Series 7: Investment Companies
The Class B shares of the KAPCO Fund carry a conditional deferred sales charge beginning at 5% and reducing each year after the second by 1% per year until eliminated. An investor making an initial purchase of $10,000 of these shares will pay a sales charge of
$0 ---> no charge for class B
According to the Investment Company Act of 1940, a diversified mutual fund may hold, at most, what percentage of a corporation's voting securities?
100%
One of your customers has been regularly investing into the shares of an aggressive growth fund. The investor has a long time horizon and does not expect to touch the account for a number of years. In the event of an emergency, federal law would require redemption proceeds forwarded within
7 days
Under the Conduct Rules, the maximum sales charge on any transaction involving an open-end investment company share is
8.5% of the offering price.
In an effort to raise additional capital, which type of registered investment company may issue debt securities?
A closed-end investment company
One of your customers is concerned about future inflation. Which of the following mutual fund recommendations is likely to be the most suitable?
A common stock growth fund
An investor has arranged to receive ½% of the value of her mutual fund account per month. This is an example of what type of plan?
A fixed-percentage periodic withdrawal plan
Which of the following investment companies is limited to offering investors a single class of common stock representing ownership in the company?
A mutual fund
Which of the following investments would likely have a lock-up period?
A principal-protected fund
One of your customers had a sideline business that was just sold for $100,000. The customer is 47 and wants to put that money into an investment that can be left alone for the next 20 years until expected retirement. Which of the following is likely the most suitable choice for this customer?
A target date fund with a date 20 years from today
Growth of capital is most likely to be the investment objective of which of the following mutual funds?
An asset allocation fund
A young first-time investor wants to put $10,000 of savings in an investment that she wants to see grow over many years. She intends to add to it in small amounts whenever able. A balanced mutual fund and an equity growth fund are chosen. What would be the most suitable share class for this initial investment?
B Shares
An aggressive investor is willing to risk $25,000 to align with his bearish outlook on the overall market. He notes liquidity being important if he needs to divest quickly, and risk taken needs to be commensurate with the upside potential. Which of the following would align most suitably with these objectives?
Broad-based market inverse index fund
Certain events will affect the net asset value (NAV) per share of a mutual fund. Which of the following events will not affect NAV?
Fund shares being redeemed by the fund upon the request of shareholders
A mutual fund's unrealized loss last month results in which of the following?
Lower net asset value (NAV) per share Reduction in the proceeds payable to shareholders who liquidate their shares
In terms of the number of issues traded, the largest secondary market for securities is the over-the-counter market (OTC). Which of the following securities cannot be traded OTC?
Mutual Funds
If a customer transfers his holdings from one fund to another within the same family of funds, what are the tax consequences?
On the transaction date, any gain or loss is recognized for tax purposes.
If an investor wants to invest in the electronics industry but does not want to limit his investments to one or two companies, which type of fund would be most suitable?
Specialized
An investor purchases $1,000 of the XYZ Growth Fund on a Tuesday. The order is time-stamped at 2:45 pm ET. When will the investor's price per share be determined?
That day based on the market close
Which of the following statements regarding exchange-traded funds (ETFs) are true?
The SEC has classified them as a type of open-end fund. They have operating costs and expenses that are lower than most mutual funds.
Which of the following statements regarding mutual fund dividend distributions are true?
The fund pays dividends from net investment income. An investor is liable for taxes on distributions, whether taken in cash or reinvested in the fund.
What are the tax consequences an investor incurs when exercising the conversion privilege within a family of funds?
The investor treats the exchange as a sale and new purchase.
Which of the following statements regarding a leveraged exchange-traded fund (ETF) are true?
The leveraged ETF may be purchased on margin. Securities within the leveraged fund portfolio may be purchased on margin.
When an agent explains mutual funds to a prospective investor, which of the following statements may be made?
The redemption value of mutual fund shares fluctuates according to the fund's portfolio value.
Which of the following statements best describes the effect of reinvesting mutual fund distributions?
The reinvestment of capital gains and dividends results in a higher cost basis.
A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100 even though she made no new investments. Which of the following statements regarding this situation is true?
The representative should remind the customer that she signed a letter of intent 12 months ago.
Your customer is interested in a leveraged fund and makes the following statements about leveraged funds to you. Which of the statements is not true?
There are no unusual risks associated with these funds, other than those incurred with any index tracking fund.
An investor purchases 100 shares of a bond ETF at a price of $50 per share on September 5, 2019. On November 1, 2019, and February 1, 2020, the fund distributes a $0.50 per share dividend. On May 11, 2020, the investor sells all the shares at $57 per share. What are the 2020 tax consequences of the sale?
