Unit 10 Test questions

A customer is interested in an exchange-traded fund (ETF). With regard to the trading of ETFs, the customer should be aware that ETFs can be purchased throughout the trading day ETFs use forward pricing, the same as mutual funds do real-time quotes are available for ETFs the NAV calculated at the end of the day, plus a sales charge, will equal the trading price A) I and III B) II and IV C) I and IV D) II and III

A) I and III. ETFs can be traded throughout the trading day. Changing price quotes are available in real time as investors buy and sell. Although ETFs have an NAV that is calculated on the basis of the portfolio holdings, the trading price is determined by supply and demand in the open market, with customers paying commissions.

In a mutual fund portfolio, it is permissible to buy all of the following EXCEPT A) stock on margin B) index options C) shares of other mutual funds D) junk bonds

A) In a mutual fund portfolio, it is permissible to buy all of the following EXCEPT

In the sale of open-end investment company shares, the prospectus A) must be delivered to the client either before or during the sales solicitation B) must be delivered at the time of, or before the delivery of the fund share certificates C) must be delivered before the sales solicitation D) is not a document requiring delivery

A) The sale of mutual fund shares requires that the client receive the prospectus before, or during, a sales solicitation.

Last year, the bond market was profitable and ABC Fund had 70% of its assets in bonds. Next year, the fund's managers expect the stock market to do well, and will adjust the fund's portfolio so 60% of its assets will be invested in stock. ABC is probably what type of fund? A) Balanced B) Hedge C) Specialized D) Aggressive growth

A) This fund is invested in both stock and bonds; it is a balanced fund. The percentage invested in the two types of securities is adjusted to maximize the yield obtained; percentages are seldom fixed and are usually at the discretion of the investment adviser.

A customer wishes to invest $800,000 in the Ajax Fund, an open-end company with a long-term growth objective. In order to take advantage of breakpoints, you recommend that the customer purchase A) Class A shares B) Class A or Class C shares C) Class B shares D) Class C shares

A) Class A shares

Which of the following two are TRUE of a leveraged exchange traded fund (ETF)? The leveraged ETF may be purchased on margin. Securities within the leveraged fund portfolio may be purchased on margin. The leveraged ETF may never be purchased on margin. Securities within the leveraged fund portfolio may never be purchased on margin. A) I and II. B) II and III. C) III and IV. D) I and IV.

A) I and II. Because an exchange traded fund is purchased and sold on an exchange, the rules generally applying to all exchange products such as purchasing them on margin, would apply. Leveraged funds can use a number of different securities types including derivative products, and trading techniques such as trading on margin as a means of attaining the leveraged returns they promise. Reference: 10.10.2 in the License Exam Manual

All of the following would qualify as management companies EXCEPT face amount certificate companies unit investment trusts closed-end investment companies open-end investment companies A) III and IV B) I and III C) I and II D) II and IV

A) III and IV

Which of the following statements regarding a unit investment trust is NOT true? A) Overall responsibility for the fund rests with the board of directors. B) It charges no management fee. C) It invests according to stated objectives. D) It is considered an investment company.

A) Overall responsibility for the fund rests with the board of directors. Explanation A unit investment trust has no board of directors; rather, it has a board of trustees. A UIT must follow a stated investment objective (as must any investment company) and does not charge a management fee because it is not a managed portfolio. Reference: 10.1.1.2 in the License Exam Manual

A customer owns shares in ACME Income Fund and decides to exchange them for shares in ACME Growth Fund within the same family of funds. Which of the following statements is TRUE? A) The exchange is a taxable event. B) Tax or loss on the exchange cannot be determined until ACME Growth Fund is sold. C) The exchange results in a deferral of tax. D) The exchange is a nontaxable swap.

A) The exchange is a taxable event. The IRS deems an exchange to be a sale and repurchase of shares. On any sale of securities, capital gains or losses are realized; as such, exchanges are a taxable event. Reference: 10.8.1.6.3 in the License Exam Manual

All of the following events will affect the NAV per share of a mutual fund EXCEPT: A) Wholesale redemption of fund shares . B) Changes in the market value of the fund's portfolio of securities . C) The fund pays dividends to its shareholders. D) The fund receives cash dividends on the securities in its portfolio .

A) Wholesale redemption of fund shares . Dividends paid and received by the fund directly affect NAV. Changes in the portfolio value affect NAV because the securities are marked to market daily. While share redemption will reduce total net asset value, the number of shares outstanding decreases in proportion, so the NAV per share stays the same.

Mutual fund Class B shares assess A) a deferred sales load B) a front-end load C) a level load D) no load

A) a deferred sales load Class B shares carry a deferred sales load. This is sometimes referred to as a back-end load. Class A shares carry a front-end load. Class C shares charge a 12b-1 fee quarterly with a small back-end load in the first year. Reference: 10.7.5.5 in the License Exam Manual

If an open-end investment company wishes to change its investment objective, it may only do so with a A) majority vote of the outstanding shareholders B) unanimous vote of the board of directors C) majority vote of the outstanding shares D) two-thirds vote of the outstanding shareholders

A) majority vote of the outstanding shareholders

The price of closed-end investment company shares is determined by A) supply and demand B) the net asset value plus the sales charge C) the Financial Industry Regulatory Authority D) the board of directors

A) supply and demand

FINRA rules require that, if a customer redeems mutual fund shares within 7 business days of purchase: A) the member firm must forfeit the concession earned. B) the fund must report the redemption promptly to the SEC. C) the customer is entitled to receive the original NAV or the current NAV, whichever is higher. D) the representative who sold the shares will be subject to a Code of Procedure hearing.

A) the member firm must forfeit the concession earned. If a customer redeems mutual fund shares within 7 business days of purchase, any concession earned by the member firm that sold it to him must be returned to the underwriter. The same rule applies to variable annuities. Reference: 10.7.6.1 in the License Exam Manual

If a mutual fund's net asset value is $9.30 and its sales charge is 7%, its offering price is A) 9.95 B) 10 C) 10.7 D) 9.97

B) $10 POP=9.3/(1-.07) POP=9.3/.93 =10

The prospectus of the ABC Fund contains the phrase "will have at least one-quarter of common stock investments in the field of business machines." The ABC Fund most likely is identified as A) a growth and income fund B) a specialized fund C) a diversified fund D) a balanced fund

B) A fund that, as part of its investment policy, makes a commitment to invest 25% or more of its assets into a particular economic or geographical sector is a specialized fund. A balanced fund invests in a balance of bonds and common and preferred stocks. A diversified fund does not invest more than 5% of the fund's assets in any one issuer. A growth and income fund may invest in many industries, seeking both dividends and capital gains.

A stock mutual fund wishes to advertise itself as diversified. To be able to do so, the fund must invest: A) at least 75% of its assets in securities other than its own. B) All of these. C) so that it holds no more than 10% of the voting stock of any one company. D) no more than 5% of its assets in any one target company.

B) All of these choices comprise the 75-5-10 rule for diversified investment companies under the Investment Company Act of 1940. At least a minimum of 75% of the total assets must be invested in securities other than those of the investment company. Of the assets invested, no more than 5% of the funds total assets can be in any one company nor can the percentage ownership of any one company be more than 10%.

