Series 6 Chapter 6
Dividend distributions
are taxable in the year they are paid to the investor.
Ordinary dividends
are taxed as ordinary income
Qualified dividends
are taxed at long-term capital gains rates
Tax-Exempt Funds
at least 80% of its investments must be in tax-exempt vehicles. For example, 80% of the investment must be municipal bonds that are federally tax-exempt and, depending on the state where the investor lives, also exempt from state taxes.
mutual funds are required to update their prospectuses
every 16 months. RRs must always make sure that they are in possession of the most recent version, since they are required to distribute the "current" prospectus to all potential customers.
capital gain event
for a mutual fund investor occurs when the investor sells or redeems a security for more than the cost basis.
capital loss event
for an investor occurs when the investor sells or redeems a security for less than the cost basis.
A realized capital loss
is a loss resulting from selling/redeeming an investment at a price lower than the original purchase price or the adjusted cost basis.
A realized capital gain
is profit resulting from selling/redeeming an investment at a price higher than the original purchase price or the adjusted cost basis.
Late trading
is the practice of placing orders to buy or redeem mutual fund shares after the NAV is calculated, typically after the close of the NYSE, but receiving the price of the previously calculated NAV already determined for that day.
Mutual fund market timing
is the practice of purchasing/redeeming mutual funds to profit from differences between the daily closing NAV and the next day's NAV due to events that occur in between calculations. Investors use this strategy to attempt to make short-term gains. This can lead to increased cost to all investors since the costs associated with issuing and redeeming shares will increase.
capital gain distribution
occurs when the fund manager sells securities in the portfolio for a profit and then shares the profit with fund investors.
unrealized capital loss
occurs when the value of an investment decreases after it was purchased, but the security has not been sold/redeemed. ARE NOT DEDUCTIBLE
unrealized capital gain
occurs when the value of an investment increases after it was purchased
Balanced Funds
Provides moderate growth and income through a portfolio of stocks and bonds—moderate risk.
forward pricing
Redemptions of mutual funds receive the next calculated NAV. Buyers pay the next calculated POP. Always assume the fund's NAV is calculated each business day at 4 p.m. Eastern Time, when the NYSE closes.
Money Market Funds
Safety and high liquidity—invests in short-term debt instruments, check-writing privileges.
GNMA Bond Funds
Safety and income are key—invests in mortgage-backed securities backed by the federal government—interest-rate, extension, and prepayment risk.
U.S. Treasury Funds
Safety and preservation of capital: invests in T-bills, T-notes, T-bonds, virtually default-free (the mutual fund shares are not guaranteed by government), interest-rate risk.
Municipal Bond Funds
Tax-free income at federal level (and possible state and local)—invests in portfolio of municipal bonds, recommended for investors in higher tax bracket.
based on the name of the fund
The SEC requires that the fund invest at least 80% of its assets in investments
Calculating the sales charge percentage when the NAV and POP are given:
(POP - NAV) ÷ POP = Sales Charge Percentage
High-yield bond fund
- Speculative (junk bonds), higher risk.
The ABC Mutual Fund has an NAV of $9.75, a sales charge of 25 cents, and an underwriter's concession of 5 cents. If an investor purchased 500 shares of this fund, what would be the total dollar amount of their purchase? A $5,000 B $4,850 C $5,025 D $4,875
A $5,000 The NAV (9.75) plus sales charge (.25) equals POP ($10). 500 shares x $10 = $5,000. The underwriter concession is included in the sales charge.
An investor has $5,000 to invest in ABC Mutual Fund. This fund has an NAV of $12 per share, a sales charge of 95 cents, and an underwriter's concession of 14 cents. The investor can purchase: A 386.1 shares B 381.97 shares C 411.86 shares D 416.6 shares
A 386.1 shares The public offering price (POP) is the price at which an investor buys shares of a mutual fund. NAV + Sales Charge (in dollars) = POP, in this example $12 + $0.95 = $12.95. $5,000/12.95= 386.1 shares.
A short-term capital gain on securities is one which results from: A A sale of a security within one year from date of purchase at a higher price than the cost basis B Any income received from that security during a one-year period C Holding securities that have appreciated in value for a year or less D A sale of a security within 2 years from the date of purchase at a price higher than the cost basis
A A sale of a security within one year from date of purchase at a higher price than the cost basis A profit (or loss) is short term if a position is liquidated after being held for 12 months or less. Short-term capital gains are taxed at ordinary income tax rates based on the investors tax bracket. If the position is held for over 12 months (12 months and 1 day), then any gain or loss is long term. Long-term capital gains are taxed at preferential rates of either 15% or 20%.
