lesson 4 combined
impact on NAV per share when shares are sold or redeemed
no impact
income funds
-income-producing equities (dividends) -less tax efficient -preferred stocks, blue chip stocks, and utility stocks
why are Face Amount Certificates (FAC) no longer favored
these are no longer favored becuse they lost some of the special tax characteristics that they previously enjoyed. all that we need to know is that it is a type of investment company.
FINRA violation which involves encouraging a customer to purchase shares at a point below an available sales charge reduction
breakpoint sale
quantity purchase discounts that apply to individuals who purchase funds from the same family
breakpoints
pricing of open-end funds
buy at POP (NAV + SC) and sell at NAV -priced so that you purchase them at a public offer price (POP), which is the net asset value plus a sales charge, and you sell your shares back to the fund at the net asset value. these are formulaic pricings, not specifically determined by the market. it is not a "where is a willing buyer and seller coming together" instead, it is what is the NAV or POP of this share
how are capital gains distributions taxed in tax-exempt municipal bond mutual funds
capital gains rates (same as taxable funds). capital gains are not tax exempt
all share classes haev 12b-1 fees, but which class has the lowest?
class A shares haev teh cheapest 12b-1
mutual fund chase class with 12b-1 fees charged quarterly
class c shares
an investment company with no provision for redeeming outstanding shares
close-end
what are the mutual fund share classes?
-class A shares -class B shares -class C shares
high-yield bond fund
-higher income and risk -taxable at all levels
growth fund
-higher risk and return -less income -small cap/mid cap
the fund has 20,000,000 shares. what is the per share NAV if the NAV is $200,000?
$200,000/20,000,000 = $10 per share NAV
what is the equation for calculating net asset value in a mutual fund or ETF
(current market value of securities + portfolio cash - liabilities)/ number of shares outstanding. mutual funds have constantly fluctuating numbers of shares outstanding, but ETFs general do not.
which class is the best for long term ownership
*in general, the regulatory view is that A class shares are a cheaper way for long-term ownership of mutual funds than B class shares. so you want to be looking for the prioritization of the A class share over the other classes*
characteristics of ETF
-Trade intra-day in the market (so you can place your orders to buy and sell them while the market is open.)
which investment companies are supervised (passively managed)
-UIT and ETF
what are letters of intent
-achieve a breakpoint over time (13 months) -you get that breakoint (reduced sales charge) because you are coming in with alot of money, over a period of time. the mutual fund company here says "we will look to your investments over up to a 13 month period and consider your purchases in aggregate over that time period when you think about how we are going. to charge you over the purchase of mutual funds.
what is included in shareholder reports?
-balance sheet -income statement -portfolio holdings
U.S gov't bond fund
-low income and risk -taxable at federal level
money market fund charactaristics
-low risk -very liquid -cash equivalent -target NAV is $1 -no-load(shares are sold without commission or sales charge
value fund
-lower risk/return (but still risky) -under-valued stocks (low p/e ration) -more income (dividends)
municipal bond fund
-moderate income and risk -tax free interest (best for high-income earners)
corp. bond fun
-moderate income and risk -taxable at all levels
which investment companies are actively managed
-open end fund and closed end fund
how are UITs managed?
-passively managed/supervised. (no active trading)
what are management fees
-pays the fund's portfolio manager -this is typically the funds largest expense -this is especially important in connection with active funds where you have investment advisors trying to select investments that will best suit the particular investment objectives. this is a much lower fee when we are thining abour ETF and other passive funds that might just be tracking an index becaues as you can imagine, you dont have to pay somneone that much to buy all the shares on a list of the S & P 500 stocks
what are class C shares
-they have a level load (assessed each year) and do not offer breakpoints -
what are 3 types of securities that are held by mutual funds with income objectives
1. bonds 2. preferred stock 3. blue chip common stock
what are the 3 different features that investors might use to get those sales charges reduced?
1. break points 2. letters of intent 3. rights of accumulation
investors who reinvest their dividends into an investment company must adjust their basis upward by the amount reinvested. An investor buys $700 of mutual fund shares, receives a $100 cash dividend distribution, and instructs the mutual fund company to reinvest the dividends. 1. Does the investor pay tax on the $100 reinvested dividend? 2. Does the investor pay a sales charge on the $100 reinvested dividend? 3. What is the investor's adjusted cost basis in the fund? 4. If the shares were sold for $950, what are the taxable capital gains? ____________
1. yes. and it does not matter that you never actually took physical posession of that 100 dollars. it was your money, you earned it this year, so you pay a tax on it this year. 2. you told the mutual fund company "take the $100, buy more shares" —you DO NOT have to pay a sales charge. the mutual fund conmpanies want to incentivize you to buy more shares to invest more capital with the fund and so they give u the incentive and you dont hav to pay sales charge-you get to buy right at NAV 3. what did investor pay for the shares? the investor has now paid $800: 700 initially, the 1oo dollar dividend. the 100 dollar was not taken by the investo but it was their money that got reinvested into the fund so the basis is 800 4. $950 (proceeds) -800 (adj. basis) =$150
when are most mutual fund orders executed?
