Unit 3 quizzes for Kaplan 65

The Alpha-Gamma Mutual Fund reports a large number of their investors liquidating shares of the fund, so much so that the dollar amount of liquidations exceeds the incoming cash for new purchases. This would lead to a condition known as A) net redemptions. B) reduced leverage. C) improved performance. D) cash outflow.

A One of the main features of open-end investment management companies (mutual funds) is that there is a continuous offer of new shares and ready redemption of old ones. When redemptions exceed new purchases, the fund suffers from net redemptions. LO 3.i

Which of the following investment companies registered under the Investment Company Act of 1940 can include senior securities in its capital structure? A) Open-end management investment companies B) Closed-end management investment companies C) Face-amount certificate companies D) Unit investment trusts

B Only the closed-end company is legally permitted to issue senior securities (preferred stock and bonds).

A REIT is able to pass-through which of the following? A) Losses from passive activity B) Losses from active activity C) Taxable income from operations D) Unrealized capital gains

C REITs are required to distribute a minimum of 90% of their taxable income from operations. Unlike the traditional flow-through vehicle, they do not pass through losses. When a gain is unrealized, there is nothing to distribute. LO 3.h

Net asset value per share for a mutual fund can be expected to decrease if A) the securities in the portfolio have appreciated in value. B) the fund has experienced net redemptions of shares. C) the fund has made dividend distributions to shareholders. D) the issuers of securities in the portfolio have made dividend distributions.

C. q1

If a customer's portfolio is heavily invested in common stock mutual funds, what is the customer's greatest risk?

Loss of Principal

All of the following statements regarding a closed-end investment company whose shares are listed on the NYSE are true except A) it is a type of management company. B) it sells at the market price based on supply and demand. C) it differs from a mutual fund. D) it may redeem its own shares.

D Q17

Starflier Mutual Fund, regulated under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with approval of A) the fund's investment adviser. B) the Securities and Exchange Commission (SEC). C) a majority of the board of directors. D) a majority of the outstanding shares.

D. Changes in investment policy require a vote of the majority of outstanding shares for approval. LO 3.a

Which of the following is not a characteristic of a real estate investment trust (REIT)? A) Relatively low marketability B) Pooling of capital to purchase properties or mortgage loans C) Shares are traded on exchanges much like the stocks of other companies D) Potential dividends from investment income or capital gains distributions

A A real estate investment trust (REIT) is a company that pools its capital to purchase properties and/or mortgage loans. Investors buy REIT shares and, in turn, receive dividends from investment income or capital gains distributions. REIT shares are traded on exchanges much like the stocks of other companies. This provides relatively high marketability, especially compared with most other types of real estate investments. Please note: We recognize that, over the past few years, there has been an enormous growth in non-traded REITs (exactly what that says—they don't trade; there is limited or no liquidity). Unless something in the question refers to a non-traded REIT, assume that all REITs are publicly traded either on the stock exchanges or OTC. LO 3.h

Which of the following investment vehicles provides for redemption by the issuer? A) Unit investment trust (UIT) B) Exchange-traded fund (ETF) C) Face-amount certificate (FAC) D) Closed-end fund (CEF)

A. A UIT typically issues redeemable securities (or units), like a mutual fund, which means that the UIT will buy back an investor's units, at the investor's request, at their approximate net asset value. ETFs and CEFs are traded in the secondary markets, and investors sell their shares in the marketplace rather than redeeming them through the issuer. Face-amount certificates are not redeemable—the investor's funds are returned when the debt is paid off. LO 3.f

It would be most accurate to refer to a 12b-1 charge as A) a deferred sales charge. B) a fee to cover distribution expenses. C) a front-end load. D) a fee not found in no-load funds.

B Q18

Daniel has a number of investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features are most likely found in what type of investment? A) Unit investment trust B) Open-end investment company C) Closed-end investment company D) Hedge fund

C A closed-end investment company (closed-end fund) is a type of investment company whose shares trade in the secondary market. LO 3.b

If general interest rates increase, the interest income of a bond unit investment trust will probably A) increase. B) remain the same. C) decrease. D) change as soon as the portfolio manager can take advantage of the higher rates now available in the marketplace.

Because the portfolio of a UIT is fixed, the income generated by that portfolio will not change. Remember, a UIT does not have a portfolio manager. LO 3.f

The Mortise Growth Fund, a registered open-end investment company, has a 1% redemption fee. To calculate the amount to be received on redemption of this fund's shares, which of the following would be used? A) The offering price minus the redemption fee B) The NAV plus the redemption fee C) The NAV minus the redemption fee D) The offering price plus the redemption fee

C q4

A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has an net asset value (NAV) of $12 and an ask price of $12.50, and that the ABC Fund has an NAV of $11.50 and an ask price 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) ABC is an open-end fund and GEM is a closed-end fund. C) ABC and GEM are both unit investment trusts. D) both are open-end funds.

A. The price for open-end funds is determined by adding the sales charge to the NAV. An open-end fund can never have an ask (or offering) price that is less than its NAV, therefore ABC cannot be an open-end fund. Because the pricing of a closed-end fund is independent of its NAV, the market price could be above, below, or the same as the NAV. That is why it is correct to state that GEM could be either open end or closed end.