Which fund alters the percentages of stocks, bonds, and cash based on the investor's investment objective? A Asset allocation funds B Sector funds C Blue-chip funds D Growth funds
A Asset allocation funds Asset allocation funds divide an investment portfolio among different asset categories, such as stocks, bonds, and cash (including cash equivalents and currencies). The fund will vary the percentages of each asset class based on the investor's objective. A more aggressive, younger investor will usually have a higher percentage of stocks than a more conservative investor. By investing in more than one asset category, the portfolio's overall performance will not normally involve big swings in either direction. Sector funds are mutual funds that focus on investing in specific, concentrated groups of securities in a particular industry, such as utilities, electronics, financial services, and healthcare. Both blue-chip and growth funds will invest in equities.
The redemption price of an open-end management company is: A Equal to the net asset value B Determined by supply and demand C Equal to the offering price D Equal to the net asset value plus the sales load
A Equal to the net asset value The NAV is the redemption price and is calculated daily by the fund. A closed-end fund's trading prices are determined by supply and demand.
Fund A's quote is $9 bid and $10 ask. Fund B's quote is $4 bid and $4.30 ask. From these two quotes, we can determine that funds are: A Fund A is a closed-end investment company and fund B is either open end or closed end B Fund A is an open-end investment company and fund B is closed end C Fund A is a closed-end investment company and fund B is open end D Fund A is either an open-end or closed-end investment company and fund B is closed end
A Fund A is a closed-end investment company and fund B is either open end or closed end If there is greater than an 8-1/2% spread between the bid (NAV) and ask (POP), the company can only be closed end since an open-end company has a maximum sales charge of 8-1/2%. If there is less than an 8-1/2% spread, the company could be either open end or closed end. Fund A's ask price of $10 minus a bid of $9 equals a $1 difference. The $1 divided by the ask price of $10 equals 10%. Fund B's ask is $4.30 minus its bid of $4 equals a sales charge of $.30 cents. The sales charge of $.30 divided by the ask of $4.30 equals a sales charge of 7%. If the ask is less than the NAV, it could only be closed end since open-end companies do not sell below their NAV. Any quote could be closed end, but a company could be open end only if the sales charge is 8-1/2% or less.
Which of the following statements best describes the characteristics of an index fund? A Low portfolio turnover and tax efficient B Low operating expenses and no management fees C Moderate portfolio turnover and tax deferred D High operating expenses and low management fees
A Low portfolio turnover and tax efficient Index funds intend to mirror the index they are tracking. This fund is said to be passively managed because trading is done only to reflect any possible changes in the index. This means portfolio turnover will be minimal. This also results in the index fund being tax efficient, as there will be fewer taxable events occurring in the portfolio. The greatly reduced need for active portfolio management usually translates into substantially lower operating expenses and management fees.
Which of the following statements is false regarding the redemption of mutual fund shares? A Mutual fund shares may be redeemed in the secondary market B Redemptions are always at NAV C Redemptions may be done by phone, through the fund's website, or by written instruction D Any redemptions above the cost basis are typically taxable
A Mutual fund shares may be redeemed in the secondary market There is no secondary trading of mutual fund shares. They must be redeemed by the fund. Redemption of mutual fund shares is always made at NAV. Most redemptions are done via the telephone or the fund's website, but some funds still require written redemption instructions to be provided by the customer. A signature guarantee may be required to redeem shares.
The price an investor pays for a mutual fund is based upon the: A NAV plus the sales charge B NAV only C Public offering price plus sales charge D NAV minus the sales charge
A NAV plus the sales charge Customers redeem at the NAV and purchase at the POP. The POP = NAV + SC. This is the mutual fund pricing formula, which is more commonly expressed as NAV + SC = POP. Typically, when the POP equals the NAV, it is likely the investor is purchasing a no-load fund.
The sales charge for a mutual fund is expressed as a percentage of the: A Public offering price B Sales load C CDSC D Net asset value
A Public offering price Under FINRA rules, mutual fund sales charges cannot exceed 8.5%. To charge the maximum sales charge, funds must offer breakpoints and rights of accumulation. The sales charge is always a percentage of the POP.
An open-end investment company that invests primarily in the securities of companies in a specific geographic area is called: A Regional fund B Global fund C Sector fund D Sectional fund
A Regional fund The question is the definition for this type of fund. A global fund invests in both foreign and domestic securities. A sector fund has at least 25% of its portfolio in one market sector. There is no sectional fund.