When each purchase is made
The diversification and professional management offered by many investment companies tends to lower the investor's risk. That does not mean elimination of risk. Of the following, it is likely the greatest risk would be investing in
a 2x ETF.
If you were reading sales literature about a mutual fund that claimed its objective is to be a single source investment for most equity investors, it would most likely be describing
a blend/core fund.
A customer is interested in a mutual fund that invests in both U.S. stocks and international stocks. This type of fund is called
a global fund.
If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as
a unit investment trust
A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in
an intermediate-term, high-grade corporate bond fund.
Flag Mountain Floating Rate Capital, a business development company (BDC), has the majority of its assets invested in debt securities. Income distributions are made in the form of
dividends
When speaking to a customer about exchange-traded funds (ETFs), a registered representative could accurately state that these funds
do not have the same potential tax consequences as mutual funds, such as making capital gains distributions annually.
Recent years have shown an enormous growth in the sales of exchange-traded funds (ETFs). Some of the benefits of using ETFs in your clients' portfolio would include
greater tax efficiency than most comparable mutual funds.
If a client prefers mutual fund investments in companies that primarily generate capital appreciation to companies that pay a steady dividend, what type of mutual fund and associated investment objective would you recommend?
growth fund
Money market mutual funds are highly recommended for those who
have a specific need for funds within the next six months to a year.
One of the goals of target date funds is to help manage
investment risk
Which of the following terms does not apply to municipal unit investment trusts (UITs)?
managed
A mutual fund that charges 12b-1 fees may use the money to cover all of the following except
management fees
The primary asset in a tax-exempt bond fund would be
municipal bonds.
If two unrelated customers wish to combine their purchases of a mutual fund to take advantage of the fund's breakpoints, you should advise them that they may
not do so because two unrelated buyers may not receive a breakpoint.
The capitalization structure of an open-end investment company can include
one issue of common stock.
In which of the following investment strategies would it be illegal for a mutual fund's portfolio manager to engage?
short-selling
A front-end sales load is defined as
the difference between the public offering price and the net asset value of a mutual fund share.
Many mutual fund investors elect to reinvest their dividends into additional shares of the fund. When an investor does this with dividends paid by a common stock fund,
the dividends are taxable in the year received.
A 3× leveraged inverse exchange-traded fund means
the goal of the fund is to have the shares go up by three times the amount that the targeted index falls.
There are risks inherent in any investment. One risk that index ETFs have that should be used to guide the investor's selection decision is
tracking risk
In general, investors pay a commission rather than a sales charge when purchasing shares of
a closed-end investment company.
If a married couple with a long-term growth objective is considering a mutual fund, and they are concerned about the fund's annual expenses, they should select
a common stock fund with a low portfolio turnover.
Most mutual funds operate as regulated investment companies. This means that
they qualify for special tax treatment under Subchapter M of the Internal Revenue Code.
Closed-end investment company shares may be
traded in the secondary markets, including the exchanges and over-the-counter (OTC) markets. traded by institutional investors
Interval Fund
An investment company registered with the SEC under the Investment Company Act of 1940 that allows investors to sell their shares back to the company at net asset value on a quarterly basis
A new client, age 25, earning $41,000 annually has saved $20,000 to allocate to an investment portfolio for the first time. The client conveys that while he would like to see some growth, an investment with moderate risk and some downside protection are important objectives for his first time investing. Aligning with the client's investment experience and objectives, which of the following would be the most suitable?
Balanced fund
What is a possible benefit of purchasing shares of a closed-end investment company in the secondary market?
Shares are frequently trading at a discount to the NAV.
Given the current business climate, an investor believes that a number of industries will be going through a consolidation over the next two to three years. Willing to invest $30,000 in the opportunity to profit if the consolidation occurs, which of the following would be the most suitable recommendation?
Special Situation Fund
If a registered representative is seeking to sell shares of an investment company to a client, which of the following statements would be accurate and permissible regarding her recommendation?
When the client redeems his shares, he will not immediately know their dollar value. If the client purchases the shares of two or more funds in the same family of funds, he may be entitled to a reduced sales charge.
An investor looking for an open-end investment company with an objective of providing capital appreciation for its shareholders would most likely choose
a growth fund
A document that allows an investor in Class A shares of a mutual fund to receive a breakpoint on an initial purchase without investing the required breakpoint amount is
a letter of intent.
A mutual fund can use the term, "no-load" as long as
any 12b-1 charge does not exceed .25%.
Most exchange-traded funds (ETFs) are structured as open-end investment companies. However, they should not be confused with mutual funds. Among the differences between the two is that ETFs
are traded in the secondary markets.
