Investment Company Securities KM
Features required for a mutual fund to charge the maximum sales charge are
- breakpoints - reinvestment of dividends at NAV - rights of accumulation.
The type of investment company product that offers current income that is exempt from regular federal income tax is a A) A municipal bond fund CEF B) An international bond CEF C) A convertible security CEF D) A U.S. Government bond CEF
A) A municipal bond fund CEF
In which of the following areas are open-end funds and unit investment trusts similar? A) They both redeem shares at the NAV B) Open-end funds have a stated termination date while unit investment trusts do not C) They both issue a fixed number of shares or units through an IPO D) The shares of both types of securities can be traded on a securities exchange
A) They both redeem shares at the NAV
Which two of the following statements regarding a closed-end fund's expense ratio are true? I. It includes the fund's management fee and administrative fees II. It includes only the fund's administration fee III. It must be included in the fund's prospectus IV. It must be included in the fund's statement of additional information but not in the prospectus A) II and III B) I and III C) II and IV D) I and IV
B) I and III
How do ETFs differ from closed-end company shares? I. ETFs are typically higher cost investments II. ETFs are typically lower cost investments III. ETFs are typically more actively managed IV. ETFs are typically less actively managed A) II and III B) II and IV C) I and IV D) I and III
B) II and IV
A "no-load" mutual fund may be purchased at the net asset value (NAV) due to the A) lack of a 12b-1 fee. B) absence of a sales charge. C) waiver of management fees. D) fact that most mutual funds will waive the sales charge for a starting investment of at least $100,000.
B) absence of a sales charge.
How are units in a UIT similar to closed end company shares? A) Both have a fixed termination date B) Both can be sold to accredited investors only C) Both are exchange traded D) Both are limited in number based on the initial public offering
Both are limited in number based on the initial public offering
A customer wishes to enter an order to purchase a share of an investment company product at a price no higher than $25 per share. This order is I. A market order II. A limit order III. Permitted for closed-end company share purchases but not ETF purchases IV. permitted for closed-end company share and ETF purchases A) I and IV B) I and III C) II and IV D) II and III
C) II and IV
All of the following statements regarding mutual fund A- shares are true EXCEPT A) They charge up-front sales charges, paid fully at the time of the initial purchase B) The sales charge for A-share funds is often discounted for large purchases C) They usually do not charge 12b-1 fees D)They are often cost effective for persons who hold their shares for a long period of time
C) They usually do not charge 12b-1 fees
When comparing 12b-1 fees across the different share classes of mutual funds, it would be found that A) Class A & B shares have higher 12b-1 fees than Class C shares. B) all share classes have the same 12b-1 fee structure. C) Class A shares have higher 12b-1 fees than Class B & C shares. D) Class B and C shares carry higher 12b-1 fees than Class A shares.
D) Class B and C shares carry higher 12b-1 fees than Class A shares.
Which two of the following are TRUE regarding the removal of a security held within a unit investment trust? I. It is a regular activity in response to changing market conditions II. It happens infrequently III. The issuer's bankruptcy could cause a security to be removed from a UIT IV. The board of directors must approve Changes to the holdings of UIT A) I and III B) III and IV C) I and IV D) II and III
D) II and III
Which two of the following statements are TRUE regarding equity UITs? I. They issue a set number of units and their offerings are then closed II. They issue as many units as necessary to complete their IPO III. They often pay monthly dividends IV. They have an unlimited life A) II and IV B) I and IV C) I and III D) II and III
D) II and III
When comparing ETFs and closed-end funds, which two of the following statements are TRUE? I. ETFs typically trade at a deeper discount or higher premium from NAV II. Closed-end fund shares typically trade at a deeper discount or higher premium III. Closed-end funds typically experience more volatility then ETFs IV. ETFs typically experience more volatility than closed-end funds A) I and III B) I and IV C) II and IV D) II and III
D) II and III Closed-end funds can commonly trade at a discount or premium of 10%- 20% of their NAV, while ETFs are normally trading within 1% of their NAV. There is much greater market volatility in the price of closed-end shares than in ETFs.