4 pm ET
A "breakpoint sale" is a(n) A) Prohibited practice that registered reps should refrain from as the result is usually an inferior transaction for the customer B) Industry recognized sales practice that rewards the efforts of mutual fund salespeople C) A sales practice that registered reps should practice as the result is usually a better deal for the customer D) Illegal practice of selling mutual fund shares to investors without disclosing all of the risks involved when investing.
?
Which of the following mutual funds is most likely a "no-load" fund? A) Index fund B) Sector fund C) Target date fund D) High-yield fund
A) Index fund Most index funds operate as "no-load" funds
A mutual fund share that charges 12b-1 fees is which of the following? A) C-share B) B-share C) A, B, or C-share D) A-share
A, B, or C-share 12b-1 shares are charged by mutual funds for marketing and distribution. These charges are in addition to front-end or back-end sales charges.
A portfolio of stocks with the goal of capital appreciation rather than distribution of income is known as a A) growth fund B) dividend fund C) mutual fund D) exchange traded fund
A. growth fund A growth funds consists of a portfolio of diversified stock whose primary function is to generate capital appreciation instead of dividend income. These funds invest in companies that reinvest earning into R&D, capex, expansion, and acquisitions.
The largest expense of a mutual fund is typically the A) Management fee B) Registration fee C) Custodial fee D) Transfer fee
A. management fee
An investor is interested in purchasing an interest in a bond fund at a price below the asset value of the portfolio holdings. Which of the following investments may be appropriate for this investor? A) An Investment grade corporate closed-end fund B) A DJIA ETF C) A fixed income UIT D) A high yield domestic bond mutual fund
An Investment grade corporate closed-end fund -Closed-end fund and ETF shares trade on exchanges at premiums or discounts to their NAV. An investment grade corporate bond CEF trading at a discount to NAV fits this investor's objective. A DJIA ETF is a stock fund.
When compared to the expenses associated with the purchase of mutual fund shares, the cost of investment in a UIT is A) More expensive B) Substantially cheaper C) Less expensive for large purchases only D) Usually about the same
B. substantially cheaper The sales charges for investing in UITs are substantially less than comparable mutual fund investments because of the fixed portfolio. There is no management fee.
Which of the following should be the primary consideration for an investor who is selecting a mutual fund investment? A. Fees B. Investment objectives C. Breakpoint schedule D. Size of the fund
B. Investment objectives you need to align what your goals are with your investment objectives
Which statement about money market mutual funds is most accurate? A. The NAV of a money market fund is always stable at $1 per share. B. Money market funds aim to maintain a net asset value of $1 per share, but the price can fluctuate above or below that amount. C. Money market funds aim to maintain a net asset value of $1 per share, but the price can fluctuate above that amount, though not below. D. Money market funds aim to maintain a net asset value of $1 per share, but the price can fluctuate below that amount, though not above.
B. Money market funds aim to maintain a net asset value of $1 per share, but the price can fluctuate above or below that amount.
The benefit investors receive for reinvestment of mutual fund dividend and capital gains distributions is A) Breakpoints B) Reduced sales charge on reinvestment C) Tax exempt growth D) Tax deferred growth
B. Reduced sales charge on reinvestment -The opportunity to reinvest distributions from the securities held within a mutual fund is compounded earnings. Unless the shares are held in a qualified retirement plan, taxation will apply on the distributions, whether reinvested or taken in cash. Reinvestment of distributions is permitted at no sales charge.
A mutual fund's public offering price is A) The net asset value per share - the sales charge B) The net asset value per share + the sales charge C) The net asset value per share/the sales charge D) The net asset value per share x the sales charge
B. net asset value plus sales charge
Which of the following statements is true regarding purchases and redemptions of mutual fund shares?
Both full and fractional shares can be purchased and redeemed -Investors can purchase or redeem full or fractional shares. For example, an investor may want to withdraw $10,000. If the NAV is $25.10 To realize this amount, the investor will redeem 398.41 shares (this number is adjusted if deferred sales charges apply). Mutual fund shares do not trade in the secondary market. Purchases take place at the POP next calculated; redemptions at the NAV next calculated. Redeemed shares are not reissued; they are canceled and destroyed.