Which of the following types of mutual funds has capital appreciation as its investment objective? A) Income. B) Specialized. C) Balanced. D) Municipal bond.

B) An objective of high-capital appreciation is most likely realized by a stock fund. A specialized fund is one that invests in stocks of one particular industry or region, and its main objective is capital or price appreciation.

Financial information CANNOT be used in a mutual fund prospectus if the information is older than: A) 9 months. B) 16 months. C) 12 months. D) 60 days.

B) Explanation A mutual fund prospectus may not contain information that is more than 16 months old. Reference: 10.2.1.4 in the License Exam Manual

Which of the following is true regarding exchange traded funds (ETFs)? The SEC has classified them as mutual funds. The SEC has classified them as a type of open-end fund. They have operating costs and expenses that are higher than most mutual funds. They have operating costs and expenses that are lower than most mutual funds. A) I and IV B) II and IV C) II and III D) I and III

B) II and IV The SEC has classified exchange traded funds as a type of open-end fund but not a mutual fund. ETFs traditionally have operating costs and expenses that are lower than most mutual funds because they do not have to purchase and sell holdings within the portfolio to accommodate investors purchasing shares or redeeming shares, as is the case with mutual funds. Reference: 10.1.1.3.4 in the License Exam Manual

An investor wants part of an existing portfolio to track and move with a popular index. While comfortable knowing that the investment will rise and fall with the index, any risk beyond that needs to be avoided. Which of the following funds would be the most suitable recommendation? A) Leveraged index B) Index fund C) Inverse index D) Inverse leveraged index

B) Index fund An index fund would be the only suitable recommendation shown here. While leveraged funds attempt to deliver a multiple of the return of the index that they are tracking, magnifying the upside potential so too can the downside potential be magnified. Inverse funds attempt to deliver returns opposite those of the index. Reference: 10.10.2 in the License Exam Manual

A fund must inform or notify its shareholders of their right to reinvest dividends at NAV A) only at the time of original purchase B) annually C) quarterly D) at the time of each distribution

B) annually

If an investor is in a low tax bracket and wishes to invest a moderate sum to gain some protection from inflation, which of the following would you recommend? A) GNMA fund B) Money market mutual fund C) Growth mutual fund D) Municipal unit investment trust

C) Growth funds invest chiefly in common stock. Historically, common stock provides greater protection from inflation than debt securities do.

The transfer agent of a mutual fund: redeems shares. sells shares. holds custody of fund securities. handles name changes of mutual fund ownership. A) I and III. B) II and III. C) I and IV. D) II and IV.

C) The transfer agent redeems shares of a mutual fund at the price calculated after receiving a request for redemption. The transfer agent also handles the transfer of account ownership for such transactions as an inheritance or gift.

If the ABCD mutual fund has a $25,000 breakpoint on its Class-A shares where the sales charge decreases from 5% to 4%, which of the following purchases would likely represent a breakpoint sale? A) 18000. B) 32000. C) 24000. D) 26000.

C) 24000. Explanation A breakpoint sale occurs just below a breakpoint where the customer could realize a reduced sales charge. Selling mutual fund shares to a customer just below a breakpoint (to share in the higher sales charges applicable to those sales) is a rules violation. Reference: 10.7.5.1.2 in the License Exam Manual

When a customer transfers the proceeds of a sale from one fund to another within the same family of funds, what are the tax consequences? A) Losses are deducted at the time of the transfer, but gains are deferred until the final redemption. B) Gains are taxed at the time of the transfer, but losses are deferred until the final redemption. C) All gains and losses are recognized on the transfer date. D) No gains or losses are recognized until the final redemption.

C) All gains and losses are recognized on the transfer date. Although a transfer within a family of funds is generally not subject to a sales charge, the customer is liable for any taxes due. The IRS considers this transaction a sale and a purchase. Any losses or gains must be declared on that year's tax form. Reference: 10.7.5.4.1 in the License Exam Manual

Closed-end investment companies continuously issue new shares generally make a one-time public offering of shares may issue debt securities may not issue preferred stock A) II and III B) I and IV C) II and IV D) I and III

C) II and IV

All of the following are characteristics typical of a money market fund EXCEPT A) the underlying portfolio consists of short-term debt instruments B) its net asset value normally remains unchanged C) it has a high beta and is safest in periods of low market volatility D) it is offered as a no-load investment

C) it has a high beta and is safest in periods of low market volatility

Each of the following situations represents a potential violation by a registered representative EXCEPT A) recommending investments to be purchased in a joint account while having suitability information on only one of the owners B) recommending a municipal bond investment over a corporate bond without knowing the client's tax status C) recommending a specific investment to a seminar audience of prospective clients D) disclosing material information about an investment to a client

D) Disclosing material information about an investment is a registered representative's responsibility; all of the other choices are potential violations.

Capital gains distributed by a mutual fund to shareholders are reported and taxable for the year: A) the shares are redeemed by the fund. B) the shareholder chooses but not later than 2 years after all shares are redeemed. C) paid by the fund. D) earned (accrued).

D) Capital gains can be distributed to shareholders by a mutual fund no more than once per year and are reported and taxable for the year earned (accrued).

XYZ Technology Fund permits rights of accumulation. A shareholder has invested $9,000 and signed a letter of intent for a $15,000 investment. If his reinvested dividends during the 13 months total $720, how much money must he contribute to fulfill the letter of intent? A) 5280. B) 9000. C) 15000. D) 6000.

D) The shareholder must contribute the full $15,000, so he owes an additional $6,000. Reinvested dividends and changes in the NAV do not count toward a breakpoint during the period of a letter of intent.

A customer of your broker/dealer is bullish on US equity securities across a broad spectrum of industries. He would like to participate in an anticipated upward movement of an equity stock index. Which of the following investments would you recommend as being closely related to the movement of equities in general? A) American depositary receipts (ADRs) B) Variable rate demand obligations (VRDOs) C) Real Estate Investment Trusts (REITs) D) Standard & Poor's depository receipts (SPDRs)

D) The spider (SPDR) is an index fund designed to replicate and track the performance of the S&P 500, a broad based equity index. Reference: 10.10.1 in the License Exam Manual

To make a public offering, a registered investment company must have a minimum net worth of: A) $10 million. B) $100 million. C) $1 million. D) 100000.

D) 100000. Investment companies are not required to register an offering with the SEC unless they have a net worth of $100,000. Reference: 10.2.1 in the License Exam Manual

A client invests $2,200 in an open-end investment company and signs a letter of intent for a $10,000 breakpoint. If he deposits $11,000 6 months later, which of the following statements is TRUE? A) He will not receive any reduction in the sales load. B) He will receive a reduced load on $10,000 worth of the shares. C) He will receive a reduced load on $8,800 worth of the shares. D) He will receive a reduced load on $13,200 worth of the shares.

