Investment Companies and Other Packaged Products

An investor purchases $40,000 of a mutual fund when the price of the fund is $18.50. In the same year, the investor receives a $700 dividend distribution and a capital gain distribution of $1,100. Both distributions are reinvested in additional shares at a price of $17.90. If the fund has a current value of is $22.80, what is the investor's cost basis using the average cost method? a. $18.47 b. $18.20 c. $20.65 d. $20.50

A. $18.47 To calculate the cost basis using the average cost method, divide the sum of all investments by the total shares owned by the investor. The investor purchased $40,000 of the fund at a price of $18.50. The total number of shares purchased was 2,162.16. The investor also received a total of $1,800 in distributions, all reinvested in additional shares when the price was $17.90. The total number of shares purchased is 100.56. The total amount invested is $41,800. The total number of shares owned is 2,262.72. Therefore, the average cost is $18.47. The current value of the fund is not relevant.

A customer owns a total of 750 shares of a mutual fund and has invested $22,000 over the last three years. If the fund is currently valued at $31.20, what is the customer's cost basis using the average cost method? a. $29.33 b. $30.27 c. $31.20 d. $60.53

A. $29.33 To calculate the cost basis using the average cost method, divide the sum of all investments by the total shares owned by the investor. The investor owns 750 shares and the total amount invested is $22,000. Therefore, the average cost is $29.33. The current value of the fund is not relevant.

The closing prices of two mutual funds on Monday, July 17th are: Bid Offer Change WORLD FUND 18.30 20.00 +.10 OCEAN FUND 5.25 5.50 +.02 The sales charge of the OCEAN Fund is: a. 4.5% b. 4.8% c. 8.5% d. 9.3%

A. 4.5% The sales charge of the OCEAN Fund is the difference between the bid price of $5.25 and the offer price of $5.50, equals $.25 ($5.50 - $5.25 = $.25). The sales charge is always expressed as a percentage of the offering price. The sales charge divided by the offering price of $5.50 equals a sales charge for OCEAN Fund of 4.5% ($.25 sales charge divided by the $5.50 offering price).

A REIT is NOT used for a tax shelter because it does NOT: a. Allow flow-through of losses b. Allow flow-through of income c. Provide limited liability d. Offer income potential

A. allow flow-through of losses A REIT allows the flow-through of income, but not losses. Shareholders have limited liability. While a REIT is similar in structure to a mutual fund, it is not defined as an investment company. Also, while it may invest in real estate properties, it is not considered to be a limited partnership. Partnerships can pass through losses.

A customer has $350,000 to invest and would like to hold a diversified portfolio of stock, bonds, and money-market instruments. She wants the percentage invested in each of these asset categories to be adjusted as financial markets change. However, her business keeps her too busy to adequately monitor her holdings and make the appropriate changes. Which of the following investments are MOST suitable for this customer? a. An asset allocation fund b. An S&P Index fund c. A bond index fund d. A variable annuity

A. an asset allocation fund Asset allocation funds hold diversified portfolios of stocks, bonds, and money-market instruments. The percentage of the portfolio invested in each of these categories is shifted by the fund manager from time to time, often according to computer models.

An investor with an investment objective of speculation wants to purchase a security that will increase by the same percentage as a decline in the S&P 500 Index. Which of the following securities would you recommend? a. An inverse exchange-traded fund (ETF) b. A leveraged exchange-traded fund (ETF) c. A leveraged inverse exchange-traded fund (ETF) d. An exchange-traded fund (ETF)

A. an inverse exchange-traded fund (ETF) An inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. An inverse ETF based on the S&P 500 Index seeks to deliver the opposite performance of that index. For example, if the S&P 500 rises by 1%, an inverse ETF would decrease by 1%, and if the S&P 500 falls by 1%, the inverse ETF would increase by 1% before fees and expenses. Choice (b) would be suitable if the customer anticipated an increase in the S&P 500 and wanted a multiple of that increase. Choice (c) would be suitable if the customer wanted a return that was a multiple or higher return and anticipated a decrease in the S&P 500, and choice (d) would be suitable if the customer only wanted to track the return of the S&P 500.

The dividend policy of most money-market funds is to declare dividends: a. Daily and pay, credit, or reinvest the dividends on a monthly basis b. Monthly and pay, credit, or reinvest the dividends on a monthly basis c. Monthly and pay, credit, or reinvest the dividends on a quarterly basis d. Quarterly and pay, credit, or reinvest the dividends on a quarterly basis

A. daily and pay, credit, or reinvest the dividends on a monthly basis Most money-market funds will declare dividends daily and pay, credit, or reinvest the dividends on a monthly basis. This information is usually found in the prospectus of the money-market fund.

To be considered a regulated investment company, a mutual fund must: a. Distribute a minimum amount of its net investment income to shareholders b. Pay tax on all net investment income prior to making distributions to shareholders c. Retain all net investment income to avoid paying tax d. Distribute all of its net investment income to shareholders

A. distribute a minimum amount of its net investment income to shareholders To qualify as a regulated investment company, the company must distribute a minimum of 90% of its investment income to its shareholders. Meeting this requirement allows the investment company to pass on distributions to shareholders without the company having to first pay taxes on the income distributed.

All of the following actions would be violations of industry rules regarding the sales of investment company shares, EXCEPT: a. Encouraging a customer to buy a class of shares with a front-end load rather than a class with a deferred sales charge b. Encouraging a customer to buy shares of a fund in order to receive an upcoming dividend c. Selling a customer shares in an amount just below the point at which a volume discount would be earned without informing the customer of the breakpoint d. Setting up a recommended list of investment companies based on the commissions received from those companies for executing portfolio transactions

A. encouraging a customer to buy a class of shares with a front-end load rather than a class with a deferred sales charge The practices described in choices (b) selling dividends, (c) breakpoint sales, and (d) favoring funds for which the firm executes portfolio transactions are prohibited. Recommending that a customer buy one class of shares rather than another is acceptable as long as there is a reasonable basis for believing that the recommendation is suitable for the customer. The suitability of a class of shares with a particular sales charge is often based not only on the length of time the customer intends to hold the investment but also on the size of the investment. Front-end load shares have a breakpoint schedule and, therefore, offer reduced sales charges on large investments, whereas the back-end load or deferred sales charge shares do not.

SPDR is considered a type of: a. Exchange-traded fund b. Index option c. World currency option d. Mutual fund

A. exchange-traded fund Standard & Poor's Depositary Receipt (SPDR) is a type of exchange-traded fund (ETF). It can be used to refer to a specific exchange-traded fund that tracks the S&P 500 or a group of ETFs.

Which of the following descriptions BEST defines a business development company (BDC)? a. It invests in private small and medium-size companies b. It invests in medium-size, publicly traded companies c. It invests in companies traded in foreign companies d. It invests in initial public offerings of small and medium-size companies

A. it invests in private small and medium-size companies A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest mostly in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment company they are not taxed if they distribute at least 90% of their income to investors. Most have an investment objective of providing current income and capital appreciation and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm. It invests mostly in private (not public) companies, and, therefore, would not invest in small, publicly traded companies of initial public offerings.

Which of the following statements is TRUE regarding dollar cost averaging? a. It is a systematic method of investing b. If employed, the average price will be less than the average cost c. It can only be set up through a payroll deduction plan d. The benefits can be obtained if one invests in a money-market fund

A. it is a systematic method of investing Dollar cost averaging is a systematic method of investing that results in the average cost of the securities purchased being less than the average of the prices paid (not the other way around). The benefits are not obtained with funds that have a stable asset value, such as money-market funds.