Which of the following statements is true regarding purchases and redemptions of mutual fund shares? A) Purchases and redemptions take place at the NAV next calculated B) Customers that want cash can sell all or a portion of their shares in the secondary market C) Mutual funds raise additional capital through selling previously redeemed shares to new investors D) Both full and fractional shares can be purchased and redeemed
Both full and fractional shares can be purchased and redeemed Investors can purchase or redeem full or fractional shares. For example, an investor may want to withdraw $10,000. If the NAV is $25.10 To realize this amount, the investor will redeem 398.41 shares (this number is adjusted if deferred sales charges apply). Mutual fund shares do not trade in the secondary market. Purchases take place at the POP next calculated; redemptions at the NAV next calculated. Redeemed shares are not reissued; they are canceled and destroyed.
Dividend and capital gains distributions are made to investors in A) Neither open-end funds nor unit investment trusts B) Open-end funds but not unit investment trusts C) Unit investment trusts but not open-end funds D) Both open-end funds and unit investment trusts
Both open-end funds and unit investment trusts -These distributions are made for both open-end funds and unit investment trusts. These are among the benefits of investing in these products.
Unlike other investment companies, a unit investment trust does not A) Have an investment objective B) Offer securities to non-accredited investors C) Actively manage its portfolio D) Provide a prospectus to investors
C) Actively manage its portfolio A unit investment trust does not have an actively managed portfolio. The securities are selected based on the trust's investment objective and held to the termination of the trust. Investors in the trust must receive a prospectus. Units may be sold to non-accredited investors.
An investor places an order to buy 100 shares of VTI. The shares will be sold at their: A. NAV B. POP C. Market Price D. Unit Price
C. market price. -because VTI is ETF ND ETF IS traded at market
Which statement about a summary prospectus is not accurate? A. It includes highlights and pertinent information from the full prospectus. B. If provided, it must be delivered to investors by the time of sale. C. If provided, the full prospectus must still be made available. D. All investment companies must provide one to investors.
D. All investment companies must provide one to investors. -only mutual funds HAVE to provide a summary prospectus.
Which of the following activities will decrease a mutual fund's NAV? A. New shares are sold to investors. B. Investors redeem shares. C. Mutual fund receives dividends from a portfolio company. D. Dividends are distributed to shareholders of the fund.
D. Dividends are distributed to shareholders of the fund. what happens when mutual fund takes the cash and distributes? the per share NAV goes down. in the other isntrances, we might see NAV going up or not changing. so if new shares are sold to investors, we might have a larger amt of shares in portfolio, but that higher value is split across more shares. if investors redeem shares, we dont only have fewer shares but we also have less shares in the pot. CHoice C: that is when the net asset value goes up. cash comes in, mutual fund is doing better. cash goes out, the mutual fund net asset value drops.
When comparing mutual funds and ETFs, it is accurate to state that: A. mutual funds are more liquid, but typically have higher fees for investors. B. mutual funds are more liquid and typically have lower fees for investors. C. ETFs are more liquid, but typically have higher fees for investors. D. ETFs are more liquid and typically have lower fees for investors.
D. ETFs are more liquid and typically have lower fees for investors. ETFs are more liqqquid than mutual funds. mutual funds have alot of liquidity, but they dont have intraday liqudiity. they cant trade their mutual funds during the trading day. you have to wait until the end of day to get the next net asset value (forward price)
Which of the following statements regarding mutual funds is not correct? A) They cannot be purchased on margin B) Investors can choose among many different investment styles within the universe of mutual funds. C) They are inappropriate for investors seeking investments that trade intra-day D) They are redeemed at the public offer price (POP).
D. They are redeemed at the public offer price (POP). Mutual fund shares are redeemed at the net asset value (NAV), not the public offer price (POP).
mutual funds can invest in which of the following asset classes?: A. stocks B.bonds C. money market D. all of the above
D. all of the above remember that mutual funds can only issue COMMON STOCK. if i am going to buy shares of a mutual funds, i will own common stock of that management company. what ownership right does that convert? maybe i own common stock in a company that owns other stocks or bonds or companies or combination. so the structure is that i own the common stock for the mutual fund, and the mutual fund owns these underlying securities in the portfolio.
mutual funds may engage in which of the following activities? A. sell securities short B. buy securities on margin C. provide investment advice D. pursue a non-diversified investment objective
D. pursue a non-diversified investment objective remember the 3 things murual funds cnanot do: they cannot shor securities, cant use margin and levergage, and cannot provide investment advice. mutual funds will provide an investment objective (this funds goal is to generate capital gain) but they do not tell you that it is appropriate for your goals. they set out their objective mutual funds are allowed to be very specific as long as they disclose their goal in their prospectus (the discolsure document). so in this case, we could have am utual fund that says "we are focusing exc;usively on a biotech company. we have expertise on this and we are only investing in this. this is fine as long as it is disclosed.