D) He will receive a reduced load on $13,200 worth of the shares. An investor signing a letter of intent has 13 months to contribute funds to reach the reduced load. The sales charge in this case, then, will be based on the total investment of $13,200. If at the end of the 13 months the investor had not invested up to the breakpoint, the fund would liquidate enough shares to pay the difference in sales load. Reference: 10.7.5.1.1 in the License Exam Manual

Leveraged index funds can be exchange-traded (ETFs) can never be exchange-traded (ETFs) can be inverse or reverse funds can never be inverse or reverse funds A) I and IV. B) II and IV. C) II and III. D) I and III.

D) I and III. Leveraged funds, those attempting to deliver a multiple of (ex: 2X, 3X) the returns delivered by the index they track, can be exchange-traded (ETFs), and can be inverse (reverse) funds as well. Inverse funds attempt to deliver returns the opposite of those realized by the index they track. Reference: 10.10.3 in the License Exam Manual

If a customer purchases shares in a municipal bond fund, which of the following statements are TRUE? Dividends are taxable. Dividends are not taxable. Capital gains distributions are taxable. Capital gains distributions are not taxable. A) II and III B) I and IV C) II and IV D) I and III

A) Your answer, II and III., was correct!. Municipal bond funds distribute federally tax-free dividends, but any capital gain distribution is subject to taxation. The tax preferential treatment of municipal bonds is limited to the interest income earned, not the gains. Reference: 10.5.1.4.1 in the License Exam Manual.

Letters of intent may be backdated up to how many days? A) 90 B) 120 C) 60 D) 30

A) 90

The open-end investment company share price quoted in the newspaper is the: A) bid price. B) dealer's price. C) underwriter's concession. D) confirmed price.

A) bid price.

A front-end sales load is defined as the: A) difference between the public offering price and the net asset value of a mutual fund share. B) concessions allowed on the purchase or sale of securities. C) fee paid to the investment adviser. D) commissions paid on the purchase or sale of securities.

A) difference between the public offering price and the net asset value of a mutual fund share. A sales load is the difference between the public offering price and the net asset value per share of the fund. Reference: 10.7.4.3 in the License Exam Manual

Mutual fund shares represent an undivided interest in the fund, which means that: A) each investor owns a proportional part of every security in the portfolio. B) the fund can only hold securities of certain companies . C) investors can only purchase full shares. D) the number of shares outstanding is limited to a predetermined maximum.

A) each investor owns a proportional part of every security in the portfolio. Each mutual fund shareholder owns an undivided interest in the investment company's portfolio. Because each share represents one class of voting stock, the investor's interest in the fund is reflected by the number of shares owned.

A retiree contacts an agent to discuss investing his retirement savings of approximately $2.1 million; his investment objective is long-term growth. The representative and customer discuss the advantages and disadvantages of diversifying among 5 different mutual funds within 2 fund families, as opposed to purchasing just 1 fund. Consequently, the agent made the following purchase recommendations: XYZ Emerging Growth Class B $495,000 XYZ Research Class B $310,000 XYZ Investors Growth Stock Class B $495,000 ABC Capital Enterprise Class B $495,000 ABC Capital Opportunity Class b $310,000 Total $2,105,000 These recommendations are: A) unsuitable because Class A shares in either (or both) fund family could be purchased for a sales charge breakpoint discount at or near 0%. B) unsuitable because the investments are not equal in amount. C) suitable because they achieve the diversification the customer seeks. D) suitable because the customer fully understands all of the ramifications and is satisfied.

A) unsuitable because Class A shares in either (or both) fund family could be purchased for a sales charge breakpoint discount at or near 0%. Explanation Class A shares, in most mutual funds, provide breakpoint sales charge discounts so there is no sales charge when purchasing $1 million worth of shares (or less in some cases). Class A shares also have lower operating expenses than Class B shares. This retired investor would be subject to back-end loads with Class B shares if the funds were needed unexpectedly within a few years. Reference: 10.7.5.5 in the License Exam Manual

If a customer's portfolio is heavily invested in common stock mutual funds, what is the customer's greatest risk? A) Loss of principal B) Loss of liquidity C) Loss of diversification D) Changes in interest rates

A) A mutual fund with a portfolio of common stock is subject to market risk. If the market falls, the value of the fund's shares also fall, subjecting the owner to loss of principal.

All of the following could be a redeemable security under the Investment Company Act of 1940 EXCEPT a(n): A) security sold on an exchange at the market price buyers and sellers have established. B) investment company security sold as a continuous initial public offering. C) security issued by an open-end investment company. D) security that pays out each investor's proportionate share of the company's assets.

A) A redeemable security is purchased from and redeemed by the security's issuer. A security that can be traded on a secondary market is not redeemable. Open-end shares are redeemable securities, closed-end shares are not.

All of the following are advantages of investing in mutual funds EXCEPT A) the ability to have personal control over the investments in the portfolio B) the ability to invest almost any amount at any time C) the ability to qualify for reduced sales loads on the basis of accumulation of investment within the fund D) exchange privileges within a family of funds managed by the same management company

A) All of the following are advantages of investing in mutual funds EXCEPT

A customer buys AC Growth Fund and enjoys a substantial paper capital gain. When he believes the market has reached its peak, he switches into AC Income Fund within the AC family of funds. He incurs a small service fee but is not charged an additional sales charge. What is the tax effect? A) Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase. B) It is a tax-free exchange. C) The tax basis of AC Income Fund is adjusted to reflect the gain in AC Growth Fund. D) Any gain or loss is deferred until he liquidates the AC Income Fund.

A) Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase. The exchange is treated as a sale of the growth fund shares followed by a purchase of the income fund shares. The gain or loss is determined by comparing the cost basis of the growth fund shares with the net asset value at the time of exchange. Any difference is a capital gain or loss, even though the proceeds were immediately used to purchase the income fund. Reference: 10.7.5.4.1 in the License Exam Manual

In which of the following markets would an investor expect to find closed-end investment company shares traded? A market maintained by the investment company itself. The over-the-counter market. The commodities market. The exchanges. A) II and IV. B) I and II. C) III and IV. D) I and III.

A) Closed-end company shares are like ordinary stock. Once issued, they trade on exchanges or in the over-the-counter market.

Your customer is asking if either exchange-traded funds (ETFs) or exchange-traded notes (ETNs) might be suitable investments for his portfolio. The customer makes several statements regarding his understanding of the products but only one of them is accurate. Which is it? A) Exchange-traded notes (ETNs) are issued by financial institutions and therefore I should be concerned about the credit worthiness of the issuer. B) Exchange-traded funds (ETFs) have a fixed coupon rate that I should expect to realize when they mature. C) If I want to sell my shares of an exchange-traded fund (ETF) I have to wait until the next price is calculated to value the portfolio of securities just like mutual funds. D) Exchange-traded notes (ETNs) are equity securities because they trade on exchanges.

A) Exchange-traded notes (ETNs) are issued by financial institutions and therefore I should be concerned about the credit worthiness of the issuer.

A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has an NAV of $12 and a POP of $12.50, and that the ABC Fund has an NAV of $11.50 and a POP of $10.98. The customer should conclude that: A) GEM may be an open- or closed-end fund and ABC is a closed-end fund. B) both are open-end funds. C) ABC is an open-end fund and GEM is a closed-end fund. D) ABC and GEM are both unit investment trusts.