Listed below are a group of mutual funds. NAV Offer Price Net Change Dreyfus 11.55 12.67 -.05 Wellington 12.70 13.85 +.07 Lenox 5.14 5.14 +.09 Sentry 13.42 14.63 -.08 Lenox fund is most likely a: a. No-load fund b. Closed-end fund c. Balanced fund d. Growth fund

A. no-load fund The Lenox fund is a no-load fund. The net asset value (bid price) and offering price (asked price) of a no-load fund are the same. There is no sales charge.

A sales breakpoint of a mutual fund is: a. The minimum dollar amount of a purchase of a mutual fund where a volume discount is given b. The minimum share amount of a purchase of a mutual fund where a volume discount is given c. The point at which a letter of intent can be obtained d. The point at which a letter of intent can be backdated

A. the minimum dollar amount of a purchase of a mutual fund where a volume discount is given A sales breakpoint of a mutual fund is the minimum dollar amount (not the share amount) of a purchase of a mutual fund where a volume discount is given. The percentage of the sales charge declines when certain minimum dollar amounts are reached.

An investor owns 1,000 shares of an open-end investment company. The bid price is $11.00 and the offer price is $11.58. The investment company charges a 1/2% redemption fee. If the investor redeems his 1,000 shares, how much will he receive? a. $10,450 b. $10,945 c. $11,000 d. $11,522

B. $10,945 When redeeming shares of an open-end investment company (mutual fund), an investor receives the NAV (bid price) minus any redemption fee. The investor would receive $11,000 (1,000 shares x $11.00 NAV) minus the redemption fee of $55 ($11,000 x 1/2%), which equals $10,945.

An investor purchases $25,000 of a mutual fund when the price of the fund is $13.20. In the same year, the investor receives a $400 dividend distribution and a capital gain distribution of $700. Both distributions are reinvested in additional shares at a price of $12.80. If the fund has a current value of $14.50, what is the investor's cost basis using the average cost method? a. $13.00 b. $13.18 c. $13.50 d. $13.85

B. $13.18 To calculate the cost basis using the average cost method, divide the total sum of all investments by the shares owned by the investor. The investor purchased $25,000 of the fund at a price of $13.20. The total number of shares purchased was 1,893.94. He also received a total of $1,100 in distributions, all reinvested in additional shares when the price was $12.80. The number of shares purchased is 85.94. The total amount invested is $26,100. The total number of shares owned is 1,979.88. Therefore, the average cost is $13.18. The current value of the fund is not relevant.

A customer makes an initial investment of $75,000 in a high-yield bond fund with a purchase of 3,850 shares. Over the next four years, the customer deposits another $48,000 and also reinvests $17,000 of distributions for a total of 2,895 additional shares. If the fund is currently valued at $26.51, what is the customer's cost basis using the average cost method? a.$19.48 b.$20.76 c.$20.90 d.$22.45

B. $20.76 To calculate the cost basis using the average cost method, divide the sum of all investments (including reinvested distributions) by the total number of shares owned by the investor. The investor purchased $75,000 of the fund, giving him 3,850 shares. Over the next four years, the customer deposited another $48,000 and also reinvests $17,000 of distributions for a total of 2,895 additional shares. The sum of all investments is $140,000 ($75,000 + $48,000 + $17,000) and the total shares owned is 6,745 (3,850 + 2,895). Therefore, the average cost is $20.76 ($140,000 ÷ 6,745). The current value of the fund is not relevant.

The following closed-end funds are listed in The Wall Street Journal. Net Asset Value Market Price American Fund 23.75 24.25 Bunker Hill Fund 21.85 21.50 A customer purchasing the Bunker Hill Fund at the current market price will pay: a.$21.50 + a sales charge b.$21.50 + a commission c.$21.85 + a sales charge d.$21.85 + a commission

B. $21.50 + a commission The key to this question is in recognizing that the customer is buying shares of a closed-end fund. Closed-end fund shares are exchange traded securities which are sold with commission or markup included. Also, since closed-end shares are exchange traded, they are purchased at their market price, not their net asset value (NAV). On the other hand, shares of open-ended companies (mutual funds) will trade for their NAV plus any applicable sales charges. The NAV + sales charge is considered to be a mutual fund's public offering price (POP).

An individual purchases $100,000 of a 2x leveraged inverse ETF. If the underlying index appreciates by 10% on the first day and then depreciates by 10% on the second day, the value of the individual's investment will be: a. $100,000 b. $96,000 c. $108,000 d. $99,000

B. $96,000 An inverse ETF is designed to return the inverse of the performance of an index, and a 2x leveraged inverse ETF is designed to reflect twice the performance of the underlying index in an opposite direction. In this case, a 10% increase in the underlying index would result in a 20% decrease in the value of the investment, $100,000 x 20% = $20,000, or a value of $80,000 on the first day. A 10% decrease on the second day would result in a 20% increase in the value of the investment, $80,000 x 20% = $16,000, or a value of $96,000 ($80,000 + $16,000).

Listed below are a group of mutual funds. NAV Offer Price Net Change Dreyfus 11.55 12.67 -.05 Wellington 12.70 13.85 +.07 Lenox 5.14 5.14 +.09 Sentry 13.42 14.63 -.08 If an investor sells his shares in Sentry fund, he will receive: a. 13.34 b. 13.42 c. 14.55 d. 14.63

B. 13.42 When an investor sells shares in a mutual fund, he will receive the bid price or net asset value. The Sentry fund's net asset value is listed as being $13.42. Therefore, the investor will receive $13.42 per share.

Which of the following investments will permit a customer to purchase publicly traded shares of a company that is MOST similar to a private equity fund? a. An exchange-traded fund b. A business development company c. An exchange-traded note d. A real estate investment trust

B. a business development company A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest mostly in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.

An investor with an investment objective of speculation wants to purchase a security that will increase three times as much the Russell 2000 Index. Which of the following securities would you recommend? a. An inverse exchange-traded fund (ETF) b. A leveraged exchange-traded fund (ETF) c. A leveraged inverse exchange-traded fund (ETF) d. An exchange-traded fund (ETF)

B. a leveraged exchange-traded fund (ETF) A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. For example, a 3X leveraged ETF based on the Russell 2000 Index seeks to deliver three times the performance of that index. So, if the Russell 2000 Index rises by 1%, a leveraged ETF would increase by 3% before fees and expenses. Choice (a) would be suitable if the customer anticipated a decrease in the Russell 2000, choice (c) would be suitable if the customer wanted a return that was a multiple or higher return and anticipated a decrease in the Russell 2000, and choice (d) would be suitable if the customer only wanted to track the return of the Russell 2000.

A client wants to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations is the most suitable for this client? a. A managed closed-end fund b. An S&P 500 Index mutual fund c. An S&P 500 Index exchange-traded fund d. An DJIA exchange-traded fund

B. an S&P 500 Index mutual fund Although all of these investments are suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method for an investor to accomplish this goal with $250 per month. The closed-end fund and ETFs are purchased on an exchange and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no-load). If the investor were to purchase a large dollar amount at one time, any of these funds may be appropriate.

An investor is looking for a fund that, with little risk to her principal investment, will supplement her current wages. Which of the following funds best suits this investor? a. A growth fund b. An income fund c. A sector fund d. A no-load fund

B. an income fund A mutual fund investor most interested in current yield (i.e., regular dividend checks) as an investment objective will most likely purchase an income fund. A growth fund invests in companies that are growing rapidly and pay out a small percentage of earnings in dividends. Investors seeking capital gains will most likely purchase a growth fund. A no-load fund is an open-end investment company that does not have a sales charge and whose investment objectives may be income or capital gains. A sector fund is a mutual fund that invests primarily in a particular industry or geographical area, such as the energy or high technology industries.