A stock mutual fund wishes to advertise itself as diversified. To be able to do so, the fund must invest its total assets, such that
at least 75% of its assets meet stated diversification requirements.
A mutual fund's expense ratio is found by dividing its expenses by its
average annual net assets
The mutual fund industry is highly regulated. One of the areas regulated is that of making disclosures. An example of that is that mutual funds must provide reports to their shareholders
biannually
An investor who makes transactions once a month using dollar cost averaging would
buy the same dollar amount of stock.
Exchange-traded funds (ETFs)
can be bought and sold throughout the trading day and have low expense ratios
If an investor has received dividends and capital gains distributions on mutual fund shares she has held for four months, she will pay
capital gains rates on capital gains distributions and ordinary income rates on dividends.
All of the following must be sold with a prospectus except
closed-end funds in the secondary market.
As a registered representative, you recommend the purchase of the ABC Fund family corporate bond mutual fund to a customer whose objective is current income. The customer agrees to the purchase and you enter the order. What type of securities has the investor purchased?
common stock
When reviewing a money market fund portfolio, one would not expect to find
common stock
A customer who seeks to supplement his retirement income and has a high risk tolerance would likely find which of the following securities most suitable?
high-yield bonds
All of the following are risks associated with most mutual funds except
liquidity risk
Which risk is generally lower when holding a municipal bond ETF instead of individual municipal bonds?
liquidity risk
When a mutual fund computes its net investment income, all of the following are included except
long-term capital gains.
Probably the most significant difference between a business development company (BDC) and any other investment company registered under the Investment Company Act of 1940 is that a BDC
makes available significant managerial assistance to the investments in their portfolio.
SEC rules require that open-end management companies distribute dividends to their investors from the firm's
net investment income.
The Profligate Perpetual Growth Fund's prospectus states that the fund meets the Investment Company Act of 1940's qualifications of a diversified management company. If the fund has net assets of $1 billion,
no more than $300 million can be invested in the voting shares of any single issuer.
When discussing unit investment trusts with a prospect, it would be correct to state that these are
nonmanaged investment companies.
The Investment Company Act of 1940 prohibits a closed-end management investment company from pursuing all of these activities except
paying dividends
A 60-year-old customer who wishes an investment that can provide for retirement needs while adjusting for changes as aging takes place would probably find which of the following investments most suitable?
target date fund
Investors looking for preservation of capital will find money market mutual funds and bank-insured CDs to be appropriate vehicles. When comparing the two, it is important for a registered representative to point out that
the bank CDs are insured by the FDIC while there is no assurance that the value of the money market fund will not lose money.
All of the following are expenses to the operation of mutual funds except
the compensation paid to the underwriter or distributor.
When an investor purchases Class A shares of a mutual fund in their brokerage account at a FINRA member firm, the sales charge is apportioned to all of the following except
the mutual fund.
Which of the following is the least suitable mutual fund transaction?
Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence
Last year, ABC Mutual Fund paid dividends of $1.50 per share and distributed $0.80 per share in capital gains. The fund has a bid price of $13.50 and an asked price of $14.20. An investor who purchased shares in this fund nine months before the distributions receives $100 in nonqualifed dividends and $53 in capital gains. All distributions were reinvested in additional shares. If this is the individual's only investment, she will
be required to pay federal taxes at the ordinary income rate on the dividend income. be required to pay capital gains tax on $53.
The practice of dollar cost averaging requires the investor to
buy a security in a falling market and buy it in a rising market.
All of the following might be found in a money market fund's portfolio except
common stock
When an investor in a mutual fund elects to reinvest dividends into additional shares, the price paid is
the net asset value per share (NAV).
Which of the following types of mutual funds has capital appreciation as its investment objective?
specialized
If a couple has a long-term growth objective and is willing to accept a reasonable amount of risk, which of the following mutual funds is most suitable for them?
Common stock fund
A prospectus must be delivered to customers in the sale of all of the following transactions except
ETFs
If general interest rates increase, the interest income of an open-end bond fund will do which of the following?
Increase
What is the most liquid investment?
Money Market Funds
If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor?
Purchasing power risk
Mutual fund Class B shares assess
deferred sales load
All of the following would be found in the money market except
preferred stock.
One of your clients purchased shares of the Ajax Mutual Fund several months ago. At that time, the net asset value (NAV) of the fund was $17.20. Today, the NAV is $17.56, and your client wants to know what accounts for the difference. You should advise her that the difference likely represents
unrealized appreciation.
One way in which open-end investment companies differ from closed-end investment companies is that open-end companies
use forward pricing to determine their redemption value.
All of the following events will affect the net asset value (NAV) per share of a mutual fund except
wholesale redemption of fund shares.
