(Investment companies) Management companies

Which individuals can join together and qualify for a breakpoint on their aggregate purchases of mutual funds? A - Family members in the same household B - Members of an investment club C - Limited partners who form a partnership to make the purchase D - All of the above

The best answer is A. Unrelated investors cannot "join together" to aggregate their purchases and get the benefit of a breakpoint. However, mutual fund companies will aggregate purchases of immediate family members in the same household and give them the benefit of the breakpoint.

If a mutual fund distributes 99% of its Net Investment Income to its shareholders, how much of the Net Investment Income will be taxable? A - 0% B - 1% C - 99% D - 100%

The best answer is B. A fund that distributes at least 90% of Net Investment Income to shareholders is "regulated" under Subchapter M of the Internal Revenue Code and pays no tax on the distributed amount. So, only the 1% of the income retained will be taxed

A registered investment adviser has $100,000 from a client to invest in a broadly diversified mutual fund. The fund prospectus has the following breakpoint schedule: $0 - $49,999 5.0% $50,000 - $149,999 4.5% $150,000 - $249,999 4.0% $250,000 - $499,999 3.5% What is the sales charge that will be paid on the investment? A - 5.00% B - 4.75% C - 4.50% D - 4.00%

The best answer is C. A breakpoint is a reduced sales charge that is paid on a large dollar purchase of a mutual fund. The breakpoint schedule is found in the fund prospectus. This fund lowers the sales charge to 4 1/2% for purchases of $50,000 - $149,999.

ETFs are: A - non-negotiable B - redeemable C - traded on exchanges D - traded over-the-counter

The best answer is C. Exchange Traded Funds, as the name says, trade on stock exchanges. Most are AMEX (now renamed the NYSE American) listed, but there are ETFs on the NYSE and NASDAQ as well.

Which of the following mutual fund terms are synonymous? A - Bid; Asking Price B - Bid; Public Offering Price C - Ask; Net Asset Value D - Ask; Public Offering Price

The best answer is D. For mutual funds the Ask is the same thing as Public Offering Price. Bid, Redemption Price, and Net Asset Value are all the same terms

When comparing a mutual fund to a hedge fund, all of the following are true EXCEPT hedge funds: A - are subject to less regulation B - use aggressive investment strategies and have higher risk C - are only available to qualified purchasers D - are liquid

The best answer is D. Hedge funds are completely illiquid investments. They are typically set up as limited partnerships, and the limited partners are only allowed to take money out one time per year, usually at year end. Hedge funds offer higher returns coupled with higher risk and are only sold to accredited (wealthy, sophisticated) investors who understand the risks involved.

A customer sells short a 3X Leveraged ETF at $30 per share. What is the customer's maximum potential loss? A - $30 per share B - $60 per share C - $90 per share D - Unlimited

The best answer is D. Shorting an ETF is the same thing as shorting any stock. Borrowed shares are sold, and then must be bought back and replaced at a later date. If the market rises, the customer's loss can be infinite.

A mutual fund has a net asset value per share of $9.45. The maximum offering price per share is: A - $9.45 B - $9.95 C - $10.25 D - $10.33

The best answer is D. The maximum sales charge on a mutual fund is 8.5% under FINRA rules. The formula to find the offering price is: Bid (NAV) / 100%- sales charge % = Ask Price

A customer switches from a growth fund to an income fund within the same "family of funds." Which statement is TRUE? A - No tax liability is incurred because this is treated as a "wash sale" B - No tax liability is incurred because this is treated as a "like kind exchange" of assets C - Tax must be paid on any amount by which the NAV of the new fund exceeds the old fund's NAV D - The sale results in a "taxable event" on which tax on any gain is due, and the purchase establishes a new cost basis

The best answer is D. When the shares of one fund are sold, unless the monies are reinvested in the same fund, (resulting in a non-taxable "like-kind" exchange), capital gains tax is due on the sale proceeds versus the cost basis in the shares. The purchase of the new (different) shares results in a new cost basis

Which of the following customers is allowed a breakpoint on mutual fund purchases? I Corporate purchaser II Investment club III Individual purchaser IV Investment adviser omnibus account A - I and III B - II and IV C - I, II, III D - I, II, III, IV

The best answer is A. People cannot "join together" to obtain a breakpoint on a mutual fund purchase. Therefore, investment clubs cannot group purchases for a breakpoint, nor can investment advisers group their customers' purchases. An individual or corporation making a purchase is considered to be "one" purchaser and qualifies for the breakpoint.

Which statement is TRUE regarding the ex date for a mutual fund? A - The ex-date is set by the Board of Directors of the Fund B - The ex-date is set by FINRA C - The ex-date is 2 business days prior to the record date D - The ex-date is the day on which the Net Asset Value per share increases

The best answer is A. The ex-date for a mutual fund is set by the Board of Directors. On that date, the price of the shares is reduced for any distributions. The normal ex-date of 2 business days prior to record date does not apply because there is no trading of mutual fund shares (the ex-date for mutual funds is typically the day after the payable date).

To impose the maximum sales charge, under FINRA rules, mutual funds must offer investors all of the following benefits EXCEPT: A - Breakpoints B - Plan Completion Insurance C - Rights of Accumulation D - Letter of Intent

The best answer is B. To impose the maximum sales charge of 8 1/2%, FINRA requires funds to give investors specified breakpoints (lowered sales charges for large dollar purchases), a letter of intent option (once the letter is signed, the investor has 13 months to complete a breakpoint), and rights of accumulation (the investor's accumulated position counts towards completion of a breakpoint). There is no requirement for the sponsor to offer plan completion insurance, which is often included in variable annuity contracts; and which funds the annuity for a beneficiary if the contract holder dies prematurely.

No load funds do not impose any of the following fees EXCEPT: A - Front end sales charge B - Redemption fee C - Management fee D - Contingent deferred sales charge

The best answer is C. A pure "no-load" fund does not impose sales charges of any kind to buy into the fund; nor to redeem shares. However, all mutual funds charge an annual management fee, which is an annual expense against the fund's investment income.

A mutual fund has a computed Net Asset Value per share of $12.30 and a Public Offering Price of $13.30. The fund has a sales charge percentage of: A - 5.5% B - 6.5% C - 7.5% D - 8.5%

The best answer is C. The formula for the sales charge percentage is: Ask -Bid / Ask = Mutual Fund Sales Charge % 13.30 - 12.30 /13.30 = 1.00/13.30 = 7.5%

A customer redeems 1,000 shares of ABC Fund. The customer must be paid the money within: A - 1 day B - 3 days C - 7 days D - 10 days

The best answer is C. Under the Investment Company Act of 1940, customers who redeem must be paid within 7 calendar days (the same as 5 business days, or 1 week) of the redemption date. Note that most funds process redemptions much more quickly than this.

A "breakpoint sale" is:I advising a customer to buy enough of a mutual fund to qualify for lowered sales charge shown in a breakpoint scheduleII advising a customer to buy an amount of a mutual fund that is just below the minimum threshold needed to qualify for a lowered sales charge shown in a breakpoint scheduleIII permitted under FINRA rulesIV a violation of FINRA rules A - I and III B - I and IV C - II and III D - II and IV

The best answer is D. A "breakpoint sale" might sound like a good thing, but it is not! It is selling a mutual fund to a customer in an amount that does not give the customer the benefit of the breakpoint. This is a violation of FINRA rules.

A 200% Leveraged Dow Jones Industrial Average Index ETF would be expected to move: I up 50% in price when the DJIA moves up 100% II up 100% in price when the DJIA moves up 50% III down 50% in price when the DJIA moves down 100% IV down 100% in price when the DJIA moves down 50% A - I and III B - I and IV C - II and III D - II and IV

The best answer is D. A leveraged ETF uses borrowing (margin) and options to magnify price movement as compared to the reference index. A 200% leveraged ETF can be expected to move 2 times as fast as the reference index, either up or down. A 300% leveraged ETF can be expected to move 3 times as fast as the reference index, either up or down

Mutual funds that have an automatic reinvestment provision will typically reinvest: A - only dividends at Net Asset Value B - only capital gains at Net Asset Value C - dividends at Net Asset Value and capital gains at the Public Offering Price D - dividends at Net Asset Value and capital gains at the Net Asset Value

The best answer is D. If a fund offers an automatic reinvestment provision, both dividend distributions and capital gains distributions are reinvested at Net Asset Value.

Which statement is TRUE regarding dollar cost averaging? A - If market prices remain constant, the plan will produce a lower average per share cost B - If market prices are fluctuating, the plan will produce a lower average per share cost C - If prices rise, smaller dollar purchases must be made; while if prices fall, larger dollar purchases must be made D - The plan requires that a constant dollar amount be maintained in equity securities, with any excess invested in debt

The best answer is B. Dollar cost averaging requires that an investor make periodic payments (say monthly) of a fixed dollar amount (say $100 per month) to buy a given security. If the price of the security is fluctuating, the average purchase cost per share will be lower for the investor than the simple mathematical average price of the shares over the same period. Dollar cost averaging does not work if the price of the stock remains fixed, nor does it protect against loss in a falling market.