Registered representatives must discuss with prospects all the following prior to opening up a dollar-cost averaging plan, except: A The RR must supply additional educational material and require attendance at a special informational seminar B Dollar-cost averaging is not for every investor C The investor should consider their financial ability to continue purchases through periods of low-price levels D Dollar-cost averaging is a long-term financial strategy for investing
A The RR must supply additional educational material and require attendance at a special informational seminar Prospects are not required to attend an informational seminar prior to establishing a dollar-cost averaging program of investing.
Which of the following events determines whether a mutual fund's capital gains distribution is short term or long term? A The period that the fund held the security B The date the shareholder reinvested the distribution C The date the shareholder purchased the fund D The length of time between declaration and payable date
A The period that the fund held the security If the fund is distributing a capital gain, the length of time the fund held the security that was sold is what is important. The length of time that an investor has held the fund is irrelevant.
Which of the following statements concerning Class B shares is accurate? A These shares typically have greater annual expenses than A shares B These shares are considered no loads if the customer holds the fund for the contingency period C B shares charge a front-end load, usually no higher than 3% D These shares will eventually convert into no-load shares
A These shares typically have greater annual expenses than A shares Class B shares often have higher annual expenses when compared with Class A shares. These shares, which carry a contingent deferred sales charge (CDSC), may never be referred to as no-load shares. Class B shares often convert to Class A shares after 7 to 8 years.
Omitting Prospectus
A document that contains a summary of information regarding the fund. It contains the fund objectives and goals, principal investment strategies, and the principal risks of the fund. The document must follow SEC Rule 482 and may not include an application to invest.
Prospectus
A document that contains information regarding the fund's objectives, investment policies and restrictions, methods of purchase and redemption, sales charges and annual expenses, the services offered, and financial statements. It also contains extensive background information on the fund's management, must be updated every 16 months, and cannot be altered.
Summary Prospectus/Mutual Fund Profile
A document that contains the fund's objectives and goals, fees and expenses, risks and performance data, investment adviser and portfolio manager, ways to purchase and redeem shares, tax information, and compensation for wholesalers and broker-dealers. It can include an application to invest as long as there is a notice on the front-page detailing how the investor can acquire a prospectus from the fund company
7 calendar days
A fund company must transmit redemption proceeds to the investor within
Geographical Focus Funds
A name suggesting that the fund focuses its investments in a particular country or geographic region is not allowed, unless the fund has adopted a policy to invest, under normal circumstances, at least 80% of the value of its assets in investments that are tied economically to the country or geographic region suggested by its name.
An investor purchased 100 shares of XYZ stock at $25 per share. After XYZ pays a 25% stock dividend, what is the customer's cost basis per share in the stock? A $15 B $20 C $25 D $30
B $20 The investor paid $2,500 to purchase 100 shares (100 x $25 per share). If there is a 25% stock dividend, the 100-share holding becomes 125 shares. The cost basis is now $20 per share ($2,500/125 shares). The total cost basis of $2,500 remains the same.
A client is looking for a safe investment to help build their IRA nest egg. Which of the following investments would you recommend? A A municipal bond fund B A U.S. government securities fund C A growth and income fund D A no-load index fund
B A U.S. government securities fund This client is looking for a conservative investment. Of the choices given, the U.S. government fund is the safest. Investing in municipal bonds or municipal bond funds in an IRA is usually inappropriate, since the earnings will be taxed when withdrawn from the IRA, even though they were generated by municipal bonds.
A fund investing in which securities would be considered an income fund? A Growth stocks B Bonds and/or preferred stocks C Common stocks D Foreign securities
B Bonds and/or preferred stocks Income funds invest primarily in bonds and preferred stocks. Common stocks and especially growth stocks are purchased for long-term appreciation. Foreign securities (usually stocks) are purchased for further portfolio diversification.
All the following events would cause a mutual fund's NAV to rise, except: A Receipt of coupon interest from a portfolio holding B Liquidation by the fund manager of a stock position for a 25% gain C An increase in the market value of a position held within the portfolio D Receipt of dividend payments
B Liquidation by the fund manager of a stock position for a 25% gain A fund's NAV will rise when the value of its underlying positions increases and when the fund receives earnings (interest and dividend payments) in the fund's portfolio. Customer deposits or withdrawals will not affect the NAV. Why? When a client deposits funds to buy shares, there are more assets ($) but also more shares outstanding. When a client redeems shares there are fewer assets ($) but also fewer shares outstanding. Liquidations of portfolio holdings also have no impact on NAV.
