index, the 2× leveraged ETF would be down 40% (40% × 60 = 24 point decrease) to 36. the answer is 36. LO 8.h
CEF Risks Include
Pricing Risk Leverage Risk
Given the NAV and asking price per share, which of the following could be open-end investment companies? A Nav: $21.86 Ask: $20 B Nav: $19.00 Ask: $20 C Nav: $10.95 Ask: $12 D Nav: $22.50 Ask: $25
Requirement of maximum sales charge of 8.5% of the ask or public offering price. Only the correct choice fits within that parameter with a sales charge of 5% $1.00 divided by $20.00. 8.c
The underwriter's concession AND administrative fee is part of the
Sales Load 8d
An investor purchased a 2x leveraged inverse ETF for $10,000. The ETF was linked to the performance of the S&P 500. During the first period, the S&P 500 rose by 8%, while during the next period, the index fell by 7%. What is the investment's value at the end of the second period?
The investment value would have declined to $8,400 ($10,000 × 16% = $1,600; $10,000 - $1,600 = $8,400). When the S&P 500 fell by 7%, the leveraged inverse ETF would have increased by 14% from $8,400 to $9,576 ($8,400 × 14% = $1,176). $8,400 + $1,176 = $9,576. KEYWORD: 2x leverage. It does the opposite twice.
When an agent explains mutual funds to a prospective investor, which of the following statements may be made?
The redemption value of mutual fund shares fluctuates according to the fund's portfolio value. 8C
under rights of accumulation
We combine all of the accounts, then choose the breakpoint that falls under the balance you qualify for. Then multiply only the new money by that percentage to get the sales charge dollar amount that will be paid. 8d
An investment company registered under the Investment Company Act of 1940, whose specific purpose is to aid in the promotion and development of small businesses, is
a business development company.
Most business development companies (BDCs) are classified as
a closed-end investment company. 8b
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 common stock fund with a low portfolio turnover. Common stock is long term growth and choosing a portfolio with a lower turnover is a better way to go. 8g
An unmanaged portfolio is a characteristic of
a unit investment trust. 8A
If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as
a unit investment trust. 8a
Capital gains distributions are always considered long term and taxed at the
capital gains rate 8f
When calculating net investment income, an investment company includes
dividends plus interest minus operating expenses. - remember DIE 8f
By distributing 90% of investment income, open-end companies can avoid
double taxation.
UIT do not
have Board of Directors employ an investment adviser actively manager their own portfolio 8a
One of the goals of target date funds is to help manage
investment risk.
Capital gains distributions are always considered
long term and taxed at the capital gains rate 8F
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. 8B
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. 8b
SEC rules require that open-end management companies distribute dividends to their investors from the firm's
net investment income.
Equity index funds move with the markets and offer
no downside protection. 8g
A balanced fund aligns with growth objective and
offers some downside protection against falls in the market.
Management Companies are
open end closed end
UIT shares are
redeemable units or shares of beneficial interest
All of the following are expenses to the operation of mutual funds except
the compensation paid to the underwriter or distributor. The underwriters receive their compensation from the sales charges. Investors pay those charges rather than the fund itself. 8.f
Many mutual fund investors elect to reinvest their dividends into additional shares of the fund. When an investor does this with dividends paid by a common stock fund,
the dividends are taxable in the year received. 8F
Net asset value (NAV) per share for a mutual fund can be expected to decrease if
the fund has made dividend distributions to shareholders. 8c
The management fees paid by an investment company are part of
the operating expense of the fund.