A customer in the 20% tax bracket with a 15-year investment time horizon is considering investing $250,000 with an objective of current income and safety of principal. The registered representative is considering making the recommendation of either a managed investment grade bond mutual fund or an investment grade bond fixed unit investment trust. When presenting the 2 choices to the customer, the registered representative should mention that: I breakpoints are available on mutual funds, but not on unit investment trusts II breakpoints are available on both mutual funds and unit investment trusts III expense ratios for mutual funds tend to be higher than expense ratios for fixed unit investment trusts IV expense ratios for fixed unit investment trusts tend to be higher than expense ratios for mutual funds A - I and III B - II and III C - I and IV D - II and IV

The best answer is B. Expense ratios for fixed unit investment trusts tend to be much lower than those for mutual funds, since there is no "management fee" to pay. Once the UIT portfolio is selected, it is "fixed" (hence the term fixed UIT) for the life of the UIT, so there is no manager to pay. Note that reduced sales charges (breakpoints) are available for large purchases of both fixed UITs and mutual funds.

A client sells $49,000 of various stocks and wishes to use the proceeds to buy a mutual fund that has breakpoints at $10,000 intervals. Which statement is TRUE? A - The customer must sign a letter of intent to reach the $50,000 breakpoint B - The customer should be informed that investing an additional $1,000 will provide the benefit of a breakpoint C - The customer should be informed that the sales charge earned by the representative will be lower if the breakpoint is reached D - No additional disclosures are required to be made to the customer

The best answer is B. If a customer is "close" to a breakpoint, it is a violation to not make the customer aware that putting in the additional funds to reach that level will result in a lower sales charge. If the disclosure is not made, the registered representative has committed a violation known as a "breakpoint sale."

An individual wishes to have a complete liquidation of the account done over a 5 year time frame. He or she should elect which type of withdrawal plan? A - Fixed shares B - Fixed period C - Fixed percentage D - Fixed dollar

The best answer is B. If an individual wishes to redeem shares of a mutual fund under a "systematic withdrawal plan," he or she gets to elect a withdrawal option. He or she could elect to have a fixed number of shares liquidated each month (Choice A); could elect to have the account liquidated over a specified period of time (for college education) (Choice B); could elect to have a fixed percentage of the portfolio liquidated each month (Choice C); or could elect to have enough shares liquidated so that a specific dollar amount is received each month (Choice D). In this example, Choice B meets the customer's requirements.

CLOSED END BOND FUNDS Fund Net AssetValue StockClose NAVChange Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to sell 100 shares of Acco Fund will receive: A - $813 B - $813 less a commission C - $832 D - $832 less a commission

The best answer is B. If closed-end fund shares are sold, the investor gets the current market price less a commission paid for executing the trade. The last price for Acco Fund is $8.13. An investor selling 100 shares receives $813 less a commission.

A customer is considering the purchase of $5,000 of ABC Growth Fund, to use as the down payment on a new car purchase that will be made in 5 - 6 years. The fund offers the following share classes: Class A shares: 5% initial sales charge No 12b-1 feesBreakpoint Schedule: $0 -$10,000 5% sales charge $10,001 -$30,000 3% sales charge $30,001 -$50,000 2% sales charge $50,001 -$100,000 1% sales charge Class B shares: No initial sales charge. 40% annual 12b-1 fee CDSC if the customer redeems within the following time periods: Redeem within Year 1: 5% redemption fee Redeem within Year 2: 4% redemption fee Redeem within Year 3: 3% redemption fee Redeem within Year 4: 2% redemption fee Redeem within Year 5: 1% redemption fee Redeem after Year 5: 0% redemption fee Class C shares: No initial sales charge.75% annual 12b-1 fee No CDSC The best recommendation for this customer is: A - purchase Class A shares B - purchase Class B shares C - purchase Class C shares D - divide the purchase equally into $2,500 each for Class A and Class C shares

The best answer is B. If this customer invested $5,000 in Class A shares, he pays a 5% sales charge and no annual 12b-1 fees for the 5 year investment time horizon. If the customer invested $5,000 in Class B shares, there is no up-front sales charge; but because the customer will redeem after year 5, there will be no redemption fee on these shares. However, the customer must pay .40% in annual 12b-1 fees for 5 years = 2.00% total fees. If the customer invested the $5,000 in Class C shares, then the customer must pay .75% annually in 12b-1 fees over 5 years, for a total of 3.75%. The lowest fee purchase is, therefore, Class B shares.

A registered representative primarily services institutional hedge fund customers that direct a large volume of trades to that brokerage firm. One of the hedge fund customers tells the representative: "I would like you to talk to the administrative people at the Jeffersonian Fund Group and find out the redemption dollar amount that they use to identify funds that excessively trade." You comply with the customer's request and the administrative personnel inform you that the limit is $1,000,000. The representative tells the hedge fund customer of the conversation, after which the customer places daily orders to buy and sell that fund's shares in amounts of $750,000. Which statement is TRUE? A - It appears that the hedge fund is engaging in the prohibited practice of late trading of mutual fund shares B - It appears that the hedge fund is engaging in the prohibited practice of market timing of mutual fund shares C - It appears that the representative has violated the insider trading rules because he divulged the mutual fund's "red flag" threshold to the hedge fund customer D - It appears that the representative has violated industry firewall requirements, because registered representatives are prohibited from talking to the administrative personnel of mutual fund companies

The best answer is B. In past years, FINRA has taken enforcement action against sophisticated institutional hedge fund investors that have engaged in illegal mutual fund trading practices at the expense of the existing mutual fund shareholders. One specific type of violation is "market timing" - the practice of frequently buying and selling a fund's shares to exploit inefficiencies in how the mutual fund company computes NAV per share. For example, if the fund held overseas stocks, that might slow up the computation of NAV for the fund company - however the sophisticated hedge fund investor might build its own software to compute NAV faster than the fund company - and would place buy orders for shares that it found to be undervalued and sell orders for fund shares that it found to be overvalued. Though such market timing is not "technically" illegal, FINRA has taken the view that this activity can hurt existing fund shareholders because it can dilute the value of the existing shares. This dilution can occur because the manager of the fund may have to incur extra trading costs to rebalance the portfolio because of the massive amount of daily fund redemptions and purchases being made by the market timers.To prevent market timing, most mutual funds have placed restrictions on excessive trading in their prospectuses and monitor accounts for excessive short-term trading. Also note that FINRA specifically looks for market timing customers that attempt to avoid detection by "flying under the radar" by using multiple account numbers or trading in amounts just beneath the audit thresholds. This customer appears to be attempting to "fly under the radar" - which is prohibited.

An institutional hedge fund customer has invested $100 million with your brokerage firm in the Madison Family of Funds. Madison allows its shareholders to exchange shares of any fund within the family at no charge. NAV of each fund in the family is computed as of 4:00 PM ET. The fund processes orders received until 4:30 PM ET each day. A representative with an institutional hedge fund client notices that this customer has been placing daily orders at 4:15 PM to exchange fund shares within the family. Which statement is TRUE regarding this situation? A - The registered representative should make the customer aware of the tax consequences of exchanging mutual fund shares B - It appears that the hedge fund customer is engaging in the prohibited practice of late trading of mutual fund shares C - Because the customer is a large institutional investor, it qualifies for a "sophisticated customer" exemption from regulatory oversight D - This institutional customer has violated its fiduciary responsibility to the other shareholders of the fund by engaging in the prohibited practice of market timing of mutual fund shares

The best answer is B. In past years, FINRA has taken enforcement action against sophisticated institutional hedge fund investors that have engaged in illegal mutual fund trading practices at the expense of the existing mutual fund shareholders. There are 2 specific types of violations: Late Trading: The practice of placing orders to buy, redeem, or exchange mutual fund shares after the time as of which the fund calculates its daily NAV (typically at 4:00 PM ET). Any such "late" orders are not supposed to be processed at that day's closing NAV; rather, they should be processed at the following day's NAV. Such late trading is prohibited under the Investment Company Act of 1940. Some mutual fund companies accepted redemption orders past the 4:00 PM cut-off, allowing sophisticated traders to take advantage of after-4:00 PM ET market close news announcements - an advantage that the regular fund shareholders did not have. This late trading is now an explicitly prohibited activity for both the fund company and the investor. Market Timing: The practice of frequently buying and selling a fund's shares to exploit inefficiencies in how the mutual fund company computes NAV per share. For example, if the fund held overseas stocks, that might slow up the computation of NAV for the fund company - however the sophisticated hedge fund investor might build its own software to compute NAV faster than the fund company - and would place buy orders for shares that it found to be undervalued and sell orders for fund shares that it found to be overvalued. Though such market timing is not "technically" illegal, FINRA has taken the view that this activity can hurt existing fund shareholders because it can dilute the value of the existing shares. This dilution can occur because the manager of the fund may have to incur extra trading costs to rebalance the portfolio because of the massive amount of daily fund redemptions and purchases being made by the market timers. To prevent market timing, most mutual funds have placed restrictions on excessive trading in their prospectuses and monitor accounts for excessive short-term trading. Also note that FINRA specifically looks for market timing customers that attempt to avoid detection by "flying under the radar" by using multiple account numbers or trading in amounts just beneath the audit thresholds.