When shares of a closed-end investment company are purchased by an investor, the price paid is based upon A) the net asset value. B) the current asking price. C) the current bid price. D) the net asset value plus commission.

B Closed-end investment company shares are priced based on supply and demand. The ask is the price that investors will pay for purchasing shares, and the bid is what investors receive when selling. Investors will also pay a commission because this is what the broker charges for executing the transaction. Shares of open-end investment companies are bought and redeemed based on NAV, but that is not so of closed-end companies. LO 3.b

Which of the following statements regarding REITs are not true? Investors receive flow-through benefits of income as well as loss. Hybrid REITs own properties, as well as make loans on others. Equity REITs are prohibited from using leverage to acquire properties. REITs are easily traded in the secondary market. A) I and IV B) I and III C) II and IV D) II and III

B. 1 & 3 It is not true that REITs offer flow-through of losses; they are not DPPs. As with most real estate purchasers, leverage, usually in the form of a mortgage, is used to acquire property. A hybrid REIT contains the features of both an equity REIT and a mortgage (debt) REIT, and most REITs trade on the exchanges or Nasdaq. Note: Even though there has been an increase in the number of non-traded REITS, unless something in the question indicates that, the question will be dealing with publicly traded REITS. LO 3.i

A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding and the current asking price of the shares is $36.38 per share, it would be correct to state that this investment company is A) an open-end investment company. B) selling at a premium. C) selling at a discount. D) selling at NAV.

C. $85 mil / 2,611,437 = Share price of $32.55. Currently selling at $36.38. A premium NAV / outstanding shares = stock price

A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has an net asset value (NAV) of $12 and an ask price of $12.50, and that the ABC Fund has an NAV of $11.50 and an ask price 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) ABC is an open-end fund and GEM is a closed-end fund. C) ABC and GEM are both unit investment trusts. D) both are open-end funds.

A Q19

If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as A) a unit investment trust. B) a growth fund. C) a closed-end company. D) a utilities fund.

A. A unit investment trust issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed; it is not traded. LO 3.f

Which of these is the best example of a venture capital investment? A) There is an investment in a mature firm that needs capital to start a new venture. The return will be based on a function of the return of the new venture above the risk-free rate. B) There is a debt investment in an immature firm that provides financing beyond what secured lenders are willing to lend but without significantly diluting the firm's outstanding equity. Real assets or capital are used to back the investment, and a minimum return is locked in. C) There is an investment in an immature, negative cash flow firm where it is possible to lose 100% of the investment. D) There is an investment in a mature firm that needs capital to start a joint venture with another mature firm. The return will be based only on the success of the new venture and not the success of the rest of the firm.

C Q20

Which of the following statements concerning hedge funds are true? 1. Purchasers of hedge funds are generally required to be accredited investors. 2. Short sales by the fund are not allowed. 3. It is not uncommon for there to be a lock-up period that may last for as long one year or even longer. 4. It would be unusual for the fund managers to have an ownership interest in the fund.

1 & 3

A mutual fund would have net redemptions when A) the number of shares being liquidated by investors exceeds those being purchased. B) the fund is performing below the average of other funds with the same objectives. C) the fund manager is selling more securities in the portfolio than are being purchased. D) the fund increases its sales charge.

A. One of the characteristics of an open-end investment company (mutual fund) is the ease of redeeming holdings. When the dollar amount of shares being redeemed exceeds that of those being purchased, the result is net redemptions. Although poor performance could lead to net redemptions, that is not always the case, so it is not always a true statement.

There are certain requirements for an investment to qualify as a REIT. Which of the following is not one of them? A) At least 75% of the REIT's taxable income must be paid out as dividends to investors. B) At least 75% of the assets must be invested in real estate-related assets, cash, and U.S. government securities. C) At least 75% of the REIT's annual gross income must be from real estate-related income such as rents from real property and interest on obligations secured by mortgages on real property. D) At least 90% of the REIT's taxable income must be paid out as dividends to investors.

A. Q #12

Which of the following statements regarding an investment company's board of directors is not true? A) No convicted felon or person convicted of a misdemeanor involving the securities industry ​within the past 10 years ​may serve on the board of directors of an investment company. B) An investment company's board of directors manages the portfolio on behalf of the investor shareholders. C) The board of directors contracts with an outside investment adviser or portfolio manager to invest the cash and securities held in the fund's portfolio. D) An investment company's board of directors concerns itself with policy and administrative matters.

B. The board of directors sets policy and manages the administrative affairs of the investment company, but it does not manage the portfolio. The board contracts with an outside investment manager to invest the funds.​ It is unlawful for any person to serve or act in the capacity of employee, officer, director, or investment adviser of any registered investment company, or principal underwriter for any registered open-end company, registered unit investment trust, or registered face-amount certificate company if that person, within the past 10 years, has been convicted of any felony or a misdemeanor involving the purchase or sale of any security. LO 3.a

A potential investor in mutual funds is bewildered by the different share classes. You are asked for advice. When comparing Class A, B, and C shares, it would be fair to state that all of the following are features unique to Class A shares except A) breakpoints. B) rights of accumulation. C) the method of calculating the redemption price. D) low or no 12b-1 charges.