Which of the following statements best describes the amount of money an investor receives when liquidating shares of an open-end fund? A Offering price plus any redemption fees, multiplied by the number of shares B Net asset value multiplied by the number of shares, minus any redemption fees, and sales charges C Bid price multiplied by the number of shares, plus a sales charge D Next available price minus any commissions, multiplied by the number of shares
B Net asset value multiplied by the number of shares, minus any redemption fees, and sales charges When an investor liquidates shares of their fund, redemption always occurs at NAV. There may also be a redemption fee and/or back-end sales charge. These amounts will vary based on the fund and how long the investor has held the fund shares. To calculate this, we must first know the gross redemption amount. Start with the net asset value and multiply it by the number of shares being redeemed. Then subtract any redemption amount and sales charge from that number. The result is the dollar amount that will be paid to the investor.
How often must a mutual fund send updated financial reports to shareholders? A Annually B Semiannually C Quarterly D Monthly
B Semiannually Updated financial reports must be sent semiannually to shareholders. Annually, an audited report is sent to both the SEC and to shareholders. Broker-dealers must provide inactive accounts with quarterly account statements and active accounts with monthly account statements.
A registered representative has spent most of the day discussing a large potential mutual fund purchase with an elderly couple in their early 80s looking to invest $200,000 that they received from the sale of their home. The RR advised the couple to spread their investment out among six different fund families to obtain maximum diversification. What potential violation of FINRA's conduct rules may have occurred? A The RR has sold the couple an unsuitable investment. Mutual funds are not an appropriate investment for elderly investors. B The RR may have committed a breakpoint sales violation C The RR has committed a freeriding and withholding violation D The RR has violated the Know Your Customer rule
B The RR may have committed a breakpoint sales violation Splitting a customer's assets between different fund families for no valid reason may be construed as a breakpoint sales violation. It would appear that the RR was trying to maximize their commission at the expense of the customer.
Based on the following prices, which of the following funds must be closed end rather than open end? A The DEF Fund: NAV = $24.89; purchase price = $27.08 B The XYZ Fund: NAV = $8.31; purchase price = $8.24 C The PDQ Fund: NAV = $23.32; purchase price = $24.08 D The ABC Fund: NAV = $7.77; purchase price = $8.03
B The XYZ Fund: NAV = $8.31; purchase price = $8.24 A mutual fund's (open-end management company) purchase price is its POP. In the case of a no-load or back-end load fund, the POP is the same price as the NAV. Only a closed-end fund might have a purchase price less than its NAV.
An investor purchased 500 shares of a mutual fund in November of last year. In December of the same year, the fund distributed $3 in dividends and $1 of capital gains. If the investor reinvested all the dividend and capital gains distributions, which of the following describes the taxation of the distribution? A The dividend distribution is always taxed at ordinary income rates B The distributions are taxable in the year they are received C The capital gains distribution will not be taxed at preferential rates D The distributions are taxable to the fund if the fund is a regulated investment company
B The distributions are taxable in the year they are received he tax liability from distributions from mutual funds is created in the year that the distribution is made, regardless of whether the distribution is taken in cash or is reinvested back into the fund. Capital gains distributions from mutual funds are derived from sales of assets the fund held long term, therefore they are taxed as long-term capital gains to the shareholder, regardless of how long the investor owned the mutual fund. A regulated investment company does not pay taxes on distributions. The shareholder is taxed for all distributions received. Dividends may be ordinary and taxed at ordinary income rates or they may be qualified and taxed at the preferential long-term capital gains rates.
If an investor decides to redeem their shares of a mutual fund, what is the payment based on? A The previous net asset value B The next computed NAV C The current bid D The next computed POP
B The next computed NAV Mutual fund shares are always redeemed at the next calculated NAV. The POP is the price the investor pays to purchase shares of a mutual fund. The terms bid and ask when securities trade in the second market. Investors receive the bid price when selling securities and pay the ask price when buying securities.
A few years following the purchase of a common stock fund for $1,000, the fund is sold for $1,500. Dividends totaling $125 had been reinvested. What is the cost basis? A $1,000 B $1,500 C $1,125 D Less than $1,000
C $1,125 When a distribution is reinvested back into the fund, it becomes part of the cost basis.
A fund charges a redemption fee of one-half of 1% for shares held less than 3 months. If you redeem 100 shares of the fund held for 2 months, having a NAV of $10, how much will you receive based on this information? A $99.50 B $999.50 C $995.00 D $950.00
C $995.00 The sale of 100 shares at $10 per share is $1000 less the redemption fee. One-half of 1% of $1000 is $5. The seller nets $995.