Crane Mutual Funds offers investors the opportunity to receive breakpoints on all purchases within their family of funds. The following lists the breakpoint schedule: Purchase Amount Sales Charge $0-$10,000 8 ½% >$10,000-$20,000 7 ½% >$20,000-$45,000 6 ½% >$45,000-$65,000 5 ½% >$65,000 5 % An investor owns $15,000 worth of the Crane Government Fund and wishes to buy $7,000 worth of the Crane Income Fund. What will be the sales charge for this purchase? A - 5 ½% B - 6 ½% C - 7 ½% D - 8 ½%

The best answer is B. Many fund families apply breakpoints to all purchases within the family, as is the case for the Crane Family of Funds. In this case, the fund has a breakpoint at $20,000, and the customer has already has $15,000 of one fund in the family. The customer wants to buy another $7,000 of another fund in the family. The customer will get the 6 ½% breakpoint on this purchase, since a total of $22,000 has been invested in the "family" - exceeding the $20,000 breakpoint needed for the lower 6 ½% sales charge.

Which of the following statements are TRUE regarding money market funds?I The Net Asset Value per share is constant at $1II The Net Asset Value per share is constant at $10III As Total Assets in the fund increase, the shareholder has the same number of shares at an increased Net Asset Value per shareIV As Total Assets in the fund increase, the shareholder receives more shares at the same Net Asset Value per share A - I and III B - I and IV C - II and III D - II and IV

The best answer is B. Money market funds are unusual in that the Net Asset Value per share is constant at $1.00. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each. For example, if an investor has 1,000 shares @ $1 ($1,000 total) in the fund, and the assets appreciate by 10%, then the customer will have 1,100 shares at $1 ($1,100 total).

A registered representative will lose any compensation earned from a customer's mutual purchase if that customer tenders the shares for redemption within how many business days after the purchase was made? A - 3 business days B - 7 business days C - 10 business days D - 30 calendar days

The best answer is B. Mutual fund shares are long-term investment vehicles. They are not allowed to be traded and they are not meant for short-term holding. A registered representative is given an "incentive" to make sure that customers are long-term buyers. If a customer buys mutual fund shares and redeems within 7 business days, all sales charges earned are forfeited and returned to the fund distributor.

MUTUAL FUNDS Fund Net Asset Value OfferingPrice Change Capital $9.01 $9.59 -.02 Common $6.37 $6.64 -.04 Corporate $7.72 $8.44 +.03 A customer who placed an order to buy 100 shares of Corporate Fund this day will pay: A - $772 B - $844 C - $772 plus commission D - $844 plus commission

The best answer is B. Open end mutual funds are purchased at the offering price, which is inclusive of any sales charges. This is a new issue prospectus offering, so no commissions are involved. The customer pays the offering price of $8.44 per share x 100 shares = $844.

Which statement is TRUE regarding ETFs (Exchange Traded Funds)? A - The purchaser of an ETF is not required to receive a disclosure document because the shares are purchased in the secondary market B - The purchaser of an ETF is required to receive either a prospectus or a Product Description summarizing key information about the ETF C - The purchaser of an ETF is required to receive an Offering Memorandum because a public offering of securities is being made D - The purchaser of an ETF is required to receive an Official Statement, at, or prior to, settlement of the transaction

The best answer is B. Regarding Exchange Traded Funds (ETFs), the shares trade in the secondary market like any other stock. However, any purchaser is required to be delivered either a prospectus (similar to that for a mutual fund) or a Product Document summarizing key information about the ETF and the details of where a prospectus can be obtained. The basic idea here is that the customer is buying the equivalent of an exchange traded index-mutual fund; and even though technically each purchase is not a "new issue" like the purchase of a mutual fund, the customer must still receive a disclosure document. An Offering Memorandum is the disclosure document used for a Regulation D private placement. An Official Statement is the disclosure document used for a new municipal bond issue.

SPDR ("Spiders"), QQQ ("Qubes") and DIA ("DIAmonds") are acronyms for: A - American Depositary Receipts B - Exchange Traded Funds C - Mutual Funds D - Collateralized Mortgage Obligations

The best answer is B. SPDRs ("Spiders"), QQQs ("Qubes"), and DIAs ("DIAmonds") are exchange traded funds (ETFs), listed on the exchanges. The "Spider" is the Standard and Poor's 500 Index ETF; the "Qube" is the NASDAQ 100 Index ETF; and the DIA is the Dow Jones Industrial Index ETF.

A "SPDR" is a(n): A - mutual fund B - ETF C - derivative D - face amount certificate

The best answer is B. The "SPDR" is the Standard and Poor's Depositary Receipt, one of the first index-ETFs. It is based on the composition of the Standard and Poor's 500 Index.

Which of the following statements are TRUE about the Investment Company Act of 1940's requirements for management companies?I At least 40% of the Board of Directors must be "non-interested" personsII At least 60% of the Board of Directors must be non-interestedIII To establish a fund, a minimum of $10,000 of Total Net Assets is requiredIV To establish a fund, a minimum of $100,000 of Total Net Assets is required A - I and III B - I and IV C - II and III D - II and IV

The best answer is B. The Investment Company Act of 1940 requires that the minimum capital to start a fund is $100,000. It also requires that at least 40% of the Board of Directors be "non-interested parties" - that is, they are not affiliated with the sponsor, custodian, transfer agent, or firms in the selling group.

A mutual fund has a computed Net Asset Value per share of $10.30 and a Public Offering Price of $11.00. The fund has a sales charge percentage of: A - 6.1% B - 6.4% C - 7 % D - 7.5%

The best answer is B. The formula for the sales charge percentage is: A - B $11.00 - $10.30 $.70 ----- = ----------------- = ---------- = 6.4% A $11.00 $11.00

Which statements are TRUE regarding closed end investment companies?I The initial offering of shares is made under a prospectusII Shares are redeemable with the issuer at Net Asset ValueIII Shares trade in the secondary market at prevailing market pricesIV The portfolio of investments is not managed A - I and II only B - I and III only C - III and IV only D - I, III, IV

The best answer is B. The initial offering of closed end investment company shares is made under a prospectus. Then the shares are listed on an exchange and trade like any other stock. The shares are not redeemable; they are negotiable. The portfolio of investments is managed - this is a closed-end management company.

The maximum annual 12b-1 fee permitted under FINRA rules is: A - .25% B - .50% C - .75% D - 1.00%

The best answer is C. 12b-1 fees are permitted under SEC Rule 12b-1. If a fund adopts a 12b-1 plan it may charge its existing shareholders for the cost of soliciting new investment to the fund. For example, if you see a television or web advertisement for a mutual fund, it is being paid for by 12b-1 fees. The "cost" of soliciting new investment also includes compensation to registered representatives selling the fund shares. The maximum annual 12b-1 fee is .75% of net assets per year under FINRA rules.

A mutual fund has the following breakpoint schedule: Purchase Amount Sales Charge $0-$10,000 6% $10,001-$25,000 5% $25,001-$50,000 4% Which single purchase amount is a "breakpoint sale"? A - $1001 B - $11,001 C - $24,001 D - $26,001

The best answer is C. A "breakpoint sale" might sound like a good thing, but it is not! It is selling a mutual fund to a customer in an amount that does not give the customer the benefit of the breakpoint. If a customer wishes to invest $24,001 in this fund, he or she should be told that another $1,000 invested will result in a lowering of the sales charge. If the customer does not have the extra $1,000 right now, then a letter of intent should be signed for the additional $1,000 purchase, which gives the customer another 13 months to get the benefit of the breakpoint.

A fund that distributes at least 90% of its Net Investment Income to shareholders is termed a(n): A - income fund B - registered fund C - regulated fund D - tax exempt fund

The best answer is C. A fund that distributes at least 90% of Net Investment Income to shareholders is "regulated" under Subchapter M of the Internal Revenue Code and pays no tax on the distributed amount.