A) GEM may be an open- or closed-end fund and ABC is a closed-end fund. The price for open-end funds is determined by adding the sales charge to the NAV. An open-end fund can never have a POP less than its NAV, therefore ABC cannot be an open-end fund.

Which of the following constitutes selling dividends? A) Enticing customers to buy mutual fund shares just before the ex-dividend date. B) Encouraging customers to sell their mutual fund shares just before the ex-dividend date. C) Encouraging investors to postpone purchases of mutual fund shares until after the ex-date for a dividend distribution. D) Withdrawing dividends, rather than reinvesting them in additional shares.

A)Enticing customers to buy mutual fund shares just before the ex-dividend date. Selling dividends is an unethical sales practice in which a member intentionally misleads customers into believing they will receive the equivalent of a rebate on their investments because the fund will soon pay a distribution. The customers suffer out-of-pocket losses because the cash immediately coming back is dividend income subject to tax. At the same time, the NAV of the fund is reduced. Reference: 10.8.1.3.3 in the License Exam Manual

Which of the following statements describe characteristics of open-end investment companies? Shares are redeemable at net asset value. Shares are always sold by prospectus. Only a limited number of shares are offered. Shares are traded on securities exchanges. A) I and II B) III and IV C) I and III D) II and III

A)Your answer, I and II., was correct!. Open-end investment companies must be prepared to redeem shares at net asset value and open-end investment companies continually issue new shares that are sold by prospectus. Unlike open-end investment companies, closed-end investment companies issue a limited number of shares which then trade in the secondary market. Reference: 10.1.1.3.2 in the License Exam Manual.

All of the following statements regarding a closed-end investment company are true EXCEPT A) it will redeem its own shares B) it differs from a mutual fund C) it sells at the market price plus a commission D) it is a type of management company

A)Your answer, it may redeem its own shares., was correct!. A closed-end investment company does not redeem its own shares. The term "mutual fund" refers to an open-end management investment company that issues redeemable shares. Reference: 10.1.1.3.1 in the License Exam Manual.

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 invests just before the dividend distribution, he can benefit by receiving the added value of that dividend. If the client purchases the shares of 2 or more funds in the same family of funds, he may be entitled to a reduced sales charge. The purchase of Class B shares always provides the greatest return on investment. A) II and IV. B) I and III. C) II and III. D) I and IV.

B) Explanation The purchase of two funds in the same family of funds may qualify an investor for combination privileges. At redemption, he will receive the next price calculated (forward pricing), which is not yet known. Class B shares, or deferred sales charge shares, may or may not provide the best return. Share class suitability can depend on the amount invested and the client's individual needs. Lastly, while the dividend is received if the fund shares are purchased before the ex-dividend date, there is no added value. The fund share price is reduced by the amount of the dividend on the ex-dividend date, just as it would be for a cash dividend paid on equity securities. Reference: 10.7.5.4 in the License Exam Manual

All of the following statements regarding money market funds are true EXCEPT A) investors pay a management fee B) specified rates of return are guaranteed C) investors typically pay no sales loads or redemption fees D) dividends accrue daily

B) Interest on money market instruments is not guaranteed or specified. Money market funds are typically no-load funds with no redemption fee, but investors do pay a management fee. The dividends earned on an investor's shares are accrued daily.

Under the Investment Company Act of 1940, mutual funds must send financial statements to shareholders at least A) monthly B) semiannually C) annually D) quarterly

B) Under the Investment Company Act of 1940, mutual funds must provide semiannual and annual reports to shareholders.

A broker/dealer selling open-end investment company shares will be required to return its entire selling concession if the principal underwriter has to repurchase those shares from a customer within how many business days of trade date? A) 60. B) 15. C) 7. D) 30.

B) Your answer, 7., was correct!. Any concession earned by the member selling the shares must be returned to the principal underwriter of the fund if the shares are redeemed within 7 business days of purchase. Reference: 10.7.6.1 in the License Exam Manual.

Wanting to be clear about an upcoming mutual fund dividend distribution, a shareholder does some research on his own. He comes away with what he thinks are all correct understandings, but one of them is not. Which is the incorrect understanding? A) An investor can receive dividends in the form of cash or choose to reinvest them in more fund shares. B) An investor is not liable for taxes if he automatically reinvests the distributions. C) Dividend distributions are not guaranteed to occur annually, quarterly, or at any time. D) The dividends are paid from the fund's net investment income.

B) An investor is not liable for taxes if he automatically reinvests the distributions. Mutual funds pay dividends from net investment income, and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash. Dividend distributions from mutual funds like individual corporate dividend distributions are not guaranteed. Reference: 10.8.1 in the License Exam Manual

Your customer redeemed 200 of her 500 Kapco common shares without designating which shares were redeemed. Which of the following methods does the IRS use to determine which shares she redeemed? A) Identified shares. B) FIFO. C) LIFO. D) Wash sale rules.

B) FIFO. When a customer does not choose a method, the IRS uses FIFO (first in, first out). This will likely result in shares with the lowest cost basis being redeemed first, which creates a greater taxable gain. Reference: 10.8.1.5.1 in the License Exam Manual

Each of the following is a characteristic of money market funds EXCEPT: A) Portfolio of short-term debt instruments . B) High beta . C) Offered without a sales load . D) Stable NAV.

B) High beta . Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and bankers acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1 per share). Beta is a measure of volatility; money market funds have low betas. Reference: 10.5.1.6 in the License Exam Manual

Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? Receiving cash distributions may reduce Customer A's proportional interest in the fund. Customer A may use the cash distributions to purchase shares later at NAV. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. Due to compounding, Customer B's principal will be at greater risk. A) II and III. B) I and III. C) I and IV. D) II and IV.

B) I and III. If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment, his proportional interest in the fund will decline. The option to have distributions automatically reinvested allows those purchases to be made at NAV but a purchase made later would be made at the POP like any other new purchase. Reference: 10.8.1.3.4 in the License Exam Manual

Mutual funds are like other types of corporations in which of the following ways? They may issue equity and debt. The board of directors makes policy decisions. Shareholders have ownership rights. Their shares trade in the secondary market. A) II and IV B) II and III C) I and IV D) I and III

B) II and III Mutual funds may only issue redeemable common stock, no preferred stock or bonds. Like corporate stockholders, mutual fund shareholders have a number of rights, including the right to elect the board of directors, which sets policies for the fund. However, the shares can only be purchased in the primary market and then redeemed with the fund.

Which of the following information should a registered representative obtain from a prospective client to ensure suitable investment recommendations? Professional society memberships. Languages spoken. Liquidity needs. Number of dependents. A) II and IV. B) III and IV. C) I and II. D) I and III.

B) III and IV. Only information relevant to a prospective customer's investment needs and objectives is required to ensure suitable recommendations. Reference: 10.5.1 in the License Exam Manual

All of the following are redeemable securities EXCEPT: A) variable annuities. B) REITs. C) unit investment trusts. D) mutual funds.