what do UITs distribute
Distributes portfolio income to investors (no reinvestment in the UIT)
What investment attributes are offered by virtually all mutual funds? A) Tax-exempt earnings B) Very low cost of ownership C) Diversified, professionally managed portfolios D) Low risk
Diversified, professionally managed portfolios -Mutual funds enable investment management firms to pool funds contributed by many investors to create and manage a diversified portfolio of securities. Some mutual funds track indexes and are passively managed, while others are actively managed. Tax benefits, risk levels and costs of ownership vary widely among different mutual funds.
which investment companies are exchange-traded
ETF and Closed end fund
If units of a UIT are redeemed prior to the termination of the trust, the investor will receive I. the value of the units as calculated at the end of the business day II. The current value based on the time order to liquidate the shares is entered III. more or less than the original purchase price IV. no less than the original purchase price
I and III Investors that liquidate their ownership in a UIT sell their units back to the issuing trust. The value of the units is determined at the end of the business day based on the current valuation of the securities held in the portfolio. There is no guarantee that an investor will receive more than their original purchase price if their units are redeemed.
Which of the following securities may be traded on a stock exchange? I. Common stock II. Derivatives III. Mutual Funds IV. Bonds
I, II and IV only The securities traded on a stock exchange include: common and preferred shares issued by companies, unit trusts, derivatives, pooled investment products (including REITS and closed end shares), and bonds. Mutual funds shares are issued and redeemed only by a mutual fund or one of its sponsors.
The shares of which of the following investment companies are NOT redeemed by the issuing companies? I. UITs II. Open end companies III. Closed-end companies IV. ETFs
III and IV The shares of mutual funds and units of UITs are redeemed by their issuing companies. The shares of closed-end companies and ETFs are traded on exchanges, and are not redeemed by their issuers.
An investor would like to invest in a growth mutual fund that holds the stock of well-known companies with a stable performance history. An appropriate recommendation for this customer is a A) Sector fund B) Specialty Fund C) Hybrid fund D) Large cap stock fund
Large cap stock fund A large cap stock fund includes the stock of blue chip companies that have large market capitalization. They are usually well recognized names with a strong performance history.
Which party is responsible for holding and safekeeping a mutual fund's cash and securities?
Mutual fund's custodian
investors who sell the fund will receive the:
NAV because they will receive the actual economic value of owning that sliver of the mutual funds
the impact of an income dividend payment on the net asset value of a mutual fund is
NAV declines on the ex-dividend date by the amount of the cash dividend per share. the dividend payment reduces the funds net assets
what happens on the maturity draw for UITs
On the trust's maturity date, any remaining securities in the portfolio are liquidated and distributed to the investors.
investors who purchase the fund will pay the ____
POP (public price offer)
All of the following statements about mutual fund 12b-1 fees are true EXCEPT A) The 12b-1 fee is included in the calculation of the fund's expense ratio B) They are charged to recover marketing and distribution costs C) They must be originally and annually approved by the fund's Board of Directors D) The maximum 12b-1 fee allowed by the Investment Company Act of 1940 is 2% of the fund's NAV
The maximum 12b-1 fee allowed by the Investment Company Act of 1940 is 2% of the fund's NAV -The Investment Company Act of 1940 permits a maximum 12b-1 fee of 1% of the fund's NAV. 12b-1 fees are charged to recover marketing and distribution costs, and are included in a fund's expense ratio. They must be approved initially and are subject to annual approval by the fund's board of directors.
Your client Sally owns 2,000 shares of the Omega Venture Fund, an open-end investment company. If Sally places an order to sell 1,000 of her shares, she will receive A) The best available price when her order is received B) The next computed public offer price C) The last computed net asset value D) The next computed net asset value
The next computed net asset value Redemptions of open-end investment company (mutual fund) shares are always executed at the next computed net asset value (bid price). Investment companies are required to calculate the net asset value (NAV) for open-end shares at least once each business day, and this is typically done at the close of trading.
A letter of intent includes all of the following features EXCEPT A) The option to include a prior purchase that was made up to 90 days before the contract was established B) A reduction in sales charges that is applicable from the first covered purchase C) A term of 13 months D) The option for the mutual fund to discontinue the contract with 30 days prior notice
The option for the mutual fund to discontinue the contract with 30 days prior notice -A letter of intent is a unilateral contract that can be canceled at any time by the customer, but cannot be canceled by the fund. If the contract is canceled, shares from an escrow account are redeemed to pay for the sales charge that would have applied without the letter of intent.
When a registered rep shifts a customer from one mutual fund to a different fund with a similar investment objective, A) They are performing normal account maintenance, which typically involves the reallocation of cash from one mutual fund to another. B) They are conducting an illegal activity, which may result in a suspension from the securities industry. C) They are helping the client to achieve stronger investment returns. D) They are engaged in "switching", a sales practice violation.