The type of investment company that only redeems its shares periodically at stated dates is known as a(n): A - open end fund B - sector fund C - interval fund D - hedge fund

The best answer is C. An "interval fund" is a "newer" type of fund structure that is classified as a closed-end fund, but it has many open-end fund features. It offers its shares continuously like an open-end fund. The shares are not listed on an exchange, like an open-end fund. However, it will only redeem shares at stated "intervals" - usually quarterly - and it will not redeem the investor's entire holding at these redemption dates. Instead, it will only redeem anywhere from 5% to 25% of the investor's net assets at a single time. Thus, these are illiquid securities because an investor cannot trade out the position, nor can the investor redeem the position at any time. The manager of the fund, not having to worry about redemptions, can make less liquid, more risky investments similar to hedge funds. And the fees charged are more similar to hedge funds than a traditional closed-end fund as well - with annual ongoing fees averaging 3%, and another average 2% fee when shares are redeemed (and this ignores the up-front sales charge that is imposed when the shares are purchased!). So why would an investor buy into such a fund? Because the investor might be able to achieve "hedge fund" like returns (since the interval fund makes investments in a much broader range of assets such as commercial property, private equity funds, hedge funds, business loans, catastrophe bonds, etc.) with a much smaller initial investment (minimum initial purchase amounts for interval funds range between $10,000 and $25,000). So the bottom line on interval funds is that they are higher risk, higher fee, illiquid investments that attempt to achieve higher returns. Thus, they are only suitable for relatively risk tolerant, sophisticated investors.

An inverse ETF is most similar to taking what options position(s) on the reference index? A - Long Call B - Short Call C - Long Put D - Short Put

The best answer is C. An inverse ETF is unprofitable when the market rises, and profitable when the market falls. So the answer is either a Long Put or a Short Call. Since the maximum loss in a rising market is capped to the amount invested, and the gain keeps increasing as the market falls, the best choice is a Long Put, which has a maximum loss of the premium in a rising market and ever-increasing gain as the market falls. In contrast, with a Short Call, in a rising market there is ever-increasing loss, and in a falling market, the gain is capped to the collected premium.

Which statement is TRUE regarding mutual funds? A - That day's opening price is the basis for fund purchase price and redemption computations B - The next day's opening price is the basis for fund purchase price and redemption computations C - That day's closing price is the basis for fund purchase price and redemption computations D - The next day's closing price is the basis for fund purchase price and redemption computations

The best answer is C. An order placed to buy or redeem mutual fund shares is "filled" at that day's closing Net Asset Value adjusted by any sales charges or redemption fees. If the fund is no load, there's no sales charge.

CLOSED END BOND FUNDS Fund Net AssetValue Stock Close NAVChange Acco $8.32 8.25 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to buy 100 shares of Acco Fund will pay approximately: A - $825 B - $832 C - $825 plus commission D - $832 plus commission

The best answer is C. Closed-end funds are listed on an exchange and trade like any other stock. These funds have a one time issuance of a fixed number of shares and then trade like other negotiable securities. A customer who buys will pay the current market price plus a commission. The last price for Acco Fund is $8.25, so 100 shares will cost $825 plus a commission.

Exchange Traded Funds (ETFs) are:I registered under the Investment Company Act of 1940 as closed-end management companiesII registered under the Investment Company Act of 1940 as open-end management companiesIII regulated by the SEC and FINRAIV regulated by FDIC and the Department of Treasury A - I and III B - I and IV C - II and III D - II and IV

The best answer is C. ETFs are almost a "hybrid" type of investment company structure because they allow for the creation of additional shares, like an "open-end" fund; but they are listed and trade like a "closed-end" fund. Technically, most ETFs are structured as open-end investment companies, since they allow for the creation of additional shares in minimum "creation units" of $50,000 - $100,000. If the shares are trading in the market at a discount to NAV, institutional investors can buy new creation units and short the equivalent shares that compose the units, in an arbitrage trade. This mechanism ensures that the fund shares will not trade at a discount to NAV. Because new shares can be created, these are registered as open-end funds under the Investment Company Act of 1940. Since ETFs are securities, they are regulated by the SEC and FINRA.

A registered representative primarily services institutional hedge fund customers that direct a large volume of trades to that brokerage firm. One of the hedge fund customers tells the representative: "I would like you to talk to the administrative people at the Jeffersonian Fund Group. If they allow me to place redemption orders for their fund shares at 4:10 PM each day, at that day's NAV, I will invest $200,000,000 in the Jeffersonian Fund Family." The customer should be informed that: A - because of the large dollar amount involved, there will be no sales charge assessed on any fund purchases within the Jeffersonian family B - this is a reasonable request because of the large dollar investment to be made and that you will contact the administrative personnel at the Jeffersonian fund family C - such an activity is illegal and any redemption requests placed at 4:00 PM must be processed based upon the next day's NAV computation D - due to required industry firewalls, registered representatives are prohibited from talking to the administrative personnel of mutual fund companies

The best answer is C. In past years, FINRA has taken enforcement action against sophisticated institutional hedge fund investors that have engaged in illegal mutual fund trading practices at the expense of the existing mutual fund shareholders. There are 2 specific types of violations:Late Trading: The practice of placing orders to buy, redeem, or exchange mutual fund shares after the time as of which the fund calculates its daily NAV (typically at 4:00 PM ET). Any such "late" orders are not supposed to be processed at that day's closing NAV; rather, they should be processed at the following day's NAV. Such late trading is prohibited under the Investment Company Act of 1940. Some mutual fund companies accepted redemption orders past the 4:00 PM cut-off, allowing sophisticated traders to take advantage of after-4:00 PM ET market close news announcements - an advantage that the regular fund shareholders did not have. This late trading is now an explicitly prohibited activity for both the fund company and the investor.Market Timing: The practice of frequently buying and selling a fund's shares to exploit inefficiencies in how the mutual fund company computes NAV per share. For example, if the fund held overseas stocks, that might slow up the computation of NAV for the fund company - however the sophisticated hedge fund investor might build its own software to compute NAV faster than the fund company - and would place buy orders for shares that it found to be undervalued and sell orders for fund shares that it found to be overvalued. Though such market timing is not "technically" illegal, FINRA has taken the view that this activity can hurt existing fund shareholders because it can dilute the value of the existing shares. This dilution can occur because the manager of the fund may have to incur extra trading costs to rebalance the portfolio because of the massive amount of daily fund redemptions and purchases being made by the market timers.To prevent market timing, most mutual funds have placed restrictions on excessive trading in their prospectuses and monitor accounts for excessive short-term trading. Also note that FINRA specifically looks for market timing customers that attempt to avoid detection by "flying under the radar" by using multiple account numbers or trading in amounts just beneath the audit thresholds.

Which statement is TRUE regarding management fees imposed by mutual funds? A - Management fees are limited to 8 1/2% of fund average net assets and are deducted from the initial investment B - Management fees are limited to a maximum of 1/2% of fund average net assets and are deducted when fund shares are redeemed C - Management fees are deducted from fund gross investment income before any dividend distributions are made D - Management fees are not imposed by mutual funds

The best answer is C. Management fees imposed by mutual funds are based on a percentage of assets under management, and are an annual reduction of the fund's gross investment income. Thus, these are deducted by the fund to arrive at the net investment income available for distribution to shareholders. Sales charges on mutual funds are limited under FINRA rules to 8 1/2% of Public Offering Price. This is applied to the total of both "up front" sales charges and "back end" redemption fees. Thus, if a fund imposes a 4% sales charge, the maximum permitted redemption fee is 4 1/2%.

Mutual Funds NAV Buy Chg ALPO FundAUDI Fund 9.51 10.39 +.02 6.82 7.45 +.04 A customer who buys 100 shares of ALPO Fund will pay: A - $951 B - $951 plus a commission C - $1,039 D - $1,039 plus a commission

The best answer is C. Mutual funds are bought at the "Ask" price that includes the sales charge. This is the Public Offering Price. The Ask price on ALPO Fund is $10.39 per share or $1,039 for 100 shares.

Which statements are TRUE about mutual fund "Class B" shares? I Class B shares impose a front-end sales charge II Class B shares impose a contingent deferred sales charge III Class B shares impose a 12b-1 fee IV Class B shares do not impose a 12b-1 fee A - I and III B - I and IV C - II and III D - II and IV

The best answer is C. Mutual funds offer various share classes to investors. The investor can choose to buy the same fund either as a Class A, B, C, or D share. Class A shares typically charge an up-front sales charge, but have no, or very low, annual 12b-1 fees. Class B shares have no up-front sales charge; instead, they have a contingent deferred sales charge, and impose higher annual 12b-1 fees than A shares. Class C shares have a lower contingent deferred sales charge than B shares, but impose the highest 12b-1 fees. Class D shares are typically sold by investment advisers. There is no sales charge, but they impose annual 12b-1 fees and service fees.

Mutual funds financial statements are sent to shareholders: A - monthly B - quarterly C - semi-annually D - annually

The best answer is C. Mutual funds send their financial statements (describing how the fund performed) to shareholders semi-annually.

"QUBES" are:I a mutual fundII an exchange traded fundIII based on the NASDAQ 100 IndexIV based on the NASDAQ Composite Index A - I and III B - I and IV C - II and III D - II and IV

The best answer is C. QQQ is the symbol for the "Qube" - the NASDAQ 100 Index Depository Receipt. This is an Exchange Traded Fund traded on NASDAQ.