B) REITs. A redeemable security has no secondary market. To sell (redeem) a redeemable security, the investor must go back to the issuer or its agent. REITs trade in the secondary markets either on exchanges or OTC. Reference: 10.7.6 in the License Exam Manual

A retired customer was unhappy with the low yields paid by her CDs. In their first meeting, her registered representative recommended Class B shares of a long-term government bond fund, emphasized the safety of government bonds, and provided her with a prospectus. After signing a statement saying she had read and understood the prospectus, the customer invested all of her money in the fund. A year later, interest rates rose and the value of the fund declined. Having assumed the fund was government guaranteed, she was upset and became increasingly so when she learned that the deferred sales charge could cause her to lose additional money if she were to redeem her shares. Which of the following statements is TRUE? A) Because the fund invests in government bonds, it is government guaranteed and is therefore just as safe as a CD. B) The representative should have fully explained the features, charges, price fluctuations, and other characteristics of a bond fund before having the customer make such a substantial investment commitment. C) Since no one can predict interest rate moves, and the customer had read the prospectus, the bond fund was an appropriate investment. D) Because her money was originally in a single investment, it was suitable to move her funds into another single investment.

B) The representative should have fully explained the features, charges, price fluctuations, and other characteristics of a bond fund before having the customer make such a substantial investment commitment. This customer is used to low-risk investments. The prospectus must not only be supplied, but the risks fully explained as well. Reference: 10.5.1.4 in the License Exam Manual

An investment adviser representative may describe dollar cost averaging to a customer as: A) a program for investing that will ensure profits even in a declining market. B) a funding technique that will cause the average cost per share to be less than the average price per share. C) a means of purchasing more shares when share prices are high. D) a form of a mutual fund withdrawal plan.

B) a funding technique that will cause the average cost per share to be less than the average price per share. Dollar cost averaging is beneficial to the client because it achieves an average cost per share which is less than the average price per share over time. Using a fixed dollar amount each investment period it enables the investor to purchase more shares when prices are lower and fewer shares when prices are higher. While dollar cost averaging does not ensure profits in any market, nor does it ensure against losses, it is an economical and convenient method for acquiring shares. Reference: 10.9.1.1.1 in the License Exam Manual

SEC rules require that open-end management companies distribute dividends to their investors from the firm's: A) gross revenue. B) net investment income. C) capital gains. D) portfolio earnings.

B) net investment income. Dividends must be paid from the net investment income. Reference: 10.8.1.1 in the License Exam Manual

The result of dollar cost averaging is to: A) obtain a lower average price per share than average cost per share. B) obtain a lower average cost per share than average price per share. C) take advantage of a bullish market by buying more shares in a rising market. D) take advantage of a non-fluctuating market.

B) obtain a lower average cost per share than average price per share. The result of dollar cost averaging is to obtain a lower average cost per share than the average price per share. This is accomplished by making regular investments of a fixed amount when prices are fluctuating. Reference: 10.9.1.1.1 in the License Exam Manual

Inverse exchange-traded funds (ETFs), also known as reverse or short funds, are managed to A) be profitable only when interest rates are rising B) perform contrary to a benchmark market index such as the S&P 500 C) be used only by professional traders and market makers D) outperform a benchmark market index such as the S&P 500

B) perform contrary to a benchmark market index such as the S&P 500 Inverse funds, which are also commonly referred to as "short" funds, try to deliver returns that are the opposite of the benchmark index they are tracking. When they are exchange traded, they can be bought on margin and are priced throughout the trading day like other exchange-traded products. They are available to individual public investors and firm proprietary traders as well. Reference: 10.10.3 in the License Exam Manual

Your customer owns a leveraged ETF having a performance goal of 200% of the underlying Index. When purchased two weeks ago the ETF was priced at 50. If the index was up 10% the first week and down 20% the second week, what is the value of the ETF today if it performed as it was intended to? A) 40 B) 36 C) 44 D) 45

B) 36 Priced at 50 when purchased, after the first weeks 10% increase in the index the 2X leveraged ETF would be up 20% (20% X 50 = 10 point increase) to 60. After the second week 20% decline in the index the 2X leveraged ETF would be down 40% (40% X 60 = 24 point decrease) to 36.

A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund? A) 7.8. B) 8.3. C) 8.42. D) 8.57.

B) The correct answer was: 8.3. The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge. Reference: 10.7.4.6 in the License Exam Manual.

Under the Conduct Rules, the maximum sales charge on any transaction involving an open-end investment company share is: A) 9% of the offering price. B) 8.5% of the offering price. C) 9% of the net asset value. D) 8.5% of the net asset value .

B) Under the Conduct Rules, the maximum sales charge on any transaction involving an open-end investment company share is:

If a customer transfers his holdings from one fund to another within the same family of funds, what are the tax consequences? A) Losses are deducted and gains are deferred. B) On the transaction date, any gain or loss is recognized for tax purposes. C) Gains are taxed and losses are deferred. D) No gain or loss is recognized until redemption.

B) Your answer, On the transaction date, any gain or loss is recognized for tax purposes., was correct!. An exchange is a taxable event. The cost basis of the shares in the original account must be compared to their redemption value. Any gain or loss is recognized in the year of the exchange. The exchange privilege allows the investor to avoid paying an additional sales charge. It does not allow the investor to avoid taxes. Reference: 10.8.1.6.3 in the License Exam Manual.

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: A) common stock fund with a high portfolio turnover. B) common stock fund with a low portfolio turnover. C) long-term corporate bond fund. D) preferred stock fund.

B) Your answer, common stock fund with a low portfolio turnover., was correct!. Of the choices given, common stock is the only vehicle capable of providing long-term growth. Preferred stock will provide dividends, but it will not provide much growth as it trades like a bond in line with interest rate changes. Of the two common stock funds, the one with the lower portfolio turnover will have lower annual expenses. Reference: 10.5.1.1 in the License Exam Manual.

Reduced sales charges are allowed under all of the following circumstances EXCEPT: A) the customer signing a letter of intent. B) combining separate purchases made by a client and his business partner in their respective IRA accounts. C) a lump-sum purchase that qualifies for a breakpoint. D) additional purchases that qualify for breakpoints under rights of accumulation.

B) combining separate purchases made by a client and his business partner in their respective IRA accounts. Explanation: Two unrelated adults may not combine transactions to receive a breakpoint. Reference: 4.2.2 in the License Exam Manual.

A prospect has primary investment objectives of current income and safety of principal. During the initial public offering of a closed-end government bond fund, an agent explains to the prospect that the fund invests in U.S. government-backed bonds, which are very safe as to principal, and plans to make monthly distributions. Little could therefore go wrong. Taken as a whole, this representation is A) misleading because government bonds experience considerable credit risk B) misleading because closed-end fund shares are subject to market pricing C) accurate because the fund offers current income D) accurate because the fund invests in government bonds that are fully backed by the United States

B) misleading because closed-end fund shares are subject to market pricing.

Which of the following funds would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection? A) S&P 500 Index fund B) A large-cap growth fund C) An international index fund D) A small-cap growth fund

B)The correct answer was: A large-cap growth fund. A large-cap growth fund is the most appropriate choice for a moderate-risk client because large capitalization stocks are generally less volatile than small-cap stocks and provide long-term capital growth. This is a more appropriate choice than the index fund because there is no stock selection there, only investing to parallel the index. Reference: 10.5.1.1.1 in the License Exam Manual.