Which of the following persons is normally compensated by receiving a fee based on a percentage of the assets under management? a. A broker's broker b. An investment adviser c. A designated market maker d. An order book official

B. an investment adviser Investment advisers are often compensated based on a percentage of assets under management. For example, mutual fund managers are usually compensated in this way.

A mutual fund shareholder is NOT required to report which of the following events for tax purposes? a. Receiving a dividend that is subsequently reinvested in the fund at the net asset value b. Appreciation in the value of the shares c. Exchanging shares of one fund for another fund within the same family of funds d. Receiving a capital gains distribution that was not reinvested in the fund

B. appreciation in the value of the shares Dividends and capital gains distributions are taxable to the investor regardless of whether they are reinvested in the fund. Exchanging shares for another fund within the same family of funds must also be reported on the investor's tax return since shares of one fund are being sold to buy shares in another fund. Appreciation in the value of fund shares is not taxable until the shares are sold to establish a capital gain.

Class A shares of an open-end investment company are different from Class B shares in that: a. Class A shares are common shares, while Class B shares are preferred shares b. Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge c. Class A shares pay quarterly dividends, while Class B shares pay a monthly dividend d. Class A shares can be purchased directly from the fund, while Class B shares are offered through broker-dealers

B. class A shares have front-end sales charge, while class B shares have a contingent deferred sales charge The difference between Class A and Class B shares is normally the fact that A shares have a front-end sales charge while the B shares have a contingent deferred sales charge (CDSC). A CDSC is deducted only when the investor redeems shares. Generally, if the investor holds the B shares for a sufficient period, there is no sales charge deducted upon redemption.

Ms. Ralana elects a withdrawal plan from a mutual fund where enough shares will be liquidated to provide her with $500 each month. This plan is called: a. Fixed-share b. Fixed-dollar c. Dollar-cost averaging d. Back-end load

B. fixed-dollar In this case, Ms. Ralana wants to receive the same (fixed) dollar amount each month. Under the fixed-share method, a specified number of shares are redeemed each month. The amount received depends on the value of the shares at that time.

A customer who has invested historically in mutual funds is considering an investment in a hedge fund for the first time. When comparing mutual funds to hedge funds, which of the following statements is NOT TRUE? a. Mutual funds are subject to more regulatory oversight than hedge funds b. Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately c. Hedge funds often use higher degrees of leverage than mutual funds d. Mutual funds may be suitable for many customers, whereas hedge funds are generally suitable for sophisticated, wealthy investors only

B. mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each other investor's assets separately Mutual funds and hedge funds both pool investors' money to manage the assets. Unlike mutual funds, hedge funds are often exempt from regulatory oversight, use leverage, and often employ aggressive financial strategies such as short selling and placing large bets on individual companies or sectors of the market. Hedge funds typically have high minimum investment requirements that make them suitable only for professional and wealthy investors.

Mrs. Jones is interested in selling 500 shares of her REIT. The sale will be handled in a manner similar to the: a. Redemption of an open-end fund b. Sale of a closed-end fund listed on the NYSE c. Liquidation of a real estate limited partnership d. Redemption of EE bonds

B. sale of closed-end fund listed on NYSE There is a secondary market for REITs (real estate investment trusts). The vast majority of REITs trade on the NYSE with prices determined by supply and demand. Closed-end funds are funds that are often bought and sold on the NYSE that trade in a similar manner.

Municipal bond unit investment trusts do NOT include which of the following characteristics? a. Investors can buy units in the fund, usually in multiples of $1,000 b. The certificates have coupons attached and are in bearer form c. Investors can redeem the units at any time through the fund's trustee d. The value of the unit will decline if interest rates rise

B. the certificates have coupons attached and are in bearer form All of the characteristics listed are true, except that the certificates have coupons attached and are in bearer form. Some unit investment trusts are funds that buy bonds for a portfolio and usually hold the bonds until maturity. The life of these funds is usually limited to the life of the bonds in the portfolio. Units can be bought in multiples of $1,000. The units can be redeemed at any time. If the general level of interest rates change, so will the price of the units. The funds are issued in book-entry form and registered form.

A client expresses an interest in purchasing a mutual fund. The client already has a joint account with her spouse and a UTMA account for her son that has assets in the same fund family held at another broker-dealer. Which of the following statements is TRUE? a. The client is not entitled to a reduced sales charge based on the value of the UTMA and joint accounts under any circumstances b. The client is entitled to a reduced sales charge based on the other two accounts c. The client is entitled to a reduced sales charge based on the value of the other two accounts only if the account is held at the same broker-dealer d. The client is entitled to a reduced sales charge based only on the value of the joint account

B. the client is entitled to a reduced sales charge based on the other two accounts A client is entitled to a reduced sales charge (breakpoint) based on the value of the accounts of other family members within the same fund family. Examples include joint accounts, minors' accounts, and certain retirement accounts. The accounts can be held at multiple broker-dealers.

Which of the following parties is responsible for the safekeeping of the securities owned by a mutual fund? a. The registrar b. The custodian bank c. The sponsor d. The transfer agent

B. the custodian bank The custodian bank is responsible for the safekeeping of the securities owned by a mutual fund. The custodian bank has no responsibility relating to the management of the fund's portfolio.

A registered representative has been asked to compare a mutual fund to a fund of hedge funds. Which of the following statements is NOT TRUE? a. A fund of hedge funds may be registered with the SEC b. The fees of mutual funds and a fund of hedge funds are similar c. A fund of hedge funds may offer an investor the ability to liquidate her shares d. A fund of hedge funds and a mutual fund may invest in the securities of foreign companies

B. the fees of mutual funds and a fund of hedge funds are similar A fund of hedge funds pools investors' money and allocates it to hedge fund managers. The fees are not regulated in the same manner as with mutual funds. Hedge funds often have higher fees than mutual funds, and their fees may include a percentage of assets under management and a percentage of the gains (for example, a 2% management fee plus 20% of the gains). Some funds of hedge funds may be registered with the SEC and may offer an investor the ability to liquidate her shares (a few times a year). Hedge fund managers are not limited to investing in securities listed on U.S. exchanges.

A breakpoint sale is BEST defined as: a. The sale of investment company shares in dollar amounts just above the point at which the sales charge is reduced on quantity transactions b. The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions c. The sale of investment company shares in anticipation of a distribution soon to be paid d. A payment of compensation to a registered representative who has ceased to be employed by a member firm

B. the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions A breakpoint sale is the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity purchases. This practice is done to assess higher sales charges on transactions and is a violation of the Conduct Rules.

One of the major differences between an open-end and closed-end investment company is: a. The composition of their portfolios b. The types of securities that each may issue c. The method of calculating net asset value d. A closed-end investment company is exempt from new issue registration requirements

B. the types of securities that each may issue Both open and closed-end investment companies must register when they issue securities. A major difference between open-end and closed-end investment companies is their capitalization (i.e., the types of securities they issue to raise money). Open-end companies, also referred to as mutual funds, may only issue common stock. However, closed-end companies may issue common stock, preferred stock, or bonds

Which of the following descriptions characterizes leveraged exchange-traded funds (ETFs)? a. They are designed to deliver the same performance as an index or other benchmark b. They are designed to deliver a multiple of the performance of an index or other benchmark c. They are designed to deliver the opposite of the performance of an index or other benchmark d. They are designed to deliver a multiple of the opposite performance of an index or other benchmark

B. they are designed to deliver a multiple of the performance of an index or other benchmark A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. For example, a 3X leveraged ETF based on the DJIA seeks to deliver three times the performance of that index. So, if the DJIA rises or falls by 1%, a leveraged ETF would increase or decrease by 3% before fees and expenses. Choice (a) is a regular ETF, choice (c) is an inverse ETF which seeks to deliver the opposite of what it is tracking, and choice (d) is a leveraged inverse ETF.

Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)? a. They offer investors the same amount of liquidity as exchange-traded REITs b. They are required to distribute the same percentage of taxable income as exchange-traded REITs c. They are not required to make periodic disclosures that are required of exchange-traded REITs d. They are suitable for the same investors as exchange-traded REITs

B. they are required to distribute the same percentage of taxable income as exchange-traded REITs Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.

A closed-end fund trading on the NYSE has a current bid price of $21.50 and an offer price of $21.70. A customer purchasing the fund would pay: a. $21.50 plus a commission b. $21.50 plus a sales charge c. $21.70 plus a commission d. $21.70 plus a sales charge

C. $21.70 plus a commission The customer would pay $21.70 plus a commission. A closed-end fund is purchased and sold like any other stock traded on the NYSE. The customer would pay the offer price plus a commission or receive the bid price less a commission when selling the security. The term sales charge refers to the built-in compensation charged by an open-end (mutual fund) company when a customer buys shares of the fund.

An individual purchases $100,000 of a 2x leveraged Exchange-Traded Fund (ETF). If the underlying index appreciates by 10% on the first day and then depreciates by 10% on the second day, the value of the individual's investment will be: a. $99,000 b. $100,000 c. $96,000 d. $108,000

C. $96,000 A 2x leveraged ETF is designed to reflect twice the performance of the underlying index or benchmark. In this case, a 10% increase in the underlying index would result in a 20% increase in the value of the investment, $100,000 x 20% = $20,000, or a value of $120,000 on the first day. A 10% decrease on the second day would result in a 20% decrease in the value of the investment, $120,000 x 20% = $24,000, or a value of $96,000 ($120,000 - $24,000).

XYZ Mutual Fund, an open-end investment company, has an NAV of $20 and a public offering price of $21.40. The prospectus states that the sales charge for purchases of fund shares of $25,000 through $49,999 is 4%. Approximately how many shares can the customer buy for $35,000? a. 1,600 shares b. 1,635 shares c. 1,680 shares d. 1,750 shares

C. 1,680 shares To compute the number of shares that can be purchased, first determine how much of the investment will go to the sales charge. This amount is $1,400 ($35,000 investment x 4% sales charge). This leaves $33,600 for purchasing shares. The investor will purchase 1,680 shares ($33,600 divided by $20 NAV per share). You do not divide by the public offering price since it includes a sales charge and you have already deducted $1,400 in sales charges.

Your customer is bullish on U.S. equities and wants to participate in an upward movement of the S&P 500 Index. Which of the following investments would you recommend? a. Diamonds b. ADRs c. SPDRs d. VRDOs

C. SPDRs Spiders (SPDRs) is an investment that replicates the S&P 500 Index. The product is organized as a unit investment trust and is classified as an exchange-traded fund (ETF). Diamonds are an exchange-traded fund that mirrors the performance of the DJIA. ADRs are American Depositary Receipts, which may be issued as proxies for many different types of individual foreign shares. VRDOs are variable-rate demand obligations that are a type of municipal security structured for tax-free money-market and high-net-worth investors.

Which of the following choices will qualify for a sales breakpoint on large purchases of mutual fund shares? a. A partnership formed to buy the securities b. A joint account formed between two unrelated individuals c. A husband and wife who are joint tenants with right of survivorship d. An investment club coordinated by a registered representative

C. a husband and wife who are joint tenants with right of survivorship Quantity discounts are allowed only for individuals and individual entities such as corporations. Partnerships and investment clubs are not entitled to a quantity discount. Joint accounts normally do not qualify for breakpoints except in cases where there is a dependency relationship in the account (e.g., husband and wife).

An investor has recently rolled over his 401(k) into an IRA at your firm. Which of the following securities will be MOST suitable if the investor wanted diversification and a higher return? a. A municipal revenue bond b. A Treasury note c. A hybrid REIT d. An equity REIT

C. a hybrid REIT Since this is a tax-deferred (retirement) account, the municipal security would not be suitable and, since the investor wants a higher return, the Treasury note would not be the best choice. Although either REIT may be suitable, the hybrid REIT is a better choice since the investor wants diversification. There are three types of REITs: mortgage REITs which provide funds to real estate owners in the form of lending them funds (i.e., a mortgage), equity REITs which own and operate income producing real estate (for example, apartment buildings, commercial property, shopping malls and other types of retail property, and vacation resorts), and hybrid REITs, which invest in both of these ventures. By purchasing a hybrid REIT, the investor can take advantage of buying a security that invests in actual equity ownership of real estate as well as investing in an interest-rate-sensitive security such as a mortgage REIT.

Crossway Shopping Centers, a REIT, is making a public offering of 3,000,000 units at $20/share. An investor who buys the issue in the primary market must receive: a. An offering memorandum b. An offering circular c. A prospectus d. An educational brochure explaining the general nature of REITs

C. a prospectus REITs are regulated as securities under the Securities Act of 1933. An investor purchasing a REIT in the primary market must receive a prospectus.

An open-end investment company has increased in value because of a rise in the market. This is best characterized as: a. A capital gain b. A profit c. Appreciation d. Ordinary income

C. appreciation An increase in the market price of an open-end investment company or other security from the purchase price is appreciation. There is only a capital gain when the security is sold and the appreciation is realized.

A CDSC is associated with which share class? a. A no-load b. Class A shares c. Class B shares d. Class C shares

C. class B shares The differences in mutual fund share classes represent the method by which a fund collects any applicable sales charge. Class A shares typically have a front-end load, which is assessed at the time that a customer purchases the shares. On the other hand, Class B shares have a back-end load, which is assessed at the time a customer redeems the shares. On B shares, if the back-end load declines over time based on how long an investor owns the shares, it is referred to as a contingent deferred sales charge (CDSC). Class C shares may assess a small front-end load, but always have a 12b-1 fee. The 12b-1 fee is an annual fee that is levied in each year that an investor owns the shares.

A client invested $35,000 in a mutual fund and receives a lower sales charge by signing a letter of intent based on a purchase level of $50,000. If, one year later, she has not contributed additional funds, which of the following choices is the BEST course of action for the RR handling the account? a. Ask the client to sign a new letter of intent for $15,000 b. Allow the client a 90-day extension from the date of the original letter of intent c. Contact the client and disclose that, if $15,000 is not deposited, a higher sales charge will be assessed d. Contact the client and disclose that she is obligated to deposit $15,000

C. contact the client and disclose that, if $15,000 is not deposited, a higher sales charge will be assessed A letter of intent (LOI) enables an investor to qualify for a reduced sales charge based on the breakpoint schedule of a mutual fund, without initially depositing the entire amount required. The LOI states the investor's intention to deposit the required money within 13 months of the inception of the letter. It may not be renewed for another 13 months. The letter of intent may be backdated for up to 90 days, but may not be extended for 90 days. Letters of intent are not binding on the investor. The investor is not obligated to contribute the additional $15,000. Investors who fail to make the additional investments are charged the amount that would equal the higher sales charge that applied to the original purchase. The fund insures that it will be able to recover the additional sales charge by withholding sufficient shares in escrow for this purpose.

Which of the following choices is NOT taxable to the owner of mutual fund shares? a. Dividends that were reinvested at net asset value b. Fund shares that appreciated which are exchanged for other shares in the same family of funds c. Fund shares held by the investor, which have appreciated but have not yet been sold d. A capital gains distribution that was reinvested at net asset value

C. fund shares held by the investor, which have appreciated but have not yet been sold Owning fund shares that have appreciated in value does not incur taxes. The appreciation becomes taxable as a capital gain when the shares are sold for the profit. An exchange within a family of funds is considered a sale and subsequent purchase, and will be a taxable event if the sale resulted in a gain. Dividends and capital gain distributions are taxable events whether or not they are reinvested.