An investor has received a summary prospectus from his registered representative. What security has the customer purchased? A) Real Estate Investment Trust (REIT) B) Variable annuity C) Direct participation program (DPP) D) Mutual fund
D) Mutual fund
The custodian for a mutual fund is primarily responsible for A) disseminating research to fund shareholders. B) executing orders for the fund's portfolios. C) providing investment advice to fund shareholders. D) the holding and safekeeping of the fund's securities and cash.
D) the holding and safekeeping of the fund's securities and cash. The custodian for a mutual fund, typically a bank or trust company, is primarily concerned with the holding and safekeeping of the fund's securities and cash.
NAV =
Fund Asset - Fund Liabilities/number of outstanding shares
Which two of the following statements regarding a closed-end fund's expense ratio are true? I. It includes the fund's management fee and administrative fees II. It includes only the fund's administration fee III. It must be included in the fund's prospectus IV. It must be included in the fund's statement of additional information but not in the prospectus A) II and III B) I and IV C) II and IV D) I and III
I and III
Which two of the following statements are TRUE regarding equity UITs? I. They issue a set number of units and their offerings are then closed II. They issue as many units as necessary to complete their IPO III. They often pay monthly dividends IV. They have an unlimited life A) II and IV B) II and III C) I and IV D) I and III
II and III
Which two of the following statements regarding the securities held by a unit investment trust are true? I. UITs are infrequently invested in equity securities II. UITs can be invested in both bonds and equities III. Trading of securities is handled by the trust sponsor IV. The portfolio of the trust is fixed A) I and III B) II and III C) I and IV D) II and IV
II and IV The portfolio of a UIT is well suited to bond investments because of their termination dates, although there are many equity trusts. Today more assets are generally directed to UIT equity trust than bond trusts. The securities for the UIT portfolio are selected and held; they are not actively traded.
Which of the following circumstances will cause a decrease in the NAV of mutual fund shares? I. Shares are redeemed II. The fund distributes dividends III. The value of portfolio securities falls IV. New mutual fund shares are sold A) I and IV B) I and III C) II and III D) II and IV
II. The fund distributes dividends III. The value of portfolio securities falls
ETFs are capitalized through
IPO
Financial statements are required to be sent to shareholders on a ____________ basis at the minimum.
Investment Company Act of 1940 - semiannual
At the termination of a UIT trust, an investor that holds units may have all of the following options EXCEPT A) Receive a cash distribution B) Receive a distribution of the actual securities held by the trust C) Rollover proceeds into a subsequent series of the same trust if available at a reduced sales charge D) Reinvest the units into the trust
Reinvest the units into the trust
An investor receives monthly dividend distributions from the municipal bond fund he holds. For tax purposes these distributions are A) Tax deferred B) Tax exempt C) Taxed as ordinary income D) Taxed as long term capital gains
Tax exempt
Intra-day trading is available for
both closed-end funds and ETFs.
B-shares have a
contingent deferred sales charge (CDSC), which is also called a back-end load. There is no front-end load on B-shares, and no CDSCs will apply if the shares are held for a long-time period. There is an ongoing 12b-1 charge that applies however. A shares have front-end loads, and C shares have level loads.
the fund investment advisor
does trading for the fund's portfolio.
A Unit Investment Trust (UIT) is best described as a A) fixed portfolio of securities assembled by a sponsor. B) managed portfolio of assets structured by a fiduciary. C) managed portfolio of assets created by a portfolio manager. D) fixed portfolio of assets created by a custodian.
fixed portfolio of securities assembled by a sponsor.
A-shares
front-end sales charges 12b-1 fees A-shares are for long-term investors Breakpoints are often applied to large purchases of A-shares.
The performance of a specific basket of stocks is tracked by a(n) A) benchmark B) index C) stochastic model D) composite
index
Are UITs actively managed?
no
C-shares
often called "level load" because of the high 12b-1 fee. No front-end load, sometimes have a contingent deferred sales charge for 1 or 1.5 years. For short-term investing only.