C Any mutual fund, regardless of the class, computes the redemption price using the forward pricing rule. Although Class B and C shares have a back-end load (CDSC) for a specified period, generally for one year, that charge is subtracted from the calculated redemption price. It is only the Class A shares that offer the two ways to reduce the front-end load: breakpoints and the rights of accumulation. If Class A shares have a 12b-1 charge, it is invariably lower than that of Class B and Class C shares. LO 3.c

The exchange privilege offered by open-end investment companies allows investors to A) exchange shares of one open-end fund for another in the same fund family at a net asset value basis. B) purchase new fund shares from dividends. C) delay the payment of taxes on shares. D) exchange personally owned securities for shares of the investment company.

A Exchange privileges allow an investor to convert the value of shares held in one fund for those of an equal value in the same family. Remember that conversion is a taxable event; if the shares converted have increased in value, capital gains taxes will be due.

One of your customers called you on Wednesday at 8:00 am ET and asked you to buy $10,000 of the Liberty Balanced Fund Class A shares. If the Wednesday morning financial pages show the fund's NAV to be $45.83 and the POP to be $48.24 and the Thursday morning quote shows the NAV as $46.22 and the POP as 48.65, what is the price per share for this purchase? A) $48.65 B) $46.22 C) $45.83 D) $48.24

A Mutual fund pricing is based on the forward pricing rule. That is, the price is based on the next calculated net asset value per share after the order is received. That calculation is always done after the 4:00 pm ET close of the market. Therefore, an order received anytime on Wednesday before 4:00 pm will be executed based on the NAV calculated at that time. That 4:00 pm price will be shown in the financial section of Thursday morning's newspapers. Remember, when purchasing shares, the price is always the POP.

What can you tell about these investment companies from the information below? NAV Ask Company A 12.34 = NAV 12.85 = ASK Company B 15.45 = NAV 14.90 = ASK A) Company A must be open-end; Company B must be closed-end. B) Company A can be either open-end or closed-end; Company B must be closed-end. C) Company A and Company B can be either open-end or closed-end. D) Company A is closed-end and Company B is open-end.

B All open-end investment companies sell at NAV plus a sales charge (if any). Therefore, the asking price can never be less than the NAV. Closed-end company asking prices are determined by supply and demand, so their prices are independent of the fund's NAV. LO 3.b

Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of the majority vote of A) the board of directors. B) the outstanding shares and a majority of that portion of the board of directors that is considered noninterested members. C) the outstanding shares. D) the noninterested directors.

B When it comes to retaining the services (hiring) of a person (or persons) to manage the portfolio of a mutual fund, there are three parties involved in the approval process. Those three parties are the shareholders, the fund's board of directors, and that portion of the fund's board consisting of noninterested members. (Remember, the board must be at least 40% noninterested, which is sometimes stated as a maximum of 60% interested.) This question asks about the initial contract. That contract is always for two years and requires the approval of a majority vote of the outstanding shares (the shareholders) and a majority vote of that group of board members who are noninterested. You should also know that, when it comes to renewal (done annually after the initial two-year contract), once again, a majority vote of that group of board members who are noninterested is required, along with either a majority of the total board or a majority of the outstanding shares. The one constant is the approval of the noninterested board members. LO 3.a

An agent has recommended investments in the XYZ fund family to his customers for 10 years. He is referred by one of his customers to a prospect who has inherited $500,000 as beneficiary of a life insurance policy. The prospect tells the agent she has never invested in the market before, is risk averse, and wants safety of principal to be the first priority with liquidity second. The agent recommends the following investments: XYZ government bond fund, B shares $200,000 XYZ large-cap growth and Income B shares $150,000 Liquid reserve money market $150,000 The recommendation is A) suitable because he recommended conservative investments. B) unsuitable because it does not address the customer's two primary objectives. C) suitable because it addresses the customer's safety objective. D) suitable because it addresses the customer's liquidity objective.

C The customer's objectives of safety and liquidity are not satisfied by these recommendations. The government bond fund and large-cap growth and income fund are both subject to market risk and, as Class B shares, are subject to a contingent-deferred sales charge in the event the customer wishes to access the funds before the back-end load expires. The back-end load is not consistent with the customer's liquidity objective. LO 3.c

Which of the following statements regarding a mutual fund that offers Class A, B, and C shares are true? Class A shares have a front-end sales charge and a low 12b-1 fee. Class B shares have a declining contingent-deferred sales charge and a high 12b-1 fee. Class C shares have a high 12b-1 fee and a level contingent-deferred sales charge. Class B and C shares allow investors to put the shares back to the fund for their original purchase price for up to one year after purchase. A) I and II B) I, II, III, and IV C) I only D) I, II, and III

D There is no put provision that guarantees the return of an investor's purchase price associated with mutual fund shares. LO 3.c