A customer is considering an investment in a hedge fund since many of his business associates have been receiving high returns over the last few years. A registered representative may make which of the following statements? a. Mutual funds are subject to less regulatory oversight than hedge funds b. Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately c. Hedge funds often use higher degrees of leverage than mutual funds d. Hedge funds may be suitable for many customers, whereas mutual funds are generally suitable for sophisticated, wealthy investors only

C. hedge funds often use higher degrees of leverage than mutual funds Mutual funds and hedge funds both pool investors' money to manage assets. Unlike mutual funds, hedge funds are often exempt from regulatory oversight, use leverage, and often employ aggressive financial strategies such as short selling and placing large bets on individual companies or sectors of the market. Hedge funds typically have high minimum investment requirements that make them suitable only for professional and wealthy investors.

The custodian bank of a mutual fund: a. Manages the fund b. Acts as the distributor of the fund c. Holds the fund's cash and securities and performs essential clerical functions but does not manage the fund d. Guarantees investors against all losses that may be incurred if the fund shares should decline in value

C. holds the cash and securities and performs the essential clerical functions but does not manage the fund The custodian bank of a mutual fund only holds the fund's cash and securities and performs important clerical functions. It does not manage the fund, which is the responsibility of the investment adviser. The custodian bank does not distribute the fund or guarantee investors against any loss that may be incurred if the fund should decline in value.

A business that is traded on an exchange, owns properties in its portfolio, and makes mortgage loans to developers is an example of a(n): a. Closed-end investment company b. Exchange-traded note c. Hybrid REIT d. Direct participation program

C. hybrid REIT A real estate investment trust (REIT) that owns properties (e.g., office buildings) and also makes loans to real estate developers is a hybrid REIT. These business structures are a combination of an equity REIT and a mortgage REIT.

When evaluating numerous mutual funds, what is meant by net investment income? a. Interest only b. Dividends only c. Interest + dividends - expenses d. Dividends + capital gains - expenses

C. interest + dividends - expenses Net investment income of a mutual fund is derived from the total interest plus dividends earned by the fund's portfolio minus the expenses of the fund.

Taxable income normally includes: a. The interest on municipal bonds issued in the state in which the taxpayer lives b. The taxpayer's annual 401(k) contributions c. Reinvested dividends paid on a mutual fund investment d. Any unrealized capital appreciation on stocks that the taxpayer owns

C. reinvested dividends paid on a mutual fund investment Taxable income includes income from all sources after all applicable deductions and adjustments are made. Reinvested dividends must be declared as income and are thus taxable. Interest on municipal bonds issued in the state in which the owner resides is usually exempt from both federal and state income taxes. 401(k) contributions are made on a pretax basis and are not included in taxable income until the taxpayer begins taking distributions. Unrealized capital gains on stocks are not included in taxable income.

Which of the following objectives is the least suitable reason for investing in a mutual fund? a. Diversification b. Professional management c. Short-term trading d. Liquidity

C. short-term trading Investors in mutual funds usually seek all of the objectives listed except short-term trading.

Which of the following descriptions characterizes inverse exchange-traded funds (ETFs)? a. They are designed to deliver the same performance as an index or other benchmark b. They are designed to deliver a multiple of the performance of an index or other benchmark c. They are designed to deliver the opposite of the performance of an index or other benchmark d. They are designed to deliver a multiple of the opposite performance of an index or other benchmark

C. they are designed to deliver the opposite of the performance of an index or other benchmark An inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. For example, an inverse ETF based on the DJIA seeks to deliver opposite performance of that index. So, if the DJIA rises by 1%, an inverse ETF would decrease by 1%, and if the DJIA falls by 1%, the inverse ETF would increase by 1% before fees and expenses. Choice (a) is a regular ETF, choice (b) a leveraged ETF that seeks to deliver a multiple of the performance of an index or other benchmark, and choice (d) is a leveraged inverse ETF.

Which investment company does NOT charge a management fee? a. An open-end investment company b. A closed-end investment company c. A unit investment trust d. An exchange-traded fund

C. unit investment trust A unit investment trust does not charge a management fee. The portfolio is fixed and there is no investment adviser since unit investment trusts are supervised, not managed.

Investment companies with no management fee and low sales charges, which invest in a fixed portfolio of municipal or corporate bonds, are categorized as: a. Open-end investment companies b. Closed-end investment companies c. Unit investment trusts d. Face amount certificate companies

C. unit investment trusts Investment companies with no management fee and low sales charges, which invest in a fixed portfolio of municipal or corporate bonds, are categorized as unit investment trusts (UITs). Investors can receive a reduced sales charge if they purchase a certain amount of a UIT.

Which of the following securities are NOT issued at a discount and mature at par? a. Commercial paper b. Bankers' acceptances c. Unit investment trusts d. Treasury bills

C. unit investment trusts Unit investment trusts are not usually issued at a discount. They are issued at par and mature at par. The other securities listed are all issued at a discount and mature at par.

An investor purchases $40,000 of a mutual fund when the price of the fund is $18.50. In the same year, the investor receives a $700 dividend distribution and a capital gain distribution of $1,100. Both distributions are reinvested in additional shares at a price of $17.90. If the fund has a current value of is $22.80 and the investor sells $9,000 worth of the fund, what is the investor's capital gain using the average cost method? a. No gain or loss is reported b. $118 c. $456 d. $1,710

D. $1,710 Using the average cost method, the gain is found by subtracting the cost basis from the sales proceeds. To calculate the cost basis using the average cost method, divide the sum of all investments by the number of shares owned by the investor. The investor purchased $40,000 of the fund at a price of $18.50, The total number of shares purchased is 2,162.16. The investor also received a total of $1,800 in distributions, all reinvested in additional shares when the price is $17.90. The total number of shares purchased is 100.59. The total amount invested is $41,800. The total number of shares owned is 2,262.75. Therefore, the average cost is $18.47. The number of shares being sold is 394.74 ($9,000 / 22.80). If we subtract the cost basis of $7,290 (394.74 x $18.47) from $9,000, this equals a capital gain of $1,710.

The net asset value (NAV) of an open-end investment company is $22.20 and its sales charge is 8%. What is the public offering (asked) price? a.$20.42 b.$22.20 c.$23.98 d.$24.13

D. $24.13 The public offering price (POP) or asked price is $24.13. To find the POP, the net asset value is divided by the complement of the sales charge, as follows: NAV / (100% - sales charge) $22.20 / (100% - 8%) $22.20 / 92% $22.20 / 92% = $24.13 Remember, a mutual fund's sales charge is always expressed as a percentage of the POP. For this reason, it is incorrect to use the sales charge (8%) multiplied by the NAV ($22.20).

A customer makes an initial investment of $20,000 in a high-yield bond fund with a purchase of 702 shares. Over the next five years, the customer deposits another $25,000 and also reinvests $14,000 of distributions for a total of 1,240 additional shares. If the fund is currently valued at $27.11, what is the customer's cost basis using the average cost method? a. $31.45 b. $28.49 c. $29.97 d. $30.38

D. $30.38 To calculate the cost basis using the average cost method, divide the sum of all investments (including reinvested distributions) by the total number of shares owned by the investor. The investor purchased $20,000 of the fund, giving him 702 shares. Over the next five years, the customer deposited another $25,000 and also reinvests $14,000 of distributions for a total number of 1,240 additional shares. The sum of all investments is $59,000 ($20,000 + $25,000 + $14,000) and the total shares owned is 1,942 (702 + 1,240). Therefore, the average cost is $30.38 ($59,000 / 1,942). The current value of the fund is not relevant.