They are engaged in "switching", a sales practice violation. -"Switching" occurs when a registered rep moves a customer from one mutual fund to another fund with a similar, or identical, investment objective. There is no benefit to the customer when this occurs, and is usually harmful.
what do ETFs track and what are some types
Track an index, sector, or commodity (≈ 95% of ETFs are passive; 5% active) -VTI - Total Stock Market ETF (broad equity) - BND - Total Bond Market ETF (broad bond) -TIPS - Treasury Inflation-Protected Securities ETF (all TIPS) - GLD - Gold Trust
Which of the following mutual fund types is most generally associated with clients seeking current income and stability of principal? A) International bond UIT B) U.S. Government UIT C) Defensive strategy UIT D) Asset allocation UIT
U.S. Government UIT -A U.S. Government bond fund is associated with an income objective of safety of principal and low risk.
type of mutual fund that is best suited to an investor seeking maximum safety
US government bond fund
how many shares does a close-end fund have?
a fixed amount
Which of the following investment company types does not have an investment advisor? A) Unit investment trust B) Closed end company C) Open end company D) REIT
Unit investment trust -Of the three basic types of investment companies, unit investment trusts are without an investment advisor. They are not actively managed. REITs are not defined as investment companies under the investment company Act of 1940 because they invest in real estate not securities.
what do unit investment trusts hold?
Unit investment trusts hold a fixed portfolio. Sell redeemable shares or "units" to investors, typically in a one-time public offering (no secondary market) -Or tracks an index (e.g., the SPY tracks the S&P 500 )
what do we call a fund that has no sales charge?
a "no load fund". a no load fund means that there is no sales charge which means that you get to buy it NAV
what is a no load fund
a mutual fund that does not impose a sales charge
what is the capitalization of a close-end fund?
a one-time IPO -they are going to have that fixed number of shares and will go out and try to sell those and after that they are not going to be selling new shares from the closed-end fund itself.
what is an index fund
a passively managed mutual fund that seeks to track the returns of the market index (for ex: S&P 500)
selling dividends
a prohibited practice in which a registered representative sells a mutual fund to an investor right before the fund pays out a dividend/ this is a violation because the dividend distributions creates a tax liability for the investor, as the investor must immediately pay taxes on the distribution
what is breakpoint?
a reduced sales charge based on the amount invested. -the NAV stays the same -as the amount you invested gets higher, the POP gets smaller
what are breakpoints?
a reduced sales charge for an investor when they invest large amounts into a mutual fund. -the NAV stays the same -as the amount you invested gets higher, the POP gets smaller (if i go in with a big volume purchase, i can negotiate for better pricing and with mutual funds this is just the same.)
what is bearing the buck
a term that means money market mutual fund has failed to maintain a stable net asset value (NAV) of $1 per share
an investment company security that combines redeemable shares with a fixed portfolio is called;
a unit investment trust (UIT)
the type of investment company securities that can be bought or sold using limit orders, at states price include:
close-end funds and ETFs because they are exchange-traded. limit orders cannot be used to buy mutual funds and unit investment trusts
other expenses in the mutual funds ratio
all mutual funds have an expense ratio and that is irrespective of whether they have a front-end sales charge or not. s -there are always costs associated with running that fund and those are going to be passed to the investors via this expense ratio
combination purchase
allow customers to aggregate their investments with the same mutual fund group in order to get reduced sales charges. -addiitonally, spouses and children can combine their investments in the same fund to receive breakpoints
what is an income fund
an equity mutual fund that invest in dividend paying companies including utility stocks, blue chip stocks, preferred stocks
growth fund
an equity mutual fund that invests in stocks of companies that are expected to appreciate at a faster rate than market average. stocks of these companies rarely pay dividends. instead, earnings are reinvested for further research and develpemt
Which of the following mutual fund orders will receive a different execution price than the others? A. An order placed on Sun. at 2:00 pm B. An order placed on Mon. at 7:00 am C. An order placed on Mon. at 3:00 pm D. An order placed on Mon. at 6:00 pm
an order placed on monday at 6 pm will be filled at next NAV (tuesday 4 pm ET)
what is a sponsor
an underwriter contracted by an investment company or limited partnership to help sell its shares
what are management company shares that may trade a price of more or less than net asset value?
close-ended investment companies
type of mgmt company shares that trade in secondary mkt
closed-end
the time of day when orders to buy or sell ETFs can be filled
at any time during the trading day as ETFs trade on exchanges like stocks
contingent deferred sales charge
back-end sales charge that investors pay when they redeem their mutual funds within a certain number of years. this fee will decrease each year the investor holds the shares
defines the funds investment objectives and oversees the direction of the fund:
board of directors
type of security typically held by mutual funds with growth objectives
common stock
what is another word for back-end load
contingent deferred sales charge
type of fee class B mutual fund shareholders pay when they redeem shares in the early years of the investment
contingent deferred sales charge (CDSC)
what is the capitalization of an open-end fund?