The ex-date for a closed-end fund listed for trading on the NYSE is set by A) FINRA B) the NYSE C) the board of directors of the fund D) the SEC

B)the NYSE. The ex-dates for closed-end funds (typically 2 business days before the record date) are determined by the exchanges on which they trade. The ex-date for open-end funds (typically the business day following the record date) is determined by the board of directors of the fund.

Mutual fund shareholders are NOT taxed on: A) interest distributions. B) capital gains distributions. C) unrealized capital gains. D) reinvested dividends.

C) unrealized capital gains. Explanation Interest, dividends, and realized capital gains are all taxed. However, unrealized capital gains are not taxed. Unrealized gains contribute to NAV appreciation and to a shareholder's capital gain upon redemption. Reference: 10.8.1.3 in the License Exam Manual

Closed-end investment company shares may be: traded in the secondary markets, including the exchanges and OTC markets. sold in the OTC primary market only. redeemed by the closed-end investment company. traded by institutional investors. A) III and IV. B) II and III. C) I and IV. D) I and II.

C) Once a closed-end investment company has distributed shares, those shares are traded in the secondary market by both individual and institutional investors.

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 that the risk taken needs to be commensurate with the upside potential. Which of the following would align most suitably with these objectives? A) Shorting broad based index calls B) Hedge fund C) Broad based market inverse index fund D) Narrow based index fund

C) Broad based market inverse index fund Inverse or reverse funds attempt to deliver returns that are opposite of those returned by the index they are tracking. If the index fell, aligning with this investors bearish market outlook, a broad based inverse index fund should do well, generating positive returns as the index performs negatively. When shorting calls, gains are limited to the premiums collected and losses are potentially unlimited which embody too much risk with not enough gain. Hedge funds are not deemed to be liquid and can be eliminated based on the investors desire to get out quickly, and an index fund (not inverse or reverse) moves with the market and losses would occur if the markets faltered as this investor expects. Reference: 10.10.3 in the License Exam Manual

Exchange traded funds: pass on capital gains to investors annually. can be bought and sold throughout the trading day. have high expense ratios. have low expense ratios. A) II and IV. B) I and IV. C) I and III. D) II and III.

C) I and III. Noted advantages of Exchange Traded Funds (ETFs) are that they have low operating costs and thus low expense ratios and can be bought and sold throughout the trading day. Reference: 10.1.1.3.4 in the License Exam Manual

Unrealized gain in a mutual fund portfolio does which of the following? Increases the dividends paid to shareholders. Represents the undistributed income and the growth in market value of securities held in the portfolio. Is realized by shareholders only when they redeem their shares. Has no effect on shareholders until the annual long-term capital gains distribution is paid. A) I and IV. B) I and III. C) II and III. D) II and IV.

C) II and III. Unrealized gains result from asset appreciation and undistributed income. This increase in value is reflected in an appreciation of the mutual fund shares. Investors realize this appreciation only by selling their shares. Reference: 10.8.1.3 in the License Exam Manual

SEC regulations for securities issued by investment companies prohibit which of the following? Closed-end funds from issuing preferred stock. Open-end funds from issuing preferred stock. Closed-end funds from issuing bonds. Open-end funds from issuing bonds. A) II and III. B) I and IV. C) II and IV. D) I and III.

C) II and IV. Explanation Closed-end funds may issue more than one class of security, including debt issues and preferred stock. Open-end funds may issue only one class of security: redeemable, voting common stock; they may not issue senior securities. Reference: 10.2.1.1 in the License Exam Manual

Given the current business climate, an investor believes that a number of industries will be going through a consolidation over the next 2 to 3 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? A) Buy call options on select stocks B) Corporate bond fund C) Special situation fund D) Sector fund

C) Special situation fund A special situation fund can be specific to mergers and acquisitions within a particular industry or among many and would be a suitable choice given the investor's opinion that consolidation may occur. Sector funds focus on only one industry or area and corporate bond funds would have no advantages in cases of industry consolidation. Purchasing standard option contracts on select companies only would be extremely speculative and their nine month life cycle would require that the positions be reinstated over a 2- to 3-year period adding to commission costs. Reference: 10.5.1.1.5 in the License Exam Manual

Which of the following statements regarding 12b-1 fees is TRUE? A) These fees are assessed on Class-A shares only and are used to fund the portfolio manager's fees. B) These fees are charged to customers who redeem their shares within six months of purchase. C) These fees are charged against the assets of the fund to defray distribution expenses. D) These fees are assessed on Class-B shares only.

C) These fees are charged against the assets of the fund to defray distribution expenses.

Which of the following investment company portfolios is supervised rather than managed? A) Closed-end bond fund. B) Regulated open-end fund. C) Unit investment trust. D) Real estate investment trust.

C) Unit investment trust. A unit investment trust buys securities and holds them until redemption or until a specified future date. The securities in the portfolio are not traded, so no manager is needed. A REIT is not considered to be an investment company. Reference: 10.1.1.2 in the License Exam Manual

When is the sales charge deducted from purchases of mutual fund shares made under a letter of intent? A) Annually. B) Monthly. C) When each purchase is made. D) When each letter of intent is completed.

C) When each purchase is made. Explanation When the customer makes the first investment under a letter of intent, the reduced sales charge applies immediately and to each subsequent investment. With each additional investment, the same reduced charge is deducted. If the customer does not invest the amount stated in the letter, the full sales load applies retroactively to the total investment. Reference: 10.7.5.1.1 in the License Exam Manual

A father opens 4 custodial accounts for each of his children with the same mutual fund company. He invests $15,000 in each account. The fund company has breakpoints at $50,000, $100,000, and $200,000. The sales charge is: A) ineligible for a breakpoint discount because these are custodial accounts. B) based on a $15,000 investment and is charged for each account. C) based on the total $60,000 investment and qualifies for the $50,000 breakpoint. D) based on the total $60,000 investment and qualifies for the $100,000 breakpoint.

C) based on the total $60,000 investment and qualifies for the $50,000 breakpoint. An investment made by one person in 4 custodial accounts for his children at the same fund company would qualify for the breakpoint that is applicable to the total amount invested. In this case, $60,000 was invested, so the applicable breakpoint is at $50,000. Reference: 10.7.5.1 in the License Exam Manual

All of the following terms apply to municipal unit investment trusts EXCEPT: A) registered. B) regulated. C) managed. D) redeemable.

C) managed. Municipal UITs buy bonds and hold them until redemption or call. The bonds are not actively traded so the portfolio is not managed but is overseen by a trustee. Reference: 10.1.1.2 in the License Exam Manual

If you invest in a front-end load mutual fund and choose automatic reinvestment, you should expect that: dividend distributions will be reinvested at net asset value. dividend distributions will be reinvested at the public offering price. capital gains distributions will be reinvested at net asset value. capital gains distributions will be reinvested at the public offering price. A) I and IV. B) II and IV. C) I and III. D) II and III.