ETFs and closed ends are sold
on exhanges
A selling agreement with the issuing company is required for the distribution of which of the following? I. Open end company shares II. Closed-end company shares III. ETFs A) I and II only B) I only C) I, II, and III D) II and III only
only open ended funds have selling agreements bc they arent sold on exchange
The sponsor of a UIT is responsible for
organizationof the trust and selection of the portfolio securities
investor's cost basis in a mutual fund is
original investment + reinvested dividends
The disclosure document that must be provided to investors in a UIT is a
prospectus.
A contingent deferred sales charge (CDSC), also called a back-end load is paid at
redemption and decreases over a period of years as defined by a published schedule. B-shares have CDSCs.
The fund custodian is responsible for
safekeeping; the transfer agent for customer redemptions and other services
Open-end funds are actively managed while exchange-traded funds are A) monitored B) verified C) supervised D) reviewed
supervised usually by a trustee on behalf of the fund
Mutual funds are defined open end funds by
the Investment Company Act of 1940 as
The sponsor of a UIT organizes
the trust and is responsible for the selection of the portfolio securities. The trustee handles administrative functions, including the recording keeping, accounting and tax reporting duties.
There is no change in NAV when new shares are issued or when shares are redeemed. true or false
true
The NAV of a closed-end company share is calculated at $10 per share. In this case, A) The customer may buy or sell shares at a price higher or lower than $10 B) The customer will sell shares for $10 if the order was placed before the close of business C) The customer will purchase shares for $10 if the order was placed before the close of business D) The customer will sell shares at the NAV of $10 plus the sales charge
The customer may buy or sell shares at a price higher or lower than $10
An investor has received a dividend from a mutual fund holding, and the dividend is reinvested. Which of the following statements are correct? A) The dividend is not taxable now, and the investor's basis is increased. B) The dividend is taxable now as ordinary income, with no impact to the basis. C) The dividend is taxed now as a capital gain, with no impact to the basis. D) The dividend is taxable now as ordinary income and the investor's basis is increased.
The dividend is taxable now as ordinary income and the investor's basis is increased
All of the following are features of mutual fund companies EXCEPT A) Investors pay the next calculated price when purchasing mutual fund shares B) They do not issue new shares after their initial public offering C) They can issue equity shares only D) They do not trade on national exchanges
They do not issue new shares after their initial public offering
Open-end and closed-end company investments share all of the following characteristics EXCEPT A) They issue a single class of shares B) Shareholders own an undivided interest in all securities with the portfolio C) Professionally managed by an investment manager subject to registration under the Investment Company Act of 1940 D) The NAV per share is calculated by subtracting the fund liabilities from the fund's assets and dividing by the number of shares outstanding
They issue a single class of shares Open-end companies commonly issue A, B and C shares which reflect different types of sales charges. Closed-end funds issue one type of share class only.
The organization of the UIT is explained and initiated with the drafting of the
Trust Indenture.
What party is responsible for the administrative duties of a unit investment trust? A) Custodian B) Sponsor C) Trustee D) Bond Counsel
Trustee
An investor is interested in an investment opportunity in which he can have an ownership interest in a specific portfolio of bonds for the next 20 years, and does not have to pay high management fees. Which of the following investments is most suitable? A) A fixed income mutual fund B) A closed end bond fund C) Units in a bond UIT D) A structured note
Units in a bond UIT Unit investment trusts hold a specified portfolio of investments for a defined period that is established at the creation of the trust. Because their portfolios are fixed, investors are not subject to high management fees.
When do investors pay the POP price?
When purchasing a mutual fund (NAV+sales charge)
Mutual fund investors generally are given a disclosure document before they make their first investment. It is called A) a summary prospectus. B) a statement of condition. C) a red herring. D) a statutory prospectus.
a summary prospectus.
A face-amount certificate is
a type of investment company that issues debt securities, obligating the issuer to pay a fixed amount at a specified date.
What fees are associated with the ownership of a UIT?
- Initial sales charge - Deferred sales charge - Trust operating expense charge
Parts of a UIT
- The trust must register under the Securities Act of 1933 - The Trust Indenture is the document that initiates the formation of the trust - The securities to be held in the portfolio are selected to meet a specified investment objective
When a redemption of mutual fund shares is requested, the fund must redeem shares within A) 3 business days of request B) 48 hours of request C) 5 business days of request D) 7 calendar days
7 calendar days
The maximum mutual fund sales charge percentage allowed is
8 ½%.