continuous offering --the mutual fund is continuously offering new shares that are registered under the securities act of 1933. there are always offering new shares because they can offer an unlimited number of them and that is the way that they raise capital : by selling these brand new shares to potential investors
can the fund require that the client put up 15000?
could the fund sue that investor? NO. the letter of intent is not binding on the client, but you are not going to get the benefit unless you actually make good on it.
creation of investment companies:
creation of the investment company: this was an entity when congress passed the investment company act of 1940. congress's goal was a way to formalize a way for investors (primarily retail investors) to put their money into a company whose function was to take that capital and reinvest it elsewhere. congress is looking at this as an opportunity to improve retali investors ability to get diversification professional management liquidity out of their nvestments. this formalizes the model where these different ivnestment companies can try to raise capital from investors and put it back to work towards a particular investment objective.
paid a fee by mutual fund to perform administrative functions such as safekeeping of securities and handling distributions to investors
custodian and transfer agent
what is the main benefit of holding money market funds, compare to individual money market securities
diversification. money market mutual funds invest in a variety of money market instruments, often different types (T bills, commercial paper, CDs)
in mutual funds, the components of net investment income are____
dividends, interest, and net capital before income tax. net investment income measures total pre-tax profits from the fund over a period of time
what happens at the end of the term using letters of intent?
example: now lets say we get to the end of the 13 months. it has been full year plus january. what is the additional investment required? our client said they would do 50. they put up 5 in april, 30 in october, we are in for 35, we need to put up an additional 15 thousand to make good on our letter of intent. if we dont put up that additional fcapital, the fund will then roll back some of the reduced sales charges and actually assess us the higher sales charge as if we didnt have the letter of intent
secondary market for close-end funds
exchanges or OTC -there is a robust secondary market on the exchanges or over the counter
prices paid to buy and sell shares of closed-end funds are determined by
market supply and demand.
3 types of investment companies as defined by the investment company act of 1940
face amount certificate, unit investment trust, management company
mutual fund orders are executed using___
forward pricing
the pricing concept that defines the purchase and redemption of mutual shares at the next calculated price
forward pricing
what is the expense ratio
fund expenses/average net assets
what is the goal of a money market mutual fund
goal of money market mutual fund:; target the $1 per share NAV but in econoic contractions, it could be the case that they "break the buck", when the money market mutual funds net asset value per share deviates from that target $1. it is not inherintly a problem other than the dact that there might be ther econonmic cirumstances that are troubling. understand that the target is $1
type of mutual fund that is focused on generating capital gains and tends to reinvest most earnings
growth fund
what are class B shares
have back-end sales charge (paid on redemption and do not offer breakpoints -it does not have an upfront fee (you dont get the breakpoint schedule as you invest more over time) and in fact, when you sell, they are going to skim off a bit of your proceeds to go for your sales charge.
investment advisor
implements the investment strategy and invests on behalf of the mutual fund
impact on NAV per share when portfolio securities increase in value
increase in NAV
type of mutual fund with low portfolio turnover and low expenses that track market performance
index fund
why do index mutual funds tend to have lower expense ratios than actively managed mutual funds
index funds are passively managed
if a client started making investments and didnt realize the letter of intent breakpoint schedule, we can sweep some of those early investments into the breakpoint schedule and this is how it is going to work:
lets say it is the begining of the year and early january the client signs a 50,000 dollkar of intent. the client is indicating and comiting to the mutual fund "i will invest 50,000 with you. the fund says "thank you. for investors that commit 50,000 with use, we give them a reduced sales charge of 3 and 3/4. now, the investor starts making good. and in april the investor puts up 5,000. what is the sales charge for that $5000 investment? this client signed a letter of intent, so all of the investents that are made now get treated at that $50,000 level. so that $5000 gets the lower POV by only having to play a sales charge of 3.75%
document that allows an investor to receive a discounted sales charge on current and future funds within the same fund family
letter of intent
the typical fee structure in class C mutual fund shares
level load
goal of stock funds
long term growth through appreciation, although income from dividends is also available through some stock instruments
what are the two types of investment companies that congress allows for?
management companies and Unit investment trusts -there is also a third, "face-amount certificates" but these are no longer favored becuse they lost some of the special tax characteristics that they previously enjoyed. all that we need to know is that it is a type of investment company.
what are management companies?
management companies have: - a board -shareholders -the company is either going to create an open ended fund )aka mutual fund) or a closed ended fund
Which risk would an investor with VTI shares face?