Shareholders in a management company have the right to:I set the management feeII vote for the Board of DirectorsIII vote to change the investment objective of the fundIV vote for the investment adviser A - I, III B - II, IV C - II, III, IV D - I, II, III, IV

The best answer is C. Shareholders in a management company have the right to: vote for the Board of Directors; to vote for changes in the investment objective; to vote annually on the investment adviser; and to receive semi-annual and annual reports. The management fee is not decided on by the shareholders of the fund.

At the market opening, a customer purchases 200 shares of an S&P 500 Inverse ETF (-1x) at $50 per share. At the end of that day, the S&P 500 Index declines by 10%. The next day, the index partially recovers and closes up 5%. What will be the market value of the 200 share position? A - $9,450 B - $9,500 C - $10,450 D - $10,500

The best answer is C. Since this ETF is "-1x," it is an inverse ETF that moves at the same rate (1x), but in the opposite direction (-), to the market. The customer starts with 200 shares at $50, or a $10,000 position. At the end of the first day, because the index falls by 10%, this position will rise by 10% to $11,000 value ($10,000 x 1.1). At the end of the second day, because the index goes up by 5%, the ETF value will decline by 5%. $11,000 x .95 = $10,450.

The provisions of the Investment Company Act of 1940 include which of the following?I Minimum initial fund capital of $100,000II "Interested persons" on the Board of Directors cannot hold over 60% of the seatsIII Changing the fund's investment objective requires a majority vote of the shareholdersIV Setting maximum sales charges on mutual fund purchases A - I and II only B - III and IV only C - I, II, III D - I, II, III, IV

The best answer is C. The Investment Company Act of 1940 requires that the minimum capital to start a fund is $100,000; that no more than 60% of the Board of Directors be "interested parties" - that is, they are affiliated with the sponsor, custodian, transfer agent, or firms in the selling group; and that the fund have a stated investment objective that can only be changed by majority vote of the shareholders. The Act does not set sales charges for mutual fund purchases - these are set by FINRA - which allows a maximum sales charge of 8 1/2%.

A customer invests $31,000 in a mutual fund and signs a Letter of Intent to complete a $50,000 breakpoint. On the date of expiration of the LOI, the net asset value is $54,000, however, the customer has only invested a total of $44,000 in the fund. What should the representative do? A - Nothing, since the account value is over $50,000 B - Distribute the amount in excess of the $50,000 LOI requirement C - Inform the client that he or she must invest another $6,000, otherwise the price paid per share will be recalculated and will be higher D - Explain to the customer that if the additional $6,000 is not deposited, the account will be liquidated

The best answer is C. The Letter Of Intent (LOI) provision operates separately from Rights of Accumulation and takes precedence over Rights of Accumulation. Because of this, the customer must deposit new money in the dollar amount required by the LOI to get the lowered sales charge. Since the customer has deposited $44,000 of the $50,000 required by the LOI already, the remaining $6,000 must be deposited to retain the reduced sales charge. If this is not done, the price paid per share will be recalculated using a higher sales charge level, resulting in the customer owning fewer shares.

A customer has $30,000 to invest in a mutual fund with a Net Asset Value per share of $9.15 and a Public Offering Price of $10.00. In the prospectus is the following breakpoint schedule: Purchase Amount Sales Charge $0$10,001 8 ½% $25,001---$10,000 7 ¼% $25,000over 6 ½% How many shares of the fund can the customer purchase? A - 3,000 B - 3,032 C - 3,066 D - 3,099

The best answer is C. The customer is purchasing enough ($30,000) to qualify for a 6 ½% sales charge. To compute the new lowered offering price, the formula is: Bid (NAV) / 100% - sales charge % = ask price 9.15 / 100% -6.5% = 9.15/ .935 = 9.786 The customer will pay $9.786 per share (rounded). A $30,000 investment will buy $30,000 / $9.786 = 3,066 shares (rounded).

A customer has $35,000 to invest in a mutual fund with a Net Asset Value per share of $9.42 and a Public Offering Price of $10.30. In the prospectus is the following breakpoint schedule: Purchase Amount Sales Charge $0$10,001 8 ½% $25,001---$10,000 7 ¼% $25,000over 6 ½% How many shares of the fund can the customer purchase? A - 3,315 B - 3,398 C - 3,474 D - 3,746

The best answer is C. The customer is purchasing enough ($35,000) to qualify for a 6 ½% sales charge. To compute the new lowered offering price, the formula is Bid (NAV) / 100%- sales charge % = Ask Price The customer will pay $10.075 per share (rounded). A $35,000 investment will buy $35,000 / $10.075 = 3,474 shares (rounded).

Which of the following statements are TRUE about the expense ratio of a mutual fund? I The lower the ratio, the less efficient the fund is II The lower the ratio, the more efficient the fund is III The higher the ratio, the less efficient the fund is IV The higher the ratio, the more efficient the fund is A - I and III B - I and IV C - II and III D - II and IV

The best answer is C. The expense ratio is: Fund Operating Expenses / Total net assets = Expense ratio The ratio really represents that portion of the fund's return on net assets that is eaten up by expenses. The lower the ratio, the greater the residual income for investors making the fund more efficient.

Which statements are TRUE regarding mutual fund expense ratios? I The expense ratio will rise if the fund raises its management fee II The expense ratio will rise if the fund incurs higher administrative costs III The expense ratio will rise if the fund experiences large investment inflows IV The expense ratio will rise if the fund experiences large redemptions A - I and II only B - III and IV only C - I, II, and IV D - I, II, III, IV

The best answer is C. The formula for the expense ratio is: Fund Operating Expenses / Total net assets = Expense ratio If expenses rise (such as a higher management fee or administrative costs), or assets fall (caused by increased redemptions), the ratio will rise. Large investment inflows would increase total net assets, causing a decline in the ratio.

A mutual fund has a net asset value per share of $10.45. The maximum offering price per share is: A - $10.60 B - $10.95 C - $11.42 D - $11.50

The best answer is C. The maximum sales charge on a mutual fund is 8.5% under FINRA rules. The formula to find the offering price is: Bid (NAV) / 100% - sales charge % = ask price 10.45 / 100% - 8.5% = 10.45 / .915 = 11.42

Which of the following funds MUST be closed end? A - NAV - $20.00 /Purchase Price - $20.00 B - NAV - $20.00 /Purchase Price - $20.50 C - NAV - $20.00 /Purchase Price - $19.50 D - NAV - $20.00 /Purchase Price - $20.25

The best answer is C. The minimum purchase price for an open-end (mutual) fund is net asset value. The fund cannot be sold for less than this amount. It may be sold for more with a sales charge not exceeding 8 1/2% of the offering price. Closed-end funds trade in the market. The market may value the fund at NAV, at a discount to NAV or at a premium to NAV. Therefore, the only fund that can sell at a discount to NAV is a closed-end fund.

Under FINRA rules, the maximum sales charge that may be imposed on a mutual fund purchase is: A - 6% of the amount invested B - 7% of the amount invested C - 8 1/2% of the amount invested D - 9% of the amount invested

The best answer is C. Under FINRA rules, the maximum sales charge that may be imposed by a mutual fund is 8 1/2% of the Public Offering Price. Note that in the real world, competition among funds has forced sales charges well below this maximum permitted level. Note that the maximum is a percentage of all dollars invested; it is not a percentage of Net Asset Value.

A fund of hedge funds: A - must invest at least 75% of its assets in hedge funds B - must invest at least 90% of its assets in hedge funds C - must invest in at least 10 different hedge funds D - can invest in any number of hedge funds

The best answer is D. A "fund of hedge funds" is a registered investment company that invests in hedge funds. There is no limit on how the manager allocates invested monies into hedge fund investments in a "fund of hedge funds."

All of the following statements are true regarding a mutual fund "Letter of Intent" EXCEPT: A - the letter can cover a period of 13 months B - the letter can be backdated 90 days C - the extra shares purchased under the breakpoint are held in escrow until the letter is completed D - during the period covered by the letter, the customer cannot redeem his shares

The best answer is D. A letter of intent can cover a period of 13 months, inclusive of a 90 day "backdate." The extra shares purchased at the lower sales charge are held in escrow until the letter is completed. If the letter is not completed, the purchase price is recalculated to the higher sales charge and the customer does not get the extra shares. The customer can always redeem his shares.

An order placed to buy or redeem mutual fund shares is filled at: A - yesterday's opening Net Asset Value B - yesterday's closing Net Asset Value C - that day's opening Net Asset Value D - that day's closing Net Asset Value

The best answer is D. An order placed to buy or redeem mutual fund shares is "filled" at that day's closing Net Asset Value adjusted by any sales charges or redemption fees.

All of the following are permitted when selling mutual fund shares EXCEPT a: A - sponsor selling shares to a selling group member at Net Asset Value B - sponsor selling shares to the public at the Public Offering Price C - sponsor selling shares to a selling group member at a discount from the Public Offering Price D - selling group member selling shares to the public at a discount from the Public Offering price

The best answer is D. Because mutual fund shares are a prospectus offering, the issue must be sold to the public at the Public Offering Price as stated in the prospectus. No discounts are allowed to the public, other than breakpoint formulas in the prospectus. The sponsor can sell shares to a selling group member at less than the Public Offering Price. This is the only way that the selling group member can make a profit on the shares, since the member resells them to the public at P.O.P.