The NAV price of closed-end company shares is A) A benchmark for comparison only, as shares trade at a discount or premium to their NAV price B) The price at which shares are purchased C) The price at which shares are sold D) Calculated once per business day
A benchmark for comparison only, as shares trade at a discount or premium to their NAV price
The structure of a unit investment trust includes all of the following functions EXCEPT A) A trustee B) A custodian C) A sponsor D) A board of directors
A board of directors
An investor that purchases mutual funds receives a lower sales charge on a $200,000 investment than what would have applied to a $100,000 purchase. This mutual fund feature is called A) A breakpoint schedule B) Contingent deferred sales charge C) Rights of accumulation D) An unrealized gain
A breakpoint schedule
Which of the following best characterizes a Summary Prospectus? A) A disclosure document that describes the background of the investment advisory personnel of the mutual fund. B) A description of the fee structure of the mutual fund, and a discussion of any penalties that may be incurred by shareholders when they liquidate their shares. C) A consolidated review of the financial highlights from the mutual fund's most recent fiscal year. D) A collection of highlights of the most pertinent information from a mutual fund's full prospectus.
A collection of highlights of the most pertinent information from a mutual fund's full prospectus.
A mutual fund's investment manager is paid A) A percentage of the increase of the value of the fund's assets B) A fixed annual management fee C) A percentage of the assets held by the fund D) From 12b-1 fees collected on an annual basis
A percentage of the assets held by the fund
A customer is interested in making an investment in a unit investment trust. The customer must receive which of the following documents for disclosure? A) An offering circular B) A prospectus C) A private placement memorandum D) A trust indenture
A prospectus
The XYZ mutual fund offers a dividend reinvestment plan to its investors. When an investor chooses to reinvest their dividend, A) They will only be required to pay income tax on a portion of the dividend. B) The investor may claim a special tax exemption on their next tax return if they have held their shares for at least one year. C) The tax liability on the dividend will be deferred until the investor sells those shares. D) A tax liability will be incurred even though the investor did not take the dividend in cash.
A tax liability will be incurred even though the investor did not take the dividend in cash.
A-shrs
A-share normally charge front-end sales charges that are paid at the time of the initial purchases. 12b-1 fees are in addition to these sales charges. A-shares make sense for persons who plan to hold their shares for a long period of time. Breakpoints are often applied to large purchases of A-shares.
What are unit investment trusts
At the termination of the trust, UIT investors will receive the value of their units, but not necessarily a full return of their principal. UITs may offer the option to roll over the proceeds into a new series of the same trust. Some UITs pay out an actual distribution of the trust securities at termination, which is called making an in-kind distribution.
All of the following are features of ETFs EXCEPT A) Often track an index or other benchmark B) Redeemed by the issuer C) Initially capitalized through a public IPO D) Typically lower fees than closed-end company shares
B) Redeemed by the issuer - usually sold on exchange
An investor in a mutual fund owns which of the following? A) A proportionate interest in the specific portfolio securities that meet the investor's objectives B) Specific securities within the mutual fund C) An undivided interest in the shares of the securities held by the mutual fund D) A divided share of the securities that are held within the mutual fund's portfolio
C) An undivided interest in the shares of the securities held by the mutual fund
What is a benefit of a dividend reinvestment plan? A) Avoid income tax on the dividend B) Buy shares below the market price C) Buy shares without paying a brokerage commission D) Buy shares that will pay a special bonus dividend in the future
C) Buy shares without paying a brokerage commission
A share of a growth fund has a POP of $5 and NAV of $5.25. This is a A) Unit investment trust unit B) More information is needed to determine the type of fund share C) Closed end company share D) Open end company share
C) Closed end company share Closed end company shares trade at a discount or premium from their public offering price. The POP of open end shares is always higher than the NAV (other than for money market funds) because it includes the sales charge.