The NOP Growth Fund charges a standard load of 6.5%. For purchases more than $25,000, the fund charges a reduced sales charge of 5.5%. How many shares could an investor purchase if they deposit $35,000 when the fund's NAV is at $22? A 1493.811 shares B 1507.970 shares C 1503.436 shares D 1497.503 shares
C 1503.436 shares The investor's purchase of $35,000 exceeds the breakpoint established at $25,000. The reduced sales charge applies to the entire deposit, not just the amount over the breakpoint. Here is the calculation: Step 1 - Determine the adjusted POP. This is calculated as NAV/(100% - Sales Charge) = $22/(100% - 5.5%) = $22/.945 (94.5%) = $23.28. Step 2 - Divide the investment amount by the POP. This gives the number of shares received: $35,000/$23.28 = 1503.436 shares.
An investor is ready to invest $30,000 into ABC Options Income Fund. Assuming the next fund quote reveals a NAV of $8.50 and a POP of $8.95, approximately how many shares will they purchase if the maximum sales charge according to the fund prospectus is 5%, and for investments between $25,001 and $50,000, the sales charge is 3%? A 3,529 shares B 3,352 shares C 3,424 shares D 3,645 shares
C 3,424 shares The POP found in the mutual fund quote assumes that the investor is going to pay the maximum sales charge. In this case, the investor is investing $30,000 and will reach a breakpoint leading to a percentage sales charge reduction. To find the price that they will pay per share, take the NAV, and divide that by 100% minus the applicable sales charge percentage. Since the investor will pay a 3% sales charge, the calculation is $8.50 ÷ (100% - 3%) or $8.50 ÷ 97% or $8.50 ÷ .97. This equals $8.76/share. Now, divide the investment amount ($30,000) by the price per share ($8.76) to calculate 3,424 shares.
The fund manager of ABC Mutual Fund reported unrealized appreciation of 12%, and a 3% increase in net income. The net result is: A Available for distribution to the outstanding shareholders regardless of the board's decision B A decreased value in the portfolio C An increased value in the portfolio D Available for distribution to the outstanding shareholders when declared by the board of directors
C An increased value in the portfolio The net results are not ready for distribution since 12% was unrealized appreciation. Unrealized appreciation cannot be distributed until the assets are sold. The portfolio increases in value when the securities increase or when the fund receives income. There was an increase in income but no increase in capital gains. Capital gains occur (are realized) when a security is sold at a gain. An increase in the value of a security is called unrealized appreciation until it's sold. Once it's sold, it's called a capital gain.
A 25-year-old would like to invest in a mutual fund that would afford the ability to invest in the market with the lowest possible cost. Which of the following funds would be the most suitable investment? A Income fund B Blue-chip fund C Index fund D Growth and income fund
C Index fund n this question the investor wants to invest in the market and pay little in costs. Index funds traditionally mirror a particular index (for example, the S&P 500). In addition, index funds are passively managed. This means the fund, in most cases, will only change securities in the portfolio when the actual index changes securities. Therefore, the expenses of the fund are lower than actively managed funds.
An investor bought shares in an investment company that had an ask price of $12 and a bid price of $10.60. This indicates the company: A Is open end or closed end B Is open end C Is closed end D Has a $1.40 sales charge
C Is closed end Open-end funds, AKA mutual funds, are purchased at their POP and redeemed at their NAV. They are not traded based on their bid and ask. Bid and ask are the terms used to establish the pricing for items that trade in the secondary market. Mutual funds are always purchased in the primary market and redeemed by their sponsor at the NAV. That eliminates two of the four answers. The difference between the bid and ask is the spread, not the sales charge. If all else fails, the spread of $1.40 would compensate the dealers for sales and purchases and $1.40 is 11.66% of the ask price which is greater than the highest allowable sales charge for a mutual fund (8.5%). Unit investment trusts typically have a sales charge of approximately 1%.. The only possible choice is a closed-end fund that trades in the secondary market based on supply and demand. Assume that a fund quoted with bid and ask prices is a closed-end fund.
Which of the following statements is false regarding a contingent deferred sales charge (CDSC)? A It is a back-end sales charge B The percentage decreases annually C It is a charge that is assessed on Class C shares D When the CDSC falls to zero the shares may convert to Class A shares
C It is a charge that is assessed on Class C shares Class B shares charge a back-end load known as a contingent deferred sales charge (CDSC). The percentage decreases annually and applies only to the shares redeemed in that year. After so many years (typically 6), the sales charge is dropped to zero. Many funds provide automatic conversions from Class B shares to Class A shares. Typically, the conversion occurs after the CDSC charge falls to zero.