CLOSED END BOND FUNDS Fund Net AssetValue StockClose NAVChange Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to buy 100 shares of Acme Fund will pay approximately: A - $990 B - $1,025 C - $990 plus a commission D - $1,025 plus a commission

The best answer is D. Closed-end funds are listed on an exchange and trade like any other stock. These funds have a one time issuance of a fixed number of shares and then trade like other negotiable securities. A customer who buys will pay the current market price plus a commission. The last price for Acme Fund is $10.25, so 100 shares will cost $1,025 plus a commission.

An individual wishes to receive a fixed amount monthly from her investment company. She should elect which type of withdrawal plan? A - Fixed shares B - Fixed period C - Fixed percentage D - Fixed dollar

The best answer is D. If an individual wishes to redeem shares of a mutual fund under a "systematic withdrawal plan," he or she gets to elect a withdrawal option. He or she could elect to have a fixed number of shares liquidated each month (Choice A); could elect to have a fixed percentage of the portfolio liquidated each month (Choice C); or could elect to have enough shares liquidated so that a specific dollar amount is received each month (Choice D). In this example, Choice D meets the customer's requirements.

CLOSED END BOND FUNDS Fund Net AssetValue Stock Close NAVChange Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to sell 100 shares of Acme Fund will receive: A - $990 B - $990 less a commission C - $1,025 D - $1,025 less a commission

The best answer is D. If closed-end fund shares are sold, the investor gets the current market price less a commission paid for executing the trade. The last price for Acme Fund is $10.25. An investor selling 100 shares receives $1,025 less a commission.

During a period of rising interest rates, which investment would be profitable? A - 2X (Leveraged) S&P 500 Index ETF B - Inverse (Short) S&P 500 Index ETF C - 2X (Leveraged) 20+ Year Treasury ETF D - Inverse (Short) 20+ Year Treasury ETF

The best answer is D. If market interest rates rise, both stock and bond prices are negatively impacted. However, fixed income security prices fall more than stock prices. Furthermore, the longer maturity and lower coupon issues fall the fastest as market interest rates rise. An inverse ETF, also called a short ETF, profits when prices drop. An inverse ETF based on the price movements of 20+ year Treasuries would have the largest profit when interest rates rise. This type of ETF has shorted 20+ year Treasuries in the hopes that prices will drop and the positions can be covered (bought back) for a profit. If market interest rates rise, this is exactly what should happen.

A customer invests $1,000 in a money market fund. If the fund's assets appreciate by 10%, the customer will have: A - 100 shares @ $11.00 each B - 110 shares @ $10.00 each C - 1,000 shares @ $1.10 each D - 1,100 shares @ $1.00 each

The best answer is D. Money market funds are unusual in that the Net Asset Value per share is constant at $1.00. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each. For example, if an investor has 1,000 shares @ $1 ($1,000 total) in the fund, and the assets appreciate by 10%, then the customer will have 1,100 shares at $1 ($1,100 total).

An investor buys $10,000 of a "regulated" mutual fund investing solely in municipal securities. Which statement is TRUE regarding the Federal tax treatment of the interest income? A - The investor must pay Federal income tax on all interest received, since payments come from the investment company B - The investor must pay tax on any distributions received from the investment company, while the company has no tax obligation C - The investor has no tax liability on any distributions received, while the investment company must pay tax on any retained income D - The investor has no tax liability on distributions received, and the investment company has no tax liability on retained income

The best answer is D. Since this mutual fund invests solely in municipal securities, there is no Federal tax liability on the interest income received (remember, the interest income from municipal securities is exempt from Federal income tax). Under the "conduit" theory, any payment distributed by the fund to shareholders retains the same character and is free from Federal income tax. Similarly, undistributed income retained by the fund would not be taxed, since it consists solely of tax free municipal interest income.

Which of the following statements are TRUE regarding the Federal tax treatment of a "regulated" mutual fund investing solely in municipal securities? I Investors have a Federal tax liability on the interest income received from the fund II Investors have no Federal tax liability on the interest income received from the fund III The investment company has Federal tax liability on the undistributed income that it retains IV The investment company has no Federal tax liability on the undistributed income that it retains A - I and III B - I and IV C - II and III D - II and IV

The best answer is D. Since this mutual fund invests solely in municipal securities, there is no Federal tax liability on the interest income received (remember, the interest income from municipal securities is exempt from Federal income tax). Under the "conduit" theory, any payment distributed by the fund to shareholders retains the same character and is free from Federal income tax. Similarly, undistributed income retained by the fund would not be taxed, since it consists solely of tax free municipal interest income.

Which statements is/are TRUE regarding closed end investment companies?I The portfolio of investments is managedII The initial offering of shares is made under a prospectusIII Shares trade in the secondary market at prevailing market prices A - I only B - III only C - II and III D - I , II, III

The best answer is D. The initial offering of closed-end investment company shares is made under a prospectus. Then the shares are listed on an exchange and trade like any other stock. The shares are not redeemable; they are negotiable. The portfolio of investments is managed by an investment adviser - remember, this is type of management company under the Investment Company Act of 1940.

A customer buys $10,000 of Government Bond Fund shares from Acme Investors, a fund sponsor and broker-dealer. Acme is the sponsor for a variety of funds within the Acme "family." The ACME family has an "exchange feature" at NAV. The customer decides to exchange his Government Bond Fund shares for Growth Fund shares within the same family. All of the following statements are true EXCEPT the: A - customer's yield will decrease B - customer will have greater capital appreciation potential C - customer will have a tax event D - customer will pay a sales charge

The best answer is D. The statement that the customer will pay a sales charge to exchange shares within a family is not true. This fund family has an "exchange feature" at NAV, which means that shares of one fund can be redeemed and reinvested in shares of another fund within the family without any sales charge. For the customer exchanging Government Bond Fund shares for Growth Fund shares, a tax event has occurred. It would be expected that the customer's yield will decrease but that capital gains will increase, since he or she is moving from an "income" fund to a "growth" fund.

Under FINRA rules, the maximum sales charge that may be imposed on a mutual fund purchase is: I 5% II 8 1/2% III of Net Asset Value IV of the Public Offering Price A - I and III B - I and IV C - II and III D - II and IV

The best answer is D. Under FINRA rules, the maximum sales charge that may be imposed by a mutual fund is 8 1/2% of the Public Offering Price. Note that in the real world, competition among funds has forced sales charges well below this maximum permitted level. Note that the maximum is a percentage of all dollars invested; it is not a percentage of Net Asset Value.

A customer redeems 1,000 shares of ABC Fund on Wednesday, June 14th. Under the provisions of the Investment Company Act of 1940, the customer must be paid the money no later than: A - Thursday, June 15 B - Friday, June 16 C - Monday, June 19th D - Wednesday, June 21st

The best answer is D. Under the Investment Company Act of 1940, customers who redeem must be paid within 7 calendar days (1 business week) of the redemption date. Note that most funds process redemptions much more quickly than this.

A customer wants to switch between 2 different mutual funds within the same "family." You should tell the customer that: A - there will be no tax liability B - there will be no tax liability if the switch is made within 60 days C - there will be no tax liability if all funds are reinvested D - taxes will be due if the fund shares that are sold have appreciated

The best answer is D. When a switch is made between two funds, the IRS considers this to be the sale of one fund and the purchase of another fund. If the fund shares that are sold have appreciated, there is capital gains tax liability.

Which statements are TRUE regarding mutual funds?I That day's closing price is the basis for fund purchase price computationsII That day's closing price is the basis for fund redemption price computationsIII The next day's closing price is the basis for fund purchase price computationsIV The preceding day's closing price is the basis for redemption price computations A -I and II B - III and IV C - I and IV D - II and III

The best answer is A. An order placed to buy or redeem mutual fund shares is "filled" at that day's closing Net Asset Value adjusted by any sales charges or redemption fees.

Which of the following investment company terms are synonymous? A - Bid; Net Asset Value B - Bid; Public Offering Price C - Ask; Net Asset Value D - Ask; Redemption Price

The best answer is A. Bid and Net Asset Value are the same terms for investment company shares. Bid is also the same thing as Redemption Price. Ask is the same thing as Public Offering Price.

If a fund distributes a capital gain to shareholders, which statements are TRUE?I The capital gain is taxable if it is taken as a checkII The capital gain is not taxable if it is taken as a checkIII The capital gain is taxable if it is automatically reinvested in the fundIV The capital gain is not taxable if it is automatically reinvested in the fund A - I and III B - I and IV C - II and III D - II and IV

The best answer is A. Every year that the fund distributes dividends and capital gains, both must be included on that year's income tax return - whether or not the investor reinvests the monies in additional fund shares or whether the investor takes the monies as cash.