There are risks inherent in any investment. One risk that index ETFs have that should be used to guide the investor's selection decision is
tracking risk. 8i
An investor, age 36, has a net worth of $650,000, with an annual income of $65,000. Wanting to add to an existing portfolio, the investor is not concerned about generating more income, as that seems to be adequate already. However, the investor does note that keeping taxes to a minimum is an objective. Which of the following funds would be the most suitable, given the investor's objectives? A Fund X: invests in companies with long-term growth potential; turnover ratio of 25% B Fund W: invests in utility companies; turnover ratio of 25% C Fund Z: invests in preferred shares; turnover ratio of 50% D Fund Y: invests in companies that have capital appreciation potential; turnover ratio of 100%
A Fund X: invests in companies with long-term growth potential; turnover ratio of 25% This investor is not concerned about income. This would eliminate the utility and preferred share funds (Fund Z and Fund W). Of the remaining two funds, Fund X and Fund Y both have the same general objective, but the one with the lower turnover ratio would generate less tax liability. The portfolio turnover ratio reflects a fund's holding period of securities being bought and sold by the fund manager. If a fund has a turnover ratio of 100%, the entire portfolio is likely to turn over in a year, and capital gains distributions are likely to be short term and subject to the maximum tax rate. That increases the tax liability, and therefore, is not the best option. By contrast, a 25% turnover ratio means the average holding period of the securities in the portfolio is four years. This would mean that any capital gains distributions are more likely to be long term and subject to a lower tax rate. 8g
In an economy where interest rates are rising, holders of which of the following investment companies, whose portfolios are in or track long-term bonds, are likely to see the greatest decline in price? A Unit investment trusts B Mutual funds C Exchange-traded funds D Closed-end funds
A Unit investment trusts All of the other options have the ability to shorten the duration when rates are high. 8i
An investor studying the annual report of a registered investment company reads that the net asset value per share has increased from $16.10 to $17.45. He notes that the market price has declined over the period. The investment company must be A closed-end company. B unit investment trust. C open-end company. D real estate investment trust.
A closed-end company. It is the closed-end investment company (CEF) where the market price is determined by supply and demand rather than the NAV. As a result, the trading price can be the same, above, or below the NAV. 8c
Securities transactions take place in the primary and secondary markets. Which of the following investment companies can trade in both?
A closed-end fund CEF 8c
Which of the following investments would be the least appropriate for a customer's IRA?
An inverse ETF IRAs are long-term investments while inverse ETFs are suitable for those with a short time horizon. LO 8.h
If interest rates were projected to decline, lengthening the duration of the portfolio would likely to be the action taken in all of the following except A municipal bond unit investment trust. B corporate bond mutual fund. C individual investor's municipal bond portfolio. D Treasury bond mutual fund.
A. municipal bond unit investment trust. When interest rates are declining, bonds with a longer duration rise the most. Therefore, steps would be taken to lengthen the duration to take advantage of the anticipated increase to the market value of the bonds. That cannot be done in a UIT because, once constructed, the portfolio does not change. LO 8.a
Certain events will affect the net asset value (NAV) per share of a mutual fund. Which of the following events will not affect NAV?
Although share redemption will reduce total NAV, the number of shares outstanding decreases in proportion, so the NAV per share stays the same. LO 8.c
A registered representative (RR) has just explained to a customer that to purchase a particular security, the customer would pay the asking price plus a commission, not a sales charge. Which of the following is the RR speaking of?
Any closed-end fund 8c
A customer of your broker-dealer is bullish on U.S. equity securities across a broad spectrum of industries. He would like to participate in an anticipated upward movement of an equity stock index. Which of the following investments would you recommend as being closely related to the movement of equities in general?
Standard & Poor's depository receipts The SPDR is an index fund designed to replicate and track the performance of the S&P 500, a broad-based equity index. LO 8.h
Pricing of a Closed end Fund is based on
Supply and Demand
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)
In which of the following investment strategies would it be illegal for a mutual fund's portfolio manager to engage?
The Investment Company Act of 1940 prohibits mutual funds from engaging in short selling. The fund's objective will affect the type of securities to be held in the portfolio, but they can only be long positions. 8j
According to the Investment Company Act of 1940, a diversified mutual fund may hold, at most, what percentage of a corporation's voting securities?
The answer is 100%, but this one is tricky. The choices didn't give the 10% at all, so pay attention to those things. To be considered a diversified investment company, 75% of the fund's assets must be diversified, such that the mutual fund owns no more than 10% of a target company's voting securities. Additionally, within that 75% of assets, no diversified investment company may invest more than 5% of its portfolio in a single company's securities. However, there are no restrictions on the other 25%. That can all be in one stock, making 30% of the fund's assets in one company. Those assets can theoretically buy all of the outstanding voting shares of a company and control 100%. 8a