A client is meeting with a registered representative at 5pm on Monday, July 3. This client decides to invest $50,000 into XYZ Income Fund and wants to know how many shares that will purchase. The NAV per share on July 3 is $15, and the POP is $16. How should the registered representative answer this question? A The NAV has already been calculated today so this order will not process until tomorrow morning B The POP is $16 per share today, so you will purchase 3,125 shares C Orders for mutual funds process daily at 4pm EST, since it is after that time this order will be processed on Wednesday at 4pm when the NAV is calculated. At that time, we will know how many shares are purchased. D The NAV is $15 per share today, so you will purchase approximately 3,333 shares
C Orders for mutual funds process daily at 4pm EST, since it is after that time this order will be processed on Wednesday at 4pm when the NAV is calculated. At that time, we will know how many shares are purchased. A customer's buy or sell order must be placed before the end of business at 4 p.m. Eastern to have their order processed at that business day's price. Orders entered after the deadline will process at 4 p.m. Eastern the next business day. The following business day is a holiday so the order will be processed on July 5 under the forward pricing rule.
When must all customers be provided with the most current mutual fund prospectus? A No later than 7 calendar days after the mutual fund was first discussed B Within 3 business days after the confirmation of the trade C Prior to or at the time of confirmation D At the time the mutual fund shares are delivered
C Prior to or at the time of confirmation Federal rules require that all customers be provided with the most current copy of a fund's prospectus (traditional mail or electronic delivery) at or before confirmation.
How are mutual fund distributions treated for tax purposes? A Only cash distributions are reportable B Only capital gains are reportable C Reportable whether if taken in cash or automatically reinvested in additional shares D Reinvestments in additional shares are income tax free
C Reportable whether if taken in cash or automatically reinvested in additional shares Distributions are reportable for tax purposes in the year they are payable, whether reinvested or paid in cash. Mutual fund investors have the privilege of reinvesting dividends and capital gains at NAV.
All the following statements are true regarding mutual fund reporting, except: A Mutual funds must submit an audited annual report to the SEC and shareholders B Mutual funds must submit semiannual reports to shareholders only C Semiannual reports must contain an auditor's disclosure document D A nonqualified opinion means the auditor agrees with the company's financial information
C Semiannual reports must contain an auditor's disclosure document The annual and semiannual reports are financial report cards for the fund that contain information like that found in the prospectus. Each fund is required to furnish the audited annual report to the SEC, and both reports to its shareholders. Annual reports (not semiannual) must contain an auditor's disclosure document that explains the auditor's findings and whether their opinion is qualified or nonqualified. A nonqualified opinion would be what the company is looking for, as it states that the auditor agrees with the company's financial information.
An investor received a year-end bonus of $25,000 and wants to invest in a mutual fund. The investor has no other current investments and wants to invest part into a government bond fund for safety and the remaining balance into a standard growth fund. Which of the following would be a violation? A The representative should discuss the benefits of breakpoints, rights of accumulation, and systematic investing B The representative should review potential breakpoint schedules offered through a fund family that offers both types of funds C The representative should recommend that the investor choose to put $5,000 into ABC U.S. Treasury Fund and $20,000 into DEF Growth Fund D The representative should complete a full financial profile on the client to determine which funds would be most suitable given the clients objectives
C The representative should recommend that the investor choose to put $5,000 into ABC U.S. Treasury Fund and $20,000 into DEF Growth Fund A breakpoint sales violation occurs when a registered representative purposely makes a sale just below the breakpoint to earn a higher sales load (or divides investable dollars among different fund families). By recommending the investor split the money between 2 fund families (ABC fund family and DEF fund family), this would be a violation.
Calculating NAV when the POP and sales charge percentage are given:
POP ($) x Sales Charge (%) = Sales Charge ($)POP ($) - Sales Charge ($) = NAV ($)
Blended Funds
Capital appreciation is primary with a mix of value and growth stocks.
Growth Funds
Capital appreciation primary objective, portfolio of common stock.
Conservative Growth Funds
Capital appreciation primary, common stock in large-cap companies for lower risk.
Aggressive Growth Funds
Capital appreciation with rapid growth, common stock in small-cap emerging growth companies—technology, younger investors with risk tolerance, high risk.
Value Funds
Capital appreciation, common stock in established large-cap companies with undervalued stock due to market inefficiency and long-increasing dividend payment history.
Sector Funds
Considered aggressive growth investment—investments are concentrated in a particular industry or geographic region.