market risk -if the overall market crashes, the value of VTI is going down. specific risk is a non-diversified risk. it is the busienss risk that you have selected 1 company to put your money with. credit risk: associated with debt instruments. credit risk is inability to repay principle or make interst payments. interest rate risk: a term that is describing the price risk for bonds as prevailing interest rates change. do interest rates affect the equity markets? yes, but for exams purpose, we assoicate it more with debt securities
___ are usually sold with no sales or liquidation fees
money market fund
mutual fund that offer tax-exempt income to shareholders
municipal bond fund
category of mutual funds that owns state and local bonds paying interest that is generally tax-exempt for federal income tax purposes
municipal bond mutual funds
bond fund
mutual fund that invests in the debt securities of corporations or government depending on its investment objectives -the overarching goal of these funds is to produce interest income for investors
how does the purchase of a fund operate?
mutual funds calculate their net asset value on a daily basis. lets say this mutual fund here as 4 investments. the value of these holdings is a total portfolio value of 210 millio ndollars. these shares get updated every day at the market close. so we have a new portfolio value ever day. the fund also has some liabilities and expenses that it incurrs to operate. expenses like paying for the management, the employees, trading commissions, etc. think about: what is the net asset value of this prtfolio/mutual fund? the stocks in the wrapper are worth 210 million dollars, the expenses that te fund incurred are 10 million dollars, that means that the net asset value is 200 million dollars. if this fund has 20 million shares, we can calcualte what the economic ownership is worth for one of those shares.
types of securities mutual funds can invest
mutual funds can invest in many types of securities including equities, corporate bonds, money market instruments, and other registered securities
type of investments trategies that are prohibited for mutual funds
mutual funds cant sell stock short or borrow money
what are no load funds
mutual funds that are sold at their NAV without any sales charges added. for these funds, the NAC and POP will be the same. these shares are typically purchased directly from the fund itself rather than though the outside broker or sponsor
mutual funds calculate their ___ on a daily basis.
net asset value
are there reinvestments for UITs?
no
what is the share price the owners of the money market mutual funds are guaranteed to receive when they sell
non. although money market mutual funds seek to maintain a stable net asset value of $1.00 per share, this is not guaranteed
what are Unit Investment Trusts (UITS)
not a company, but a trust, that the board has created. -has a board of trustees -this entity will raise capital from investors, selling units in their trust and the trust to get a hold of other securities in further of achieving some objective. many exchange traded funds are organized as unit investment trusts. some are also organized as openn-end mutual funds, and that is a blended model, but for out purpases, we will think of UITs as standing alone and having some unique characteristics
why dont some investors have to pay a sales charge using breakpoint when others have to?
nvestors who come in with larger investments amounts, and some ivnestors dont have to pay any sales charge because they reach the threshold where the sales charge drops to zero
what does the mutual fund expense ratio include and what is it
on top of the sales charge the annual expense ratio that you wil pay every year for the funds operations. they consist of a buch of different components: -management fees -12b-1 fees -other expenses
what are the type of management company shares that are redeemed by the issuer?
open-end (mutual)
what is the expense ratio formula
operating expenses/average value of fund assets
Exchange-traded fund VTI tracks the performance of a benchmark index that measures the investment return of the _______
overall stock market.
the management style of index mutual funds is said to be:
passive. index mutual funds so not attempt to predict market trends. they only try to mirror the holdings and performance of the underlying index
what is the investment style of most exchange-traded funds (ETFs)
passive. nost ETFs are designed to passively track indexes
transfer agent
performs customer service functions on behalf of mutual fund
how do you calculate the NAV?
portfolio value - fund liabilities =NAV
when must mutual fund investors be provided a summary prospectus
prior to or at the time of sales
what is late trading
prohibited practice where mutual fund orders re received after the close of business and are filled at that day's fixed price rather than the next days price. -it is a violation. it could provide an information advantage for the investor receiving the shares since after-market close news could be considered. orders are required to be priced tat at the next NAV calculation
switching
prohibited practice which registered representative moves customer from one mutual fund to another that has similar objectives for no legitimate investment purpose while generating additional sales charges
secondary market for open end funds
purchased and redeemed with fund -the secondary market is describing investor-to-investor exhanges, investor to investor sales, and in an open-end fund, you dont really have a seconardy market because all of the purchase and redemtions are actually with the fund company itself. so even if i held shares of an open end mutual fund and i wanted to liquidate my share and you wanted to buy those shares and we agreed on a price, the way that this investment works is that we would not be allowed to trade them with one another. instead, i would take my shares and redeem them back to the fund and the fund would then take those shares and cancel them, create brand new shares, and issue them to you.