Mutual funds that have an automatic reinvestment provision must reinvest: A - dividends at NAV and capital gains at NAV B - dividends at NAV and capital gains at POP C - dividends at POP and capital gains at NAV D - dividends at POP and capital gains at POP

The best answer is A. If a fund offers an automatic reinvestment provision, both dividend distributions and capital gains distributions are reinvested at Net Asset Value.

Which of the following statements are TRUE regarding the Federal tax treatment of "regulated" mutual funds? I Investors have no Federal tax liability on the interest income received from a municipal bond fund II Investors have no Federal tax liability on the interest income received from a corporate bond fund III The investment company has no Federal tax liability on the undistributed income that it retains from a municipal bond fund IV The investment company has no Federal tax liability on the undistributed income that it retains from a corporate bond fund A - I and III B - I and IV C - II and III D - II and IV

The best answer is A. If a mutual fund invests solely in municipal securities, there is no Federal tax liability on the interest income received (remember, the interest income from municipal securities is exempt from Federal income tax). Under the "conduit" theory, any payment distributed by the fund to shareholders retains the same character and is free from Federal income tax. Similarly, undistributed income retained by the fund would not be taxed, since it consists solely of tax free municipal interest income. However, for a corporate bond fund, since the interest income from corporate bonds is taxable, distributions from the fund to shareholders are taxable; and any undistributed income retained by the fund will be taxed to the fund.

An individual wishes to have a fixed number of shares liquidated each month. He or she should elect which type of withdrawal plan? A - Fixed shares B - Fixed period C - Fixed percentage D - Fixed dollar

The best answer is A. If an individual wishes to redeem shares of a mutual fund under a "systematic withdrawal plan," he or she gets to elect a withdrawal option. He or she could elect to have a fixed number of shares liquidated each month (Choice A); could elect to have the account liquidated over a specified period of time (for college education) (Choice B); could elect to have a fixed percentage of the portfolio liquidated each month (Choice C); or could elect to have enough shares liquidated so that a specific dollar amount is received each month (Choice D). In this example, Choice A meets the customer's requirements.

A customer with an 8+ year investment time horizon has $60,000 to invest. She has the choice of either Class A or Class B shares of ACME Fund.The Class A shares have the following sales charge breakpoint schedule with no annual 12b-1 fees: Purchase Amount Sales Charge 0 - $10,000 6% $10,001 - $20,000 5% $20,001 - $30,000 4% $30,001 - $50,000 3% $50,000 - $100,000 2% $100,000 and over 1% The Class B shares have the following declining sales charge schedule and a .50% annual 12b-1 fee: Contingent Deferred Sales Charge If Redeem After Year 1: 6% If Redeem After Year 2: 5% If Redeem After Year 3: 4% If Redeem After Year 4: 3% If Redeem After Year 5: 2% If Redeem After Year 7: 1% If Redeem After Year 8: 0% The best recommendation for the customer is to: A - Buy $60,000 of the Class A shares B - Buy $60,000 of the Class B shares C - Sign a Letter of Intent to buy over $100,000 of the Class A shares D - Split the purchase evenly into a $30,000 Class A Share purchase and a $30,000 Class B share purchase

The best answer is A. If the customer invests $60,000 in Class A shares, she will pay a 1-time 2% sales charge. If the customer invests in Class B shares, she will pay no sales charge to redeem after 8 years, but will have paid .50% in 12b-1 fees for each of the 8 years, for a total of 4%. Thus, the Class A shares are less expensive.

A customer is considering the purchase of $60,000 of ABC Growth Fund, to pay for his 13 year old child's undergraduate college education starting when the child reaches age 18. The fund offers the following share classes: Class A shares: 5% initial sales chargeNo 12b-1 fees Breakpoint Schedule: $0 -$10,000 5% sales charge $10,001 -$30,000 3% sales charge $30,001 -$50,000 2% sales charge $50,001 -$100,000 1% sales charge Class B shares: No initial sales charge.40% annual 12b-1-fee CDSC if the customer redeems within the following time periods: Redeem within Year 1: 5% redemption fee Redeem within Year 2: 4% redemption fee Redeem within Year 3: 3% redemption fee Redeem within Year 4: 2% redemption fee Redeem within Year 5: 1% redemption fee Redeem after Year 5: 0% redemption fee Class C shares: No initial sales charge.75% annual 12b-1 fee No CDSC The best recommendation for this customer is: A - purchase Class A shares B - purchase Class B shares C - purchase Class C shares D - divide the purchase equally into $20,000 each for Class A, B and C shares

The best answer is A. If this customer invested $60,000 in Class A shares, he pays a 1% sales charge and no annual 12b-1 fees for the 5 year investment time horizon. If the customer invested $60,000 in Class B shares, there is no up-front sales charge; and if the monies remain invested for 5 years, then there is no redemption fee. However, the customer must pay .40% in annual 12b-1 fees for 5 years = 2.00% total 12b-1 fees. If the customer invested the $60,000 in Class C shares, then the customer must pay .75% annually in 12b-1 fees over 5 years, for a total of 3.75%. The lowest fee purchase is, therefore, Class A shares.

Which of the following customers is NOT allowed a breakpoint on mutual fund purchases?I Investment ClubII Omnibus AccountIII Corporate PurchaserIV Individual Purchaser A - I and II only B - III and IV only C - I, II and III D - I, II, III, IV

The best answer is A. Investment clubs cannot group purchases for a breakpoint, nor can investment advisers group their customers' purchases. An individual or corporation making a purchase is considered to be "one" purchaser and qualifies for the breakpoint.

The bid price of a mutual fund is $14.30 and the ask price is $15.50. The fund has the following breakpoint schedule: Purchase Amount Sales Charge $0$10,001 7.75% $25,001---$10,000 7.25% $25,000over 6.50% The fund charges a redemption fee of 1/2%. A customer who redeems 200 shares this day will receive: A - $2,846 B - $2,846 less a commission C - $2,860 D - $2,860 less a commission

The best answer is A. Mutual funds are redeemed at NAV less a redemption fee (if any). No commissions are charged on purchases or redemptions. The redemption fee of 1/2% must be deducted to get the net proceeds.$14.30 NAV x .995 x 200 shares = $2,846

When comparing mutual fund "Class A" and "Class B" shares, which statements are TRUE? I Class A shares impose a front-end sales charge; Class B shares impose a contingent deferred sales charge II Class A shares impose a contingent deferred sales charge; Class B shares impose a front-end sales charge III Class A shares impose a smaller 12b-1 fee; Class B shares impose a larger 12b-1 fee IV Class A shares impose a larger 12b-1 fee; Class B shares impose a smaller 12b-1 fee A - I and III B - I and IV C - II and III D - II and IV

The best answer is A. Mutual funds offer various share classes to investors. The investor can choose to buy the same fund either as a Class A, B, C, or D share. Class A shares typically charge an up-front sales charge, but have no, or very low, annual 12b-1 fees. Class B shares have no up-front sales charge; instead, they have a contingent deferred sales charge, and impose higher annual 12b-1 fees than A shares. Class C shares have a lower contingent deferred sales charge than B shares, but impose the highest 12b-1 fees. Class D shares are typically sold by investment advisers. There is no sales charge, but they impose annual 12b-1 fees and service fees.

Which statements are TRUE about mutual fund "Class A" shares? I Class A shares impose a front-end sales charge II Class A shares impose a contingent deferred sales charge III Class A shares impose no, or a very low, 12b-1 fee IV Class A shares impose a high 12b-1 fee A - I and III B - I and IV C - II and III D - II and IV

The best answer is A. Mutual funds offer various share classes to investors. The investor can choose to buy the same fund either as a Class A, B, C, or D share. Class A shares typically charge an up-front sales charge, but have no, or very low, annual 12b-1 fees. Class B shares have no up-front sales charge; instead, they have a contingent deferred sales charge, and impose higher annual 12b-1 fees than A shares. Class C shares have a lower contingent deferred sales charge than B shares, but impose the highest 12b-1 fees. Class D shares are typically sold by investment advisers. There is no sales charge, but they impose annual 12b-1 fees and service fees.

MUTUAL FUNDS Fund Net Asset Value OfferingPrice Change Capital $9.01 $9.59 -.02 Common $6.37 $6.64 -.04 Corporate $7.72 $8.44 +.03 Common Fund has a 1/2% redemption fee. A customer who redeemed 200 shares this day will receive: A - $1,268 B - $1,268 less a commission C - $1,274 D - $1,274 less a commission

The best answer is A. Open end mutual fund shares are redeemed at Net Asset Value, without any commissions being charged. However, the fund may impose a redemption fee. Common Fund has a Net Asset Value per share of $6.37 x 200 shares = $1,274 gross redemption amount. Since .5% is taken as a redemption fee, the customer receives $1,274 x .995 = $1,268.