An investor wishes to redeem 1,000 shares of a mutual fund. The POP is $15 per share, the funds' sales charge is 6%, and the fund charges a 1% redemption fee. What amount would the investor receive when redeeming their 1,000 shares directly through the fund? A $14,241 B $14,100 C $14,650 D $13,959
D $13,959 Public offering price minus percent sales charge equals net asset value (redemption price). $15 - 6% ($.90) = $14.10 x 1000 = $14,100 - 1% ($141) = $13,959.
A no-load fund is permitted to charge investors which of the following? A A CDSC B A back-end sales charge C An up-front sales charge D A 12b-1 fee
D A 12b-1 fee Many funds do not levy sales charges, either front end or back end (contingent deferred sales charge or CDSC). Therefore, the NAV and POP are the same. These are known as no-load funds. No-loads still charge their customers management, administrative, and, in some cases, 12b-1 fees (up to a maximum of .25% per year).
POP - NAV = Sales Charge
POP - NAV = Sales Charge (in dollar terms)
A couple has been preparing for retirement. They have been aggressive investors and are happy with the nest egg they have been able to amass. Most of their income needs will be covered by the 2 pension checks they receive each month. Primarily, they would like their investment to provide additional income while also growing to stay ahead of inflation. Which of the following recommendations might help them meet their goals? A A GNMA fund B A high-grade corporate bond fund C An asset allocation fund with 90% equities, 10% bonds D An asset allocation fund with 40% equities, 60% bonds
D An asset allocation fund with 40% equities, 60% bonds While at first glance it may seem that they would like to have their cake and eat it too, there are several ways to draw income while also looking to keep pace with rising prices. A corporate bond fund or a GNMA fund would give them income but not provide a sufficient hedge against inflation. When considering an asset allocation model, their primary concern is income with growth as a secondary consideration. The 40/60 equity/debt asset allocation would more appropriately meet this goal.
Company A: NAV = $8.30 POP = $9.00 Company B: NAV = $11.50 POP = $11.00 Based on the preceding information, which statement is true? A Company A is closed end and Company B is open end B Company B could be either open end or closed end C Both companies are closed end D Company A could be either open end or closed end Company B is closed end
D Company A could be either open end or closed end Company B is closed end A closed-end fund's POP can trade at, above, or below NAV, but the open-end fund always has the POP above or equal to the NAV, never below.
The redemption price of an open-end management company is: A Equal to the offering price B Equal to the net asset value plus the sales load C Determined by supply and demand D Equal to the net asset value
D Equal to the net asset value The NAV is the redemption price and is calculated daily by the fund. A closed-end fund's trading prices are determined by supply and demand.
A prospective investor asked a registered representative to explain dollar-cost averaging. The registered representative should tell the prospect that this method of investing: A Offers considerable protection against loss in a declining market B Eliminates the possibility of lower sales charges normally available under rights of accumulation C Should be temporarily discontinued during higher market periods D Involves continuous investing in shares at stated intervals regardless of the price level of shares
D Involves continuous investing in shares at stated intervals regardless of the price level of shares Dollar-cost averaging does not provide lower sales charges or provide protection against loss. It does involve continuous investing in shares at stated intervals regardless of the price level of shares and requires the investor to continue to invest over the long term.
On May 23rd, an investor purchased 500 shares of ABC Growth Fund, an open-end investment company. On August 1st, the investment manager of the fund liquidated the fund's holding of XYZ common shares for a profit. The fund had held the XYZ stock for three years. On November 20th, ABC Growth Fund made its annual capital gain distribution to shareholders. The entire gain was attributable to the sale of the XYZ shares. Which of the following describes the income tax consequence of this distribution to the investor? A Short-term capital gain, taxable at preferential tax rates B Passive income, taxable at ordinary income tax rates C Short-term capital gain, taxable at ordinary income tax rates D Long-term capital gain, taxable at preferential tax rates
D Long-term capital gain, taxable at preferential tax rates CORRECT! Capital gain distributions from mutual funds to shareholders are based on how long the fund has held the portfolio investment, not how long the investor has held the fund shares. Because the fund has held the XYZ stock for 3 years, the gain is long term. When the customer receives a Form 1099-DIV from the fund, it will show the gain as a long-term capital gain distribution.
Which of the following is made available to investors only upon request? A Financial statements B Prospectus C Breakpoint schedule D SAI
D SAI The statement of additional information (SAI) contains supplementary information on many of the items found in the prospectus, including fund holdings, transactions, and fees. Although there is no requirement for periodical mailing of the SAI to shareholders, this document must be furnished upon request. The prospectus must be provided to investors at, or prior to, confirmation of sale. The prospectus will contain all relevant information for investors to make an informed investment decision, including financial statements and the breakpoint schedule.