A customer that invests in a unit investment trust owns A) Shares in a portfolio of securities that is actively managed B) Shares in a fixed portfolio of securities C) Units in a fixed portfolio of securities D) Units in a portfolio of securities that is actively managed
C) Units in a fixed portfolio of securities
The function of the sponsor of the fund is which of the following? A) Safekeeping of the fund's securities B) Managing the investment of the fund's assets C) Handling customer share redemptions and distributions of dividends and gains D) Distributing shares of the fund
Distributing shares of the fund The sponsor of the fund distributes, or is in charge of the sale of the fund's shares. Distributors must have a selling agreement with the fund.
An increase to a mutual fund's NAV per share will occur in all of the following circumstances EXCEPT A) The value of securities held within the portfolio increases B) Investors reinvest their dividend and capital gain distributions C) The mutual fund portfolio receives interest income from bonds it owns D) The mutual fund portfolio receives dividends from equity securities it owns
Investors reinvest their dividend and capital gain distributions The NAV per share does not increase when distributions are reinvested or when new shares are bought or sold. The additional funds that flow into the portfolio are offset by the issuance of additional new shares, so the NAV remains the same. The NAV increases when the value of securities in the portfolio increase or when the fund receives distributions from portfolio securities.
Which of the following characteristics applies to an investment in a UIT? A) Investors can add to their holdings through subsequent primary offerings of the trust B) The investor's units have a fixed value C) The units can be easily liquidated through exchange trading D) Investors will know the securities that comprise their units for as long as they hold the investment
Investors will know the securities that comprise their units for as long as they hold the investment
How are shares of exchange-traded funds (ETFs) bought and sold? A) Only through Swap Execution Facilities B) Just like stocks C) Just like mutual funds D) Only through margin accounts
Just like stocks ETF shares can be bought and sold throughout the trading day at bid-ask spreads, just like stocks. They are easily bought and sold in brokerage accounts, in any amount
The greatest cost to an investor when investing in a money-market fund is A) brokerage fees B) custodial fees C) management fees D) overhead
Management fees are always the largest expense of a fund. They are paid to the Investment Advisor as a percentage of assets under management and are the single largest liability of a fund.
Closed-end company investments share all of the following features EXCEPT A) Multiple classes of common shares B) A fixed number of shares issued C) Offer common, preferred, and debt securities D) May be purchased on margin
Multiple classes of common shares
When is a mutual fund allowed to buy securities on margin? A) Never B) Only with special permission from the SEC C) Only in the first 10 trading days of each month D) Only after opening a margin account
Never
Which type of mutual fund is sold at net asset value? A) Front-end load B) No-load C) Open-end D) Closed-end
No-load funds (bc of the sales charge)
What is the minimum amount an investor can normally invest in an ETF? A) One share B) 10000 C) 5000 D) 100 shares
One share
Which fund can only issue common stock?
Open end closed can issue common, preffered, and bonds
An investor is planning to make an additional investment in a particular mutual fund. His representative suggests he take advantage of a potential sales charge discount by purchasing shares within the same family to get a sales charge discount that includes including shares he currently owns. The fund feature that provides this potential advantage is A) A letter of Intent B) Rights of accumulation C) An Exchange provision D) A Conversion privilege
Rights of accumulation Rights of accumulation allows customers to include previous purchases of the same fund in the calculating the sales charge discount that applies on a new purchase. The new sales charge is determined by adding the new purchase to the total accumulated value of ownership in a mutual fund family, and often allows for the combination of purchases of other funds in the same family, purchases in several different accounts, and purchases between family members. The terms of ROA are included in the fund's prospectus.
All of the following statements regarding mutual fund breakpoints are true EXCEPT A) The breakpoint for a mutual fund purchase applies even if the fund purchase is made through a brokerage account at another broker dealer B) Breakpoints must be available for a mutual fund to charge the maximum allowable sales charge. C) The breakpoint schedule applies to fund purchases in different fund families D) Financial advisors are prohibited from encouraging a customer to make a purchase just below the point at which a breakpoint would apply
The breakpoint schedule applies to fund purchases in different fund families A mutual fund's breakpoint schedule applies only to purchases within a single fund family.