The cost of investing in a mutual fund is measured by the: A - front load cost B - expense ratio C - comparative performance of the fund to the Standard and Poor's 500 index D - taxation of distributions at the investor level

The best answer is A. The "cost" of investing in a fund is the sales charge - or front end load. This charge is deducted from the gross dollars paid, with the net amount invested in the fund. The expense ratio measures the operating efficiency of the fund - it shows how much of the fund's return on net assets is eaten up by expenses.

The provisions of the Investment Company Act of 1940 include all of the following EXCEPT: A - setting maximum sales charges on mutual fund purchases B - requiring a majority vote of the outstanding shares to change a fund's investment objective C - requiring at least 40% of the fund's Board of Directors to be "non-interested" parties D - requiring minimum initial fund capital of $100,000

The best answer is A. The Investment Company Act of 1940 requires that the minimum capital to start a fund is $100,000; that at least 40% of the Board of Directors be "non-interested parties" - that is, they are not affiliated with the sponsor, custodian, transfer agent, or firms in the selling group; and that the fund have a stated investment objective that can only be changed by majority vote of the shareholders. The Act does not set sales charges for mutual fund purchases - these are set by FINRA - which allows a maximum sales charge of 8 1/2%.

A mutual fund's expense ratio has been increasing over the last 4 years. Which of the following may have caused the increase? I Higher management fees II Higher redemptions III Higher dividend distributions IV Higher capital gains distributions A - I and II B - III and IV C - I and IV D - II and III

The best answer is A. The formula for the expense ratio is: Fund Operating Expenses / Total net assets = Expense ratio If expenses rise (such as a higher management fee), or assets fall (caused by increased redemptions), the ratio will rise. Distributions made by the fund have no bearing on the ratio.

Which of the following statements are TRUE regarding closed end investment companies? I Shares are issued in a one-time offering II Shares are continually issued III Shares trade on an exchange or over-the-counter IV Shares are redeemed with the issuer A - I and III B - I and IV C - II and III D - II and IV

The best answer is A. The initial offering of closed-end investment company shares is made under a prospectus. Then the shares are listed on an exchange and trade like any other stock. The shares are not redeemable; they are negotiable. Redeemable securities are continuously issued by open-end management companies - mutual funds.

The fund offers the following share classes: Class A Shares: 5% Initial Sales ChargeNo 12b-1 feesBreakpoint Schedule: 0-$20,000 5% Sales Charge $20,001-$40,000 3% Sales Charge $40,001-$60,000 2% Sales Charge $60,001-$100,000 1% Sales Charge Class B Shares: No Initial Sales Charge.20% Annual 12b-1-fee CDSC if the customer redeems within the following time periods: Redeem within Year 1: 5% Redeem within Year 2: 4% Redeem within Year 3: 3% Redeem within Year 4: 2% Redeem within Year 5: 1% Redeem after Year 5: 0% Class C Shares: No Initial Sales Charge.75% Annual 12b-1 fee No CDSC (Refer to the exhibit window to answer the following question) A 45-year old customer received a $50,000 year-end bonus, which the customer wishes to invest in the mutual fund shown in the exhibit window. The customer will not need the investment monies until retirement age, which the customer tells the representative is age 70. As the representative, you should tell the customer that he or she should: A - buy Class A shares, and that if he invests another $10,001, he will reach the breakpoint necessary for a lower sales charge B - buy Class B shares because there is no up-front sales charge and his investment time horizon is long enough that there will be no redemption fee C - buy Class C shares because they have no up-front sales charges and no redemption fees D - divide his or her purchase amount equally between Class A, Class B, and Class C shares in order to receive the maximum diversification benefit

The best answer is A. This customer has a large dollar amount to invest and a 25 year investment time horizon, so Class A shares, with a 1-time upfront sales charge reduced by a breakpoint, are the appropriate investment. Otherwise, the customer would be paying many years of high 12b-1 fees, that would amount to much more than the reduced sales charge on the Class A shares. In addition, the customer should be informed that he or she is close to a $60,000 breakpoint, which will qualify the customer for an even lower sales charge.

The fund offers the following share classes: Class A Shares: 5% Initial Sales ChargeNo 12b-1 feesBreakpoint Schedule: 0-$20,000 5% Sales Charge $20,001-$40,000 3% Sales Charge $40,001-$60,000 2% Sales Charge $60,001-$100,000 1% Sales Charge Class B Shares: No Initial Sales Charge.20% Annual 12b-1-fee CDSC if the customer redeems within the following time periods: Redeem within Year 1: 5% Redeem within Year 2: 4% Redeem within Year 3: 3% Redeem within Year 4: 2% Redeem within Year 5: 1% Redeem after Year 5: 0% Class C Shares: No Initial Sales Charge. 75% Annual 12b-1 fee No CDSC (Refer to the exhibit window to answer the following question) A 30-year old customer with a 30-year investment time horizon has received her first substantial year-end bonus of $30,000 from her job working at DEF Corporation and decides to invest the money in ABC Growth Fund. She informs you that things have been going well at work and she is likely to receive at least another $30,000 bonus at the end of next year that she will invest as well. You should inform the customer that: A - because of the fund's "rights of accumulation" feature, you will be able to offer her a 1% sales charge on Class A shares B - because of the fund's "letter of intent" feature, you will be able to offer her a 1% sales charge on Class A shares C - the best recommendation for such a long investment time horizon would be Class C shares since they have neither a "front-end load" nor a "back-end load" D - the best recommendation for the customer is to use this year's bonus of $30,000 to buy ABC Fund shares; and to use next year's bonus to buy shares of another growth fund so that she can achieve "double diversification"

The best answer is B. A Letter of Intent (LOI) gives an individual 13 months to qualify for a breakpoint. This customer is investing $30,000 now and another $30,000 in 12 months, for a total of $60,000. Put in $1 more and the customer qualifies for the $60,001 breakpoint of 1%.

An investor buys 100 shares of an open-end investment company with a 5% contingent deferred sales charge. The sales charge is reduced by 1% for every full year that the fund is held. The investor redeems the 100 shares at an NAV of $15 per share after holding them for 5 months. The investor will receive: A - $1,350 B - $1,425 C - $1,475 D - $1,500

The best answer is B. A contingent deferred sales charge is imposed if an investor redeems a mutual fund before holding the fund for a stated time period. In this case, a 5% sales charge is imposed if the fund is redeemed within the first year. Using the redemption price of $15 per share x .95 = $14.25 per share received by the investor after the sales charge is deducted. $14.25 x 100 shares = $1,425 received upon redemption.

Which statements are TRUE regarding a mutual fund "Letter of Intent"? I The letter can cover a period of 16 months II The letter can be backdated 90 days III The extra shares purchased under the breakpoint are held in escrow until the letter is completed IV During the period covered by the letter, the customer cannot redeem his shares A - I and II B - II and III C - II, III, IV D - I, II, III, IV

The best answer is B. A letter of intent can cover a period of 13 months, inclusive of a 90-day "backdate." The extra shares purchased at the lower sales charge are held in escrow until the letter is completed. If the letter is not completed, the purchase price is recalculated to the higher sales charge and the customer does not get the extra shares. The customer can always redeem his shares.

An investor purchases 1,000 mutual fund shares with a Net Asset Value of $10 each, where the fund imposes a 5% contingent deferred sales charge if the shares are redeemed within the first year. The sales charge decreases by 1% for each year the investor remains invested in the fund. If the investor were to redeem his shares during the second year of holding the fund, based upon the NAV of $10, he or she will receive: A - $10,000 B - $9,600 C - $9,500 D - $9,400

The best answer is B. Deferred sales charges are imposed only if a customer redeems, with the amount of the sales charge typically being reduced the longer the investor remains in the fund. This investor is redeeming his $10,000 investment after holding it for 1 full year; therefore the fund is being redeemed during the 2nd year. This means the Contingent Deferred Sales Charge is 4% (it is 5% if redeemed in year 1; 4% in year 2; 3% in year 3; 2% in year 4; 1% in year 5; 0 thereafter). If the investor redeems during year 2, he or she must pay the 4% deferred sales charge, and the investor will receive $10,000 x .96 = $9,600 upon redemption.

An investor purchases 1,000 mutual fund shares with a Net Asset Value of $10 each, where the fund imposes a 5% contingent deferred sales charge if the shares are redeemed within the first year. The sales charge decreases by 1% for each year the investor remains invested in the fund. If the investor were to redeem his shares during the fifth year of holding the fund, based upon the NAV of $10, he or she will receive: A - $10,000 B - $9,900 C - $9,800 D - $9,700

The best answer is B. Deferred sales charges are imposed only if a customer redeems, with the amount of the sales charge typically being reduced the longer the investor remains in the fund. This investor is redeeming his $10,000 investment during the 5th year of holding the fund. This means the Contingent Deferred Sales Charge is 1% (it is 5% if redeemed in year 1; 4% in year 2; 3% in year 3; 2% in year 4; 1% in year 5; 0 thereafter). If the investor redeems during year 5, he or she must pay the 1% deferred sales charge, and he will receive $10,000 x .99 = $9,900 upon redemption.