The closing prices of two mutual funds on Monday, July 17, are: Bid Offer Change WORLD FUND 18.30 20.00 +.10 OCEAN FUND 5.25 5.50 +.02 An investor who bought 300 shares of WORLD Fund on Monday, July 17, will pay: a. $1,575 b. $1,650 c. $5,490 d. $6,000

D. $6,000 When an investor buys shares of a mutual fund (open-end investment company), the investor pays the offering price, which includes the sales charge. When buying the WORLD Fund, the investor would pay the offering price of $20.00. Three hundred shares purchased at $20.00 equals, $6,000 ($20.00 x 300 shares).

According to current regulations, if a client redeems his mutual fund shares, the fund company must send the payment within: a. 3 days b. 5 days c. 10 days d. 7 days

D. 7 days Federal regulations require that funds send payment for the redemption of mutual fund shares within seven days.

Ralph, a New York City resident, sold his apartment for $250,000. He is contemplating purchasing another property within the next 2 to 6 months, but wants to keep the proceeds invested while he is looking. Ralph's primary goals are preservation of capital, liquidity, and limiting his tax liability. Which of the following securities best meets his objectives? a. A corporate bond fund rated AA b. MBIA-insured revenue bonds c. High-grade preferred stock d. A U.S. government money-market fund

D. a U.S. government money-market fund A U.S. government money-market fund is not only safe, but the income received by Ralph is exempt from state and local taxes. This is not to be confused with a U.S. government bond fund, which may experience loss of capital if interests rates were to rise sharply. The other investments can result in a loss of capital if interest rates rise.

An investor is seeking an investment that will outperform the market, but does not involve buying and holding individual securities. All of the following are considered suitable, EXCEPT: a. A hedge fund b. A liquid alternative investment c. A global allocation fund d. A business development company

D. a business development company A global allocation fund is a type of mutual fund that invests in equities and bonds in both the U.S. and in foreign countries. Although the fund is diversified, it does invest in traditional securities and usually employs a buy and hold investment objective. The term alternative investments refers to investments that use non-traditional strategies, such as short selling, using derivatives, long/short trading or neutral strategies, trading in distressed securities or currencies, and arbitrage. Alternative strategies differ from simply buying, holding, and selling securities and are often viewed as a way to diversify a portfolio through the use of securities other than equities and bonds. These types of strategies are used by hedge funds and private equity funds. Though hedge funds employ non-traditional investment strategies, one of the disadvantages of investing in hedge funds is their lack of liquidly. A liquid alternative investment combines the structure of an SEC-registered mutual fund (which is liquid) with a non-traditional or alternative investment. Alternative investments are designed to outperform the market; however, investors do assume a greater degree of risk. A business development company (BDC) raises capital by selling securities to investors and then using the money it raises to invest in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing them with funding when they are unable to raise capital for themselves.

A customer wants to purchase a security that invests primarily in private companies that have difficulty raising capital in public markets. Which of of the following investments would you recommend? a. A real estate investment trust (REIT) b. A collateralized mortgage obligation (CMO) c. A direct participation program (DPP) d. A business development company (BDC)

D. a business development company (BDC) A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest mostly in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.

Which of the following is TRUE regarding contingent deferred sales charges? a. Funds that assess a contingent deferred sales charge may be represented as a no-load fund because there is no front-end fee b. A redemption charge that reverts to the fund's portfolio is considered a contingent deferred sales charge c. A contingent deferred sales charge is not assessed if the customer redeems the shares at a loss d. A confirmation for a fund that assesses a contingent deferred sales charge must disclose that a charge may be assessed upon redemption, even if the same disclosure is made in the prospectus

D. a confirmation for a fund that assesses a contingent deferred sales charge must disclose that a charge may be assessed upon redemption, even if the same disclosure is made in the prospectus Industry rules require that the following disclosure be printed on the front of a confirmation for the purchase of a mutual fund that assesses a contingent deferred sales charge: "On selling your shares, you may pay a sales charge. For the charge and other fees, see the prospectus." Funds that assess such charges may not be represented as no-loads and may not be referred to as no initial load without further explanation. Sales charges are fees that are used to pay sales-related expenses, such as commissions and advertising costs. A redemption fee that reverts to the fund's portfolio is not considered a contingent deferred sales charge.

Which of the following choices would be LEAST suitable for an investor seeking liquidity? a. Preferred stock of a financial services company b. A mutual fund that invests in international markets c. A real estate investment trust (REIT) d. A hedge fund using leverage

D. a hedge fund using leverage Of the choices listed, the hedge fund would be the least suitable since it does not offer liquidity. Hedge funds are not subject to the same regulations for requiring access to their funds as are mutual funds. The shares are not redeemable on a daily basis and are not suitable for an investor requiring a certain degree of liquidity. The preferred stock and REIT are exchange-traded and may be sold at any time.

A type of security which combines a sophisticated, non-traditional investment strategy with the liquidity of a mutual fund is: a. A hedge fund b. A non-traded REIT c. A private equity fund d. A liquid alternative investment

D. a liquid alternative investment The term alternative investments refers to investments that use non-traditional strategies, such as short selling, using derivatives, long/short trading or neutral strategies, trading in distressed securities or currencies, and arbitrage. Non-traditional strategies differ from simply buying, holding, and selling securities (a long-only strategy), and are often viewed as a way to diversify a portfolio through the use of securities other than equities and bonds. Non-traditional (alternative) strategies are used by hedge funds and private equity funds. One of the disadvantages of investing in hedge funds and private equity funds is their lack of liquidly. They often state a specific time when an investor may only take out their money. A liquid alternative investment combines the structure of an SEC-registered mutual fund (which is liquid) with a non-traditional or alternative investment. Most REITs are traded on an exchange (e.g., the NYSE) and offer investors a high degree of liquidity. Similar to limited partnership interests, shares of non-traded REITs do not trade on an exchange and offer very limited liquidity. Non-traded REITs are not suitable for investors who are seeking liquidity.

For the following size transactions, ABC mutual fund has a bid price of $8.50 and an asked price of $9.26. Which of the following sales is allowed under the Conduct Rules? a. A member sells 250 shares of ABC fund at $9.10 to a nonmember firm b. A member sells 250 shares of ABC fund at $9.10 to another firm through a nonmember firm c. A member sells 250 shares of ABC fund at $9.10 to one of the firm's customers d. A member sells 250 shares of ABC fund at $9.26 to one of the firm's clients

D. a member sells 250 shares of ABC fund at $9.26 to one of the firm's clients A FINRA member firm may not sell the fund at a discount ($9.10) to a nonmember firm or to one of the firm's customers (the public). According to the Conduct Rules, a member firm can only give a discount from the public offering price to another member firm. The discounts and selling concessions member firms give to each other are inducements for firms to be members of FINRA (the self-regulatory organization of over-the-counter broker-dealers) and to abide by its rules and regulations.

Which of the following funds is the least suitable for investors mainly seeking income? a. A mortgage-backed securities fund b. A municipal bond fund c. A balanced fund d. A sector fund

D. a sector fund A sector fund invests in securities of a specific industry or specific geographic location and typically does not have income as a primary objective.

If a customer's objectives are safety of principal and income, you as the registered representative would NOT suggest: a. AA-rated corporate bonds b. High-grade preferred stocks c. A bond fund which invests in investment-grade municipal bonds d. An Exchange-Traded Fund that tracks the S&P 500 Index

D. an exchange-traded fund that tracks the S&P 500 Index An ETF that tracks the S&P 500 Index invests in common stocks that will not pay a high dividend and will fluctuate in value with the general equity market. This customer wants income and safety of principal, which may be found in the other three investment choices.