C) I and III Mutual funds that offer automatic reinvestment of dividends and gains distributions must do so at net asset value. Reference: 10.7.5.3 in the License Exam Manual

A registered representative speaking to a customer is explaining registered funds that invest in nonregistered hedge funds. Which of the following statements would NOT be correct? A) These funds generally allow purchases with an initial investment that is lower than what would be required to invest directly in a hedge fund. B) Hedge funds are directly available to sophisticated (accredited) investors, while funds of hedge funds allow all investors to invest in hedge funds indirectly. C) These funds, called funds of hedge funds, eliminate all of the risks associated with hedge funds. D) To divest of your fund of hedge fund investment, the shares will need to be redeemed by the mutual fund issuer.

C) These funds, called funds of hedge funds, eliminate all of the risks associated with hedge funds. Because the portfolio of the registered fund consists of shares of nonregistered hedge funds, virtually all of the risks associated with hedge funds are transferred to the mutual fund. Funds of hedge funds allow all investors, not just accredited investors, to have access to hedge fund investments, and they are likely to have lower initial investment requirements, making that access even easier. To divest of fund of hedge fund shares, the issuer would have to redeem them from the investor, as is the case with all registered mutual funds. Reference: 10.5.1.8 in the License Exam Manual

A mutual fund must, at a minimum, provide which of the following periodic reports to shareholders? Audited annual reports. Unaudited annual reports. Audited semiannual reports. Unaudited semiannual reports. A) II and III. B) II and IV. C) I and IV. D) I and III.

C) Your answer, I and IV., was correct!. An investment company must send an unaudited report to shareholders at least semiannually and an audited report of its financial condition at least annually. Reference: 10.4.2 in the License Exam Manual.

Customers could pay a commission, rather than a sales charge, for shares of a(n): A) open-end investment company. B) mutual fund. C) closed-end investment company. D) front-end load fund.

C) Your answer, closed-end investment company., was correct!. Sales charges could be paid on all types of open-end funds. Commissions are paid on securities traded in the secondary market, such as closed-end investment company shares. Reference: 10.1.1.3.1 in the License Exam Manual.

A customer of a registered representative is considering a hedge fund investment and asks what the lock-up period means? The registered representative correctly explains it is A) the minimum length of time the hedge fund portfolio manager intends to hold any single investment within the portfolio B) the length of time that is required to have the hedge fund registered with the SEC during which time the fund may not sell any shares C) a period of time during which liquidation of fund shares is prohibited by the fund, which means that there is an element of illiquidity to be considered D) a period of time during which the fund manager will not make any changes (purchases or sales) within the hedge fund portfolio

C)Your answer, a period of time during which liquidation of fund shares is prohibited by the fund, which means that there is an element of illiquidity to be considered, was correct!. Hedge funds generally employ a lock-up provision to ensure that capital invested by shareholders will remain with the fund long enough to ensure the manager's ability to implement the intended fund strategy and to begin to see the results of that strategy. There is no standard lock-up period, which can differ from fund to fund, and it should always be noted that during the lock-up period, the investment is essentially rendered illiquid.

If two 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: A) do so, provided that they indicate the proportion that goes into each separate account. B) not do so, because they both have accounts with the same broker/dealer. C) not do so, because two unrelated buyers may not receive a breakpoint. D) do so, provided that they have no business connection with the fund sponsor.

C)Your answer, not do so, because two unrelated buyers may not receive a breakpoint., was correct!. Two customers cannot combine their purchases to take advantage of a fund's breakpoints. Breakpoints are never allowed for investment clubs. Reference: 10.7.5.1 in the License Exam Manual.

Lifecycle funds embody all of the following characteristics EXCEPT A) the asset allocation of the fund will be adjusted regularly to keep risk and reward balanced optimally, given the time remaining until the target date is reached B) the objective assumes that as an investor nears retirement, the investor's tolerance for risk will diminish C) as the fund moves closer to its target date, the portfolio holdings will be adjusted to gradually assume more and more risk D) these funds are usually structured as funds of funds so that the entire composition of the fund portfolio consists of funds offered by the same fund family

C)as the fund moves closer to its target date, the portfolio holdings will be adjusted to gradually assume more and more risk Lifecycle or target date funds are managed in such a way as to lessen the amount of risk associated with the portfolio as it gets closer to its target date, which is usually the anticipated time of retirement for the fund investor.

An investor wants to invest $200,000 in the banking industry sector. The investor would like to utilize leverage and do this purchase in a margin account. Additionally, she stresses wanting to avoid year-end tax statements showing unrealized capital gains liabilities. You would suggest which of the following as suitable given the investor's criteria? A) A bank sector mutual fund B) Money market fund holding short term bank notes C) Stocks in the 3 largest U.S. banks D) A bank sector exchange traded fund (ETF

D) A bank sector exchange traded fund (ETF) The investor's criteria eliminate mutual funds as being suitable. Mutual funds make annual capital gains distributions for which the owner incurs a tax liability and mutual funds cannot be purchased on margin. Conversely, an ETF will rarely make a capital gains distribution and because they trade like all exchange traded products they can be purchased on margin making them more suitable for this investor. Buying only a few select bank stocks is not a good representation of the entire sector. Reference: 10.1.1.3.4 in the License Exam Manual

A new client, age 25, earning $41,000 annually has saved $20,000 to allocate for the first time to an investment portfolio. 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? A) Municipal bond fund B) Money market fund C) Equities index fund D) Balanced fund

D) Balanced fund A balanced fund, which consists of both equities and debt instruments, not only aligns with the growth objective but also offers some downside protection against falls in market due to the debt portion of it's portfolio. Equity index funds move with the markets and offer no downside protection. A money market fund would not align with growth and a municipal bond fund would have no benefit for an investor in a lower income bracket. Reference: 10.5.1.2 in the License Exam Manual

When discussing mutual funds with a customer, each of the following statements are prohibited EXCEPT: A) The income yield of the fund consists of both dividends and capital gains. B) Buy the shares on record date in order to receive the dividend. . C) Get a few friends to join with you to form an investment club and you may qualify for a breakpoint. D) Buy shares of different funds in the same fund family and you may qualify for a breakpoint on the total purchase.

D) Buy shares of different funds in the same fund family and you may qualify for a breakpoint on the total purchase. Explanation Most funds provide a combination privilege, allowing investors to aggregate purchases made in different funds in the same family to qualify for a breakpoint. The income yield of a mutual fund includes dividends only. A group of friends is not eligible for a breakpoint (investment clubs are not eligible). "Selling dividends" is a prohibited practice because of the immediate tax liability incurred with the dividend and share price adjustment that results after the dividend distribution. Reference: 10.7.5.1 in the License Exam Manual

All of the following may receive breakpoint discounts EXCEPT: A) an investor in an individual retirement account . B) a pension plan trustee . C) a husband and wife in a joint account. D) an investment club .