An individual contacts her financial representative to sell her mutual fund shares. The price she will receive is A) The next calculated NAV price B) The next calculated POP price C) The asked price at the close of the trading day D) The market price at the time the order is entered
The next calculated NAV price
All of the following statements are true when shares of a mutual fund are redeemed EXCEPT A) The redeemed shares are not sold to other investors; they are canceled B) CDSCs may apply C) The fund will pay the investor the redemption value D) The shareholder will receive the POP next calculated
The shareholder will receive the POP next calculated
A direct comparison of open-end funds and closed-end funds will show that A) Both types of funds redeem their shares at the closing NAV of the business day. B) Open-end funds have an actively managed portfolio but closed-end funds do not. C) There is an active secondary market for closed-end funds but not for open-end funds. D) Both types of funds issue a fixed number of shares or units through an IPO
There is an active secondary market for closed-end funds but not for open-end funds.
A mutual fund sponsor receives a request for redemption just after market close and redeems the shares at the NAV just calculated at the close. Which of the following statement is TRUE? A) This is standard practice for the redemption of fund shares since redemption must be made on the day of request B) Since the order was received after market close, the redemption should have taken place at market opening on the next business day C) This is a prohibited practice known as late trading D) This is a permitted practice known as late trading
This is a prohibited practice known as late trading
In which of the following investments is the investor most likely to hold an interest in the same securities for the life of the investment? A) UIT B) Open end company C) Closed end Company D) Hedge fund
UIT
A unit investment trust differs from other investment companies in that it has no
board of directors, corporate officers or investment advisor.
Closed-end companies raise additional capital through
rights offerings or reinvestment of certain dividend distributions. Their capital and number of shares outstanding are fixed.
From a capital perspective, an ETF is structured most like which of the following type of investments? A) Closed-end company B) Hedge fund C) Private equity D) Open end
Closed-end company A closed-end company is similar to ETF's. Each of these investments has a fixed capitalization. After its initial IPO, there are not additional shares issued.
Which of the following features is associated with mutual fund shares but NOT ETFs? A) Exchange traded B) Securities held by investors represent an equity interest C) Professionally managed pool of securities D) Continuous primary offering
Continouns Primary Offering Mutual fund shares are issued through a continuous primary offering, which means shares are available when investors want to purchase them. Closed-end company shares are limited because there is a fixed pool of capital. ETFs are traded on exchanges, mutual fund are not.
An investor owns shares in three different mutual fund families, each offering breakpoints. To qualify for a breakpoint in any one family, A) Ownership of multiple fund families disqualifies an investor to participate in breakpoints. B) Holdings across all three families may be used to determine eligibility for a breakpoint in any one family. C) Holdings in each family must be considered individually to determine breakpoint eligibility. D) The investor would need to sign a letter of intent.
Holdings in each family must be considered individually to determine breakpoint eligibility. This question is centered towards testing your understanding of rights of accumulation. By definition: rights of accumulation is where you will receive a breakpoint through aggregating shares in the same fund family. Though signing a letter of intent seems like an attractive answer choice, the more correct answer is B). You cannot pool three different mutual fund families to get a breakpoint -- you have to treat all 3 as separate since they are from different mutual fund families. Key takeaway: investors cannot use their positions in multiple fund families to qualify for breakpoints in any one family.
In which of the following ways are UIT units and mutual fund shares most similar? A) They are both redeemed by their issuer when investors want liquidity B) They are both created for a specified length of time C) Additional shares or units are readily available for purchase D) They both sell interests to investors through continuous primary offerings
They are both redeemed by their issuer when investors want liquidity Both shares of mutual funds and UIT units are redeemed by their issuer when investors want liquidity. They are redeemed at the NAV price calculated at the end of that business day. Additional units in a UIT are only available when other investors have redeemed their units, but mutual fund shares are continually available
A registered representative tells a customer to move money from one mutual fund to another fund with a similar investment objective, without stating any purpose or benefit of the trade. This violation is referred to as A) switching. B) spoofing. C) freeriding. D) late trading.
switching