A business development company (BDC) is MOST suitable for which of the following investors?: a. An investor who is seeking a liquid investment in a portfolio of established companies b. An investor who is seeking a non-speculative investment in a portfolio of companies that are privately held c. An investor who is seeking a speculative investment in a portfolio of distressed companies and understands that the investment will not offer liquidity d. An investor who is seeking a speculative investment in a portfolio of distressed companies and is interested in liquidity

D. an investor who is seeking a speculative investment in a portfolio of distressed companies and is interested in liquidity A business development company (BDC) raises capital by selling securities to investors, has a structure that is similar to a closed-end investment company, and provides the investor with access to their capital (liquidity). A BDC will use the money it raises to invest in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. Since some of the funds are invested in the equity of non-public companies, purchasing shares of a BDC is similar to buying a publicly traded investment in a private equity firm. Due to the speculative nature of BDC investments, RR's should inform investors of all of the potential risks before making the investment.

A client is interested in obtaining the expense ratio of a mutual fund recommended by the RR. Which of the following actions would be BEST for the RR to take? a. Instruct the client to obtain the information from FINRA b. Refer the client to the fund's sponsor since the RR may not be authorized to release this information c. Instruct the client to obtain that information from the SEC database of mutual fund prospectuses d. Inform the client that this information may be obtained by reviewing the front of the fund's prospectus

D. inform the client that this information may be obtained by reviewing the front of the fund's prospectus Mutual funds are required to disclose in the front of a prospectus a standardized fee table of all its fees. The fee table must include the expense ratio, which is the percentage of a fund's assets that is used to pay its operating costs. It is determined by dividing total expenses by the average net assets in the portfolio.

Which of the following choices is NOT a characteristic of a HOLDR? a. Diversification b. The right to vote c. The ability to control when distributions are taxed d. Once-a-day pricing

D. once-a-day pricing Holding Company Depository Receipts (HOLDRs) are created by depositing securities of a certain sector (e.g., biotech, internet, retail) into a trust and selling interests in the trust to investors. HOLDRs offer investors a level of diversification that is similar to an exchange-traded fund (ETF). Unlike ETFs, the owner of a HOLDR has an ownership interest in the shares of the companies in which the HOLDR is invested and retains the right to vote. Once the portfolio has been created, the composition of the portfolio will typically not change. However, if a company that is included in the portfolio goes bankrupt or merges with another company, the makeup of the HOLDR may be altered. Investors have the ability to control when they are taxed, since they determine when to hold or sell the HOLDR. An investor in a mutual fund does not have that benefit since the portfolio manager determines when to hold or sell the securities in the fund. Benefits also include liquidity and pricing throughout the day (i.e., they are exchange-traded) as compared to an index or sector mutual fund, which has daily pricing and is purchased directly from the fund. HOLDRs have no management fees and are considered low-cost since there are only small transaction costs and custodian fees.

Which of the following advantages is NOT a benefit of owning a real estate investment trust (REIT)? a. Stable dividend income b. Liquidity c. Diversification d. Protection against rising interest rates

D. protection against rising interest rates Real estate investment trusts (REITs) offer investors a stable dividend based on the income being produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange and offer investors liquidity. Since investors typically purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income-earning securities become more attractive.

A customer contacts a registered representative and wants to invest a large sum of money in four different mutual fund families. Which of the following statements is the MOST important disclosure the RR should make to the client? a. The customer will not be able to diversify his assets b. The customer will not be able to switch mutual funds within each family c. The customer will not be able to receive a single account statement d. The customer will not be able to receive sales breakpoints

D. the customer will not be able to receive sales breakpoints The term fund family or fund complex is used to define a single investment company or mutual fund company with many different types of mutual funds that a customer may choose to purchase. The objective is to provide a large number of mutual funds providing a broad range of suitability for investors. A customer may be able to invest a large sum of money with one fund family, receive a sales breakpoint (reduced sales charge), diversify his assets, and have the ability to switch between mutual funds. The most important disclosure that should be made to the client is that there is no advantage to allocating his investment in four different fund families, thereby losing the possibility of receiving a reduced sales charge (sales breakpoints). The ability to receive a single account statement is not an important disclosure and this information is usually provided to clients that have different fund families with a single broker-dealer.

The Founders Income Fund has declared a dividend that is payable to stockholders of record on Friday, May 29. This mutual fund's ex-dividend will typically be on: a. Monday, May 25 b. Tuesday, May 26 c. Wednesday, May 27 d. The date that is set by the fund or its principal underwriter (sponsor)

D. the date that is set by the fund or its principal underwriter (sponsor) Mutual fund shares do not trade on exchanges and do not have a fixed settlement date. For this reason, the ex-dividend date for a mutual fund will not be two days before the record date, as it is for common stock. Instead, a mutual fund's ex-dividend date is on a date that is determined by the fund or its principal underwriter (sponsor). In practice, mutual funds will often use the day after the record date as the ex-dividend date.

When analyzing a mutual fund's expenses, an analyst does NOT consider: a. The management fees charged by the investment adviser b. The fees charged by the fund's custodian c. The fund's expense ratio d. The sales load charged to buy fund shares

D. the sales load charged to buy fund shares When analyzing a mutual fund's expenses, an analyst is concerned about the amount of expenses as compared to the amount of money managed by the fund. This comparison is made by calculating the fund's expense ratio (operating expenses divided by total net assets). The operating expenses include management fees (which is usually the largest expense) and the fee paid to the fund's custodian. Total net assets are the fund's assets minus liabilities. Sales charges are not considered expenses of the fund.

Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)? a. They offer investors the same amount of liquidity as exchange-traded REITs b. They are not required to distribute the same percentage of taxable income as exchange-traded REITs c. They are not required to make periodic disclosures that are required of exchange-traded REITs d. They are not suitable for the same investors as exchange-traded REITs

D. they are not suitable for the same investors as exchange-traded REITs Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.

Which of the following statements is TRUE regarding dividend and capital gain distributions of mutual funds? a. They may be combined to determine the total yield b. The taxes may be deferred if they are invested in additional mutual fund shares c. Dividends are taxed as long-term capital gains d. They can be reinvested automatically in additional shares if the shareholder chooses to do so

D. they can be reinvested automatically in additional shares if the shareholder chooses to do so Of the choices listed, the only true statement regarding dividend and capital gain distributions from an open-end investment company (mutual fund) is that they can automatically be reinvested in additional shares if the fundholder chooses to do so. They may not be combined to determine yield. The taxes must be paid in the year that the distribution is realized, even if the distribution is reinvested. Qualified dividends are taxable at a maximum rate of 20% regardless of how long the fund is held and nonqualified dividends are taxed as ordinary income. Long-term capital gain distributions are taxable as long-term capital gains regardless of how long the fund shares are held.

Which TWO of the following are suitable for an aggressive investor who wants a non-traditional investment as well as access to his capital? I. A business development company II. A hedge fund III. A liquid alternative investment IV. A private equity fund

I and III Both a business development company and a liquid alternative investment are non-traditional investments that are suitable for an aggressive investor. A business development company (BDC) raises capital by selling securities to investors, has a structure that is similar to a closed-end investment company, and provides an investor with access to his capital (liquidity). A BDC will use the money it raises to invest in private companies, small and developing businesses, as well as financially troubled companies that have difficulty raising capital in public markets. Since some of the funds are invested in the equity of non-public companies, purchasing shares of a BDC is similar to buying a publicly traded investment in a private equity firm. The term alternative investments refers to non-traditional strategies, such as short selling, using derivatives, long/short trading or neutral strategies, trading in distressed securities or currencies, and arbitrage. These strategies differ from simply buying, holding, and selling securities and are often referred to as a way to diversify a portfolio through the use of securities other than equities and bonds. These are the types of strategies are used by hedge funds and private equity funds. One of the disadvantages of both hedge funds and private equity funds is their lack of liquidly. A liquid alternative investment combines the structure of an SEC-registered mutual fund (which is liquid) with a non-traditional or alternative investment.