three mutual fund trading practices that are disapproved by the SEC unless stringent disclosure and finacial requirements are met
purchasing securities on margin, selling securities short, and participating in joint trading accounts
what is the process of updating an ETF portfolio as companies are added or subtracted from the underlying index is
reconstitution. the reconstitution of the index. - -what happens when the passive funds have to change what is in their portfolio to match waht is in the index
investment advisors act of 1940
requires registration of persons who charge fees for providing investment advice
equation of calculating the taxable capital gain on a sale of mutual fund shares is
sales proceed - cost basis of shares sold. since different lots of shares may have different cost basis, its important to know which shares are sold
in a stock mutual fund, an investor wishes to sell share at a profit and pay a long term capital gains rate
selling shares that have been held for more than 1 year
How often are mutual fund investors required to receive shareholder reports?
semiannually
pricing of closed end funds
supply and demand bid-ask spread -this is a market-driven price based on supply and demand or a big ask spread. if i have share of a closed-end fund and i want to sell them and you want to buy them, you and i can agree on a price and trade those shares.
what is the POP (public price offer) equivalent to?
the NAV + the sales charge
a closed-end fund is trading at a discount. this means;
the current market price of shares is below the fund's net asset value (NAV)
what is the sales load
the difference between the public offering price and net asset value
what are 12b-1 fees
these pay for marketing and shareholder services the name 12b-1 comes from the legal code that permits the assessment of these kinds of fees and this is a fee that goes out to the shareholders and that way they have a call center where they could call and get information about the fund and that the fund can makret itself to other investers hopefully achieving economies of scale/ scope that will drive down the cost
using rights of accumulation: if John owns $10,000 of mutual fund A in an individual account.His spouse owns $20,000 of the same fund in her individual account. If John buys $5,000 of the fund, what sales charge will be assessed
the rights of accumulation. the sales charge is calculated based on how much of the funds he owns. so in this case, between him and his spouse, they own $30,000 and so the appropriate sales charge would be 4 1/4 % on the 5000 investment. this creates loyalty and lock-in so investors will continue to buy shares of this fund so the answer is 4.25%
what do investment companies do?
their goal is to pool money from investors and deploy it based on specific investment goal
what do open-funds and closed-funds do?
they both actively manage portfolios to achieve stated investment objectives
what are class A shares
they have upfront sales charge and offer breakpoints. -this is the share class that the regulators want retail investors in. you pay your fee upfront - they typically have the lowest 12-b fees and you can get lower sales charges through breakpoints, either over time (with letter of intent) or with rights of accumulation to get aggregated
what do UITs sell
they sell redeemable shares or units to the investors, typically in a 1 time ublic offering and these shares go out and there is no secondary market. remember, when we see the term "redeemable" and you own those shares and want to liquidate, who do you want to talk to? you need to talk to the unit investment trust who could redeem the share or the unut which will allow you to liquidate it.
what do exchange traded funds do
they track an underlying index
management investment company
type of invesmtne company that actively manages a portfolio of securities to achieve a stated investment objective for investors. this is the. most common type of investment company and includes both closed-end funds as well as mutual funds
face amount certificate
type of investment company that issues debt securities to its investors and is backed by interest on real property and securities
what is a type of investment companies which issues redeemable securities and is not actively managed
unit investment trust
which investment companies are redeemable (do not go in secondary market)
unit investment trust (UIT) and open end fund (mutual)
how many shares does an open-end fund have?
unlimited
what are rights of accumulation?
use share appreciation or aggregate investments to reach a break point. think of it as a loyalty program where a mutual fund says to an investor who has been with them for a long time "hey we recognize that you have been with us, you have alot of money in your account that holds our funds and we want to recognize and honor that. so we are going to give you the breakpoint, not based on how much you are investing right now, but based on how much money you have on account with us. we calcualte your sales charge based on the appreciated and aggrgated holdings (tootal investments you have in the related accounts of our fund). so you can aggregate with your imediate family members, spouse, children, etc. you could also aggregate your holdings across different accounts. so if you had a brokerage account, a retirement account, or an educational savings account.. allow the investor to get breakpoints based on the appreciated value of the shares in the investors account. -aggregare with immediate family members -aggregate holdings in different accounts owned by the investor
the turnover ratio of index mutual fund can be described as
very low compared to actively managed mutual funds. this is because index funds hold a relatively fixed basket of index components which seldom change
the portfolio turnover in an exchange traded fund generally can be described as
very low. in most ETFs, the goal is to track an underlying index. portfolio securities are changes (turn over) only when the index is reconstituted
what is forward pricing?
when orders are filled at a price based on the next calculated net asset value (NAV) plus a sales charge if applicable.
who do you purchase mutual funds from?
when you buy a mutual fund (purchase a share of an open-end investment company), you must do so from the fund family. so if you are buying a vanguard mutual fund, you haev to buy it from vanguard. becuase these securities are redeemable and do not have a secondary market. you are not allowed to sell the shares directly between investors
do all mutual funds have an expense ratio
yes
can Mutual Fund orders be placed throughout the day?
yes. you can place an order any time but it will be executed at the next 4 pm eastern the next day