D) an investment club . Breakpoints are not available to investment clubs. Reference: 10.7.5.1 in the License Exam Manual

A prospectus must be delivered to customers in the sale of all of the following transactions EXCEPT A) mutual funds B) new issues of registered common stock C) unit investment trusts D) exchange traded funds (ETFs) trading in the secondary market

D) exchange traded funds (ETFs) trading in the secondary market Exchange traded funds trading in the secondary market, like other securities that are already trading in the secondary market, do not require the delivery of a prospectus. Reference: 10.1.1.3.4 in the License Exam Manual

All of the following statements concerning investment companies are true EXCEPT A) an investment company that invests the majority of its assets in one industry may still qualify as a diversified company B) a nondiversified company is any management company that has not been classified as a diversified company C) a diversified company can be either an open-end (mutual fund) or a closed-end investment company D) to be considered a diversified investment company, the IC's portfolio must invest in both equity and debt instruments

D) to be considered a diversified investment company, the IC's portfolio must invest in both equity and debt instruments Your answer, to be considered a diversified investment company, the company must invest in both equity and debt instruments., was correct!. A diversified investment company could be either a closed-end company or an open-end company. There is no requirement for a diversified company to have both equity and debt in its portfolio. An investment company can follow the 75-5-10 diversification formula and still invest within one industry (e.g., a technology fund). Reference: 10.1.1.3.3 in the License Exam Manual.

An investment adviser's contract must be approved by: A) FINRA's National Adjudicatory Council. B) the SEC. C) the FINRA district committee. D) the fund's board of directors or outstanding shares.

D) An investment adviser's contract is approved annually by the board of directors or by a majority vote of the outstanding shares.

A FINRA member broker/dealer trading in shares of an open-end investment company may NOT buy shares of the fund: A) at a discount from the public offering price. B) to cover existing orders. C) for the firm's own investment purposes. D) for the purpose of resale at a later date.

D) A broker/dealer may buy shares only to fulfill existing orders or for its own investment account, not for inventory.

Which of the following mutual fund portfolio allocations would probably be most suitable for a 40-year-old professional who states that he is an aggressive investor? A) 50% small-cap stocks, 50% U.S. government securities B) 5% small-cap stocks, 5% international stocks, 90% large-cap stocks C) 50% corporate bonds, 50% municipal bonds D) 50% small-cap stocks, 25% international stocks and 25% large-cap stocks

D) A portfolio of small-cap stocks as well as one with international stock is generally considered to be one with the higher risk levels associated with an aggressive investor. Comparatively, the remaining choices would be too conservative for an aggressive investor.

For a customer interested in buying an inverse exchange traded fund (ETF) tracking the performance of the Standard & Poor's 500 index, which of the following market views would make that purchase most inappropriate? A) Both bullish or bearish B) Bearish C) Neutral D) Bullish

D) Bullish Inverse (reverse) ETFs are designed to deliver returns that are opposite of the benchmark index they are tracking. Therefore, buying an inverse ETF that tracks the S&P 500 index at a time when the market outlook is bullish would be most inappropriate. If the index rises with the anticipated bullish market, the fund that delivers returns that are the opposite of the index would fall in value. Reference: 10.10.3 in the License Exam Manual

The principal underwriter of an open-end investment company is also known as the: A) trustee. B) registrar. C) dealer. D) sponsor.

D) Sponsor A mutual fund's underwriter is also known as the sponsor or distributor of the fund. Reference: 10.3.5 in the License Exam Manual

A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to: A) decline the transaction because short-term trading of funds is not allowed. B) buy the XYZ Aggressive Growth Class A shares with a 4% load and .25% 12b-1 fee. C) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and .75% 12b-1 fee. D) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and .75% 12b-1 fee.

D) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and .75 12b-1 fee. If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares.

A 3X leveraged fund priced at $42 tracks an index that is up 2% one day and then down 3% on the next day. What should this fund be approximately priced at following these two volatile days? A) $30.22 B) $41.86 C) $44.38 D) $40.53

D)$40.53 The fund starts at $42, up 2% on day one equals .84 up (.02 × $42 = .84). Given the 3X leverage, this would equate to a $2.52 increase on day one (3 × .84 = $2.52). At the start of day two, the fund would be priced at $44.52 ($42 + $2.52 = $44.52). On day two, the index falls by 3%. A 3% decrease in the fund equals $1.33 (.03 × $44.52). Again due to the 3X leverage structure of the fund, the $1.33 decrease equates to a $3.99 drop in the fund price (3 × $1.33 = $3.99). Therefore after the two volatile days the fund should be priced at approximately $40.53. Reference: 10.10.2 in the License Exam Manual

To qualify for the quantity discount, which of the following may NOT be joined together under the definition of "any person" ? A) Father and son in an UTMA account. B) Husband and wife investing in a joint account. C) Trust officer working on behalf of a single trust account. D) Father and his 35-year-old son investing in separate accounts.

D)Father and his 35-year-old son investing in separate accounts. For the purpose of qualifying for breakpoints, the definition of "any person" includes family units, but only minor children. Adults, other than a husband and wife, are separate persons. Reference: 10.7.5.1 in the License Exam Manual

A customer is interested in an exchange-traded fund (ETF). With regard to the trading of ETFs, the customer should be aware that ETFs can be purchased throughout the trading day ETFs use forward pricing, the same as mutual funds do real-time quotes are available for ETFs the NAV calculated at the end of the day, plus a sales charge, will equal the trading price A) I and IV B) II and III C) II and IV D) I and III

D)I and III. ETFs can be traded throughout the trading day. Changing price quotes are available in real time as investors buy and sell. Although ETFs have an NAV that is calculated on the basis of the portfolio holdings, the trading price is determined by supply and demand in the open market, with customers paying commissions.

After a mutual fund's tenth year, performance statistics must show results for each of the following periods EXCEPT: A) 10 years. B) 1 year. C) 5 years. D) 3 years.

D)The correct answer was: 3 years. Mutual fund performance statistics must show results for 1, 5, and 10 years, or the life of the fund, whichever is shorter. Reference: 10.6.1 in the License Exam Manual.

The monies and securities of a mutual fund company are held by the A) custodian bank B) underwriter C) transfer agent D) investment adviser

The correct answer was - A: custodian bank. Explanation: The custodian bank holds mutual fund monies and securities. Reference: 2.3.3 in the License Exam Manual.

When calculating net investment income, an investment company includes: A) just dividends plus interest. B) dividends plus interest, minus operating expenses. C) only interest. D) only dividends.

The correct answer was - B: dividends plus interest, minus operating expenses. Explanation: Net investment income equals gross investment income minus operating expenses. Gross investment income is interest and dividends received from securities in the investment company's portfolio. Reference: 3.7.2.1 in the License Exam Manual.

According to the Investment Company Act of 1940, an open-end investment company must compute its NAV no less frequently than A) once per week B) once per year C) once per month D) once per business day

The correct answer was - D: no less frequently than once per day. Explanation: Mutual funds must calculate the value of fund shares at least once per business day; funds may calculate the value more often and will disclose this fact in the prospectus. Reference: 2.4.2 in the License Exam Manual.

The fee received by the management company from an investment company depends on the A) volume of new shares sold B) average annual net assets of the fund C) total annual profits of the fund D) type of securities in the fund's portfolio

Your answer, net assets of the fund., was correct!. The management company receives a fee based on the average annual net assets of the fund. Reference: 10.3.2 in the License Exam Manual.