Which TWO of the following statements are TRUE regarding REITs? I. They may invest in both commercial and residential real estate II. They may retain a majority of their income III. Dividends paid are taxed as ordinary income IV. They may be sold only to retail investors

I and III REITs invest in many different types of residential and commercial income-producing real estate such as apartment buildings, hotels, shopping centers, office complexes, storage facilities, hospitals, and nursing homes. Income is received from the rental income paid by the tenant leasing the real estate owned by the REIT. REITs must pay a minimum of 90% of their taxable income and the dividends received by investors are taxed at the same rate as ordinary income. The dividends paid to shareholders of REITs do not qualify for the lower 20% tax rate given other types of common and preferred stock. They can be suitable for both retail and institutional investors.

A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE? I. The bid price is equal to the net asset value II. The bid price is equal to the net asset value plus the redemption fee III. The offer price is equal to the net asset value plus the sales charge IV. The offer price is equal to the net asset value minus the sales charge

I and III The bid price of a mutual fund is also equal to the net asset value (NAV) and is the price a customer will receive if shares are sold. It does not include the redemption fee, which may be charged when the customer sells her shares. The offer price is equal to the NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a mutual fund.

Which TWO of the following investment companies are NOT open-end? NAV Offered I. $8.00 $ 7.00 II. $9.20 $10.00 III. $7.00 $ 7.00 IV. $8.00 $10.00

I and IV Open-end companies are not offered below their current net asset value. According to the Conduct Rules, the maximum sales charge permitted for an open-end company is 8 1/2%. Choices (I) and (IV) must be closed-end companies. Choice (I) is a closed-end company because it is offered below its net asset value. Choice (IV) must be a closed-end company because when doing the sales charge calculation (sales charge divided by offering price), the result is a 20% sales charge, which is above the allowable maximum. Therefore, choice (IV) is a closed-end fund trading at a 25% premium to NAV.

Which TWO of the following actions may an RR engage in when selling shares of a mutual fund? I. Tell a customer to invest in a family of funds to take advantage of a breakpoint II. Sell dividends III. Explain that the exact value can be determined at redemption IV. Allow a customer to sign a letter of intent two months after his initial investment

I and IV Selling dividends means to suggest purchasing shares just prior to the ex-date and is a violation of securities rules since it does not benefit the investor. A letter of intent may be backdated up to 90 days. When redeeming shares, the price is based on the next calculated NAV so it is not known at the time of redemption. A family of funds allows an investor to take advantage of breakpoints although investing in more than one fund.

A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE? I. The bid price is equal to the net asset value II. The bid price is equal to the net asset value minus the redemption fee III. The offer price is equal to the net asset value plus a commission IV. The offer price is equal to the net asset value plus the sales charge

I and IV The bid price of a mutual fund is also equal to the net asset value (NAV) and is the price a customer will receive if shares are sold. It does not include the redemption fee, which may be charged when the customer sells her shares. The offer price is equal to the NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a mutual fund. The term commission is not used in the mutual fund industry as the term sales charge or sales load is used, and is built into the price the customer pays for the fund.

The tax treatment of a business development company is similar to which TWO of the following securities? I. A municipal bond II. A real estate investment trust III. A closed-end investment company IV. A variable annuity

II and III A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. For tax purposes, they are regulated similar to investment companies (mutual funds and closed-end funds) and to REITs that also must distribute a minimum of 90% of their income. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.

Which TWO of the following statements are normally TRUE of money-market mutual funds? I. They are load funds II. They are no-load funds III. Dividends are computed daily and credited monthly IV. Dividends are computed weekly and credited monthly

II and III Money-market funds are normally no-load, open-end investment companies. Their portfolio consists of short-term, fixed-income securities such as Treasury bills, commercial paper, and bankers' acceptances. Dividends on money-market fund shares are usually computed daily and credited monthly. Investors may elect to reinvest the dividends each month, thereby buying more shares.

A client is seeking a mutual fund that will maximize its return by limiting expenses. As a result, he wants to invest in a portfolio that is passively managed. Which TWO of the following choices will help achieve this goal? I. A portfolio that invests only in fixed income securities II. An exchange-traded fund based on the Nasdaq 100 Index III. A mutual fund that tracks the S&P 500 Index IV. An account managed by an investment adviser

II and III Passive investing or management is designed to minimize transaction costs and capital gains. This is accomplished by a portfolio manager trying to mirror an index, not outperfom an index. An exchange-traded fund or mutual fund that follows and is designed to replicate an index such as the S&P 500 or the Nasdaq 100 will accomplish this objective. Active management is a situation where the portfolio manager frequently trades the securities in a portfolio to achieve results that will outperform an index. The portfolio could be invested in equity or fixed-income securities.

A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE? I. The bid price is equal to the net asset value minus the redemption fee II. The bid price is equal to the net asset value and does not include the redemption fee III. The offer price is equal to the net asset value plus the sales charge IV. The offer price is equal to the net asset value minus the sales charge

II and III The bid price of a mutual fund is also equal to the net asset value (NAV) and is the price a customer will receive if shares are sold. It does not include the redemption fee, which may be charged when the customer sells her shares. The offer price is equal to the NAV plus the sales charge, if any, and is the price a customer would pay to purchase shares of a mutual fund.

Which TWO of the following statements are characteristics of REITs? I. They are formed as a limited partnership II. They provide limited liability for shareholders III. They invest only in mortgages IV. They are required to distribute a minimum percentage of their income

II and IV A real estate investment trust (REIT) is organized as a corporation that offers stock to the public and, as such, provides investors with limited liability. REITs are not limited partnerships and, therefore, will not have a flow-through of losses. An investor's risk is limited to her investment. They can have an equity position in real estate (own the buildings) or be involved in mortgage activities (lend money). They must distribute 90% of their income in order to qualify for preferential tax treatment.

Which TWO of the following statements are TRUE regarding an international fund? I. It will invest in U.S. and non-U.S. companies II. It will invest in only non-U.S. companies III. There is no currency risk since it is issued by a U.S. mutual fund family IV. There is currency risk since the portfolio has international exposure

II and IV An international fund is one that invests exclusively in non-U.S. companies. This is in contrast to a global fund, which invests in U.S. and non-U.S. companies. Since the international fund will hold securities issued by companies in various countries, currency fluctuations could damage the value of the securities within the portfolio (currency risk).

Broker-dealers are permitted to take part in which TWO of the following actions regarding the sale of mutual fund shares? I. Tell investors to buy mutual funds shortly before a dividend or capital gains distribution is to be paid II. Assign loan value to fully paid shares that have been owned for more than 30 days III. Provide a discount to nonmember broker-dealers when selling them investment company shares IV. Continue to compensate retired registered representatives for prior sales if a contract was signed with the registered representative who has retired

II and IV Under industry rules, broker-dealers are permitted to continue to compensate retired registered representatives for sales made prior to retirement (i.e., to render continuing commissions or trails) if a contract is signed with the registered representative who has retired. To induce an investor to buy mutual fund shares shortly before a dividend or capital gain distribution is to be paid is a violation of the Conduct Rules and is called selling dividends. There is no benefit to the customer because the value of the mutual fund will decline when the fund sells ex- (without the) dividend or when there is a capital gain distribution. The customer could just as well have waited and received the same value in shares. The broker-dealer used the imminent payment of the dividend or capital gain distribution as a sales tool to sell the customer, whereas the customer's needs and objectives should have been the salesman's major consideration. Although broker-dealers may not obtain credit for a customer to buy open-end shares (because mutual funds may not be bought on margin), loan value may be assigned to fully paid shares that the customer has owned for more than 30 days. Also, broker-dealers may not give a discount to nonmember broker-dealers when selling investment company shares.