An investor has signed up for a mutual fund investment program in which they invest $100 per month. Over the previous six months, the prices of the fund at the times of purchase were $4.00, $4.50, $5.00, $5.50, $6.75, $7.25. Which of the following statements is correct? A The average cost per share is unrelated to the average price per share B The average cost per share is equal to the average price per share C The average cost per share is greater than the average price per share D The average cost per share is lower than the average price per share
D The average cost per share is lower than the average price per share Dollar-cost averaging in a fluctuating market will result in a lower average cost per share than the average price per share. In this question, the total investment was $600, and the investor bought approximately 114 shares. The average cost per share was $5.26 ($600/114). The average price is the 6 prices paid added together and then divided by 6. The result of this calculation is $5.50. Therefore, the average cost is lower than the average price.
Mutual fund redemption fees are paid to: A FINRA B The SEC C The investment advisers of the fund D The fund
D The fund Some funds will impose a redemption fee as a short-term trading penalty to discourage market timing. The redemption fee is paid directly to the fund, and the SEC limits the fee to 2% of the value of the customer's fund.
When an investor redeems their mutual fund shares, which of the following statements is accurate? A The holding period is based on how long the fund has held the investments B The investor cannot use capital losses to offset capital gains C The holding period is short term if the investor held the shares one year or less and any gains taxed at preferential rates D The holding period is long term if the investor held the shares for greater than 12 months and any gains are taxed at preferential rates
D The holding period is long term if the investor held the shares for greater than 12 months and any gains are taxed at preferential rates If the shares were held for over 12 months (12 months and 1 day), then any gain or loss is long term. Gains on assets held over 12 months are taxed at preferential rates of either 15% or 20%. Capital losses can be used to offset up to 100% of capital gains. Any unused losses may be used to offset up to $3k of ordinary income and can be carried forward indefinitely.
Calculating POP when the NAV and sales charge percentage are given:
POP = NAV ÷ (100% - Sales Charge %)
What is the primary factor causing mutual fund share prices to increase or decrease? A Reinvestment of fund distributions B Fund purchases C Fund redemptions D Securities portfolio price fluctuations
D. Securities portfolio price fluctuations The primary driver of mutual fund share price fluctuations is when the fund's portfolio of securities rises and falls. The other three choices result in no change in price per share.
FIFO (First In, First Out)
Determines the cost basis by identifying first shares purchased as the first shares redeemed. This is usually the worst-case scenario if the account has appreciated.
Share Identification
Determines which specific shares are redeemed at the time of redemption. This method may be determined by an accountant.
Equity Income Funds
Dividend income primary, typically preferred stock, dividend paying large-cap companies, energy, utilities.
Corporate Bond Funds
Higher risk than U.S. government and municipal bond funds—invests in corporate debt instruments. -
Precious Metals Funds
Invest in mining companies that produce gold, silver, or platinum, but they can also invest directly in the commodities—may provide a hedge against inflation.
High-grade bond fund
Investment grade, lower risk, lower yield.
Fixed Percentage
Involves liquidating a fixed percentage of the customer's portfolio (perhaps 1% a month). Once again, the amount of each check may vary based on the fluctuating market value of the portfolio
Fixed-Share Amount
Involves liquidating the same number of shares each month (e.g., 10, 25, 50) and sending the customer the proceeds. Since the share prices will most likely fluctuate, the customer's monthly check will vary.
Fixed-Dollar Amount
Involves sending a check out each month for a designated amount (e.g., $1,000).
Index Funds
Mirrors the performance of the market by investing in stocks of a specific index (such as S&P 500)—lower management fees, passively managed.
POP, Sales Charge, and NAV Calculations
NAV + Sales Charge (in dollars) = Public Offering Price (POP) For example: If the NAV is $9.15 and the sales charge is $0.85, the POP is $10. ($9.15 + $0.85 = $10.00)
Asset Allocation Funds
Type of hybrid fund where the objective is to protect against significant losses by dividing the portfolio (allocating a % of investment) among stocks, bonds, and cash and rebalancing to maintain those percentages. Target-date funds are asset allocation funds designed to become more conservative the closer they get to a target date.
Fixed Time Period
The investor instructs the fund to systematically liquidate all holdings within a specified time period (e.g., 5 years). The fund will periodically sell the investor's holdings to exhaust the account balance within this time frame. Since the fund value will fluctuate, the amount is recalculated for each withdrawal and will vary with fund performance.
Growth & Income Funds
Type of hybrid fund that has two objectives: capital appreciation and current income—invests in a mix of growth stock and income-bearing securities such as bonds and/or preferred stock.
