2 Product Information: Investment Company Securities and Variable Contracts

Question 1

Determine whether each statement describes an open-end or a closed-end company.
Trades in the secondary market

Answer 1

closed-end.

Question 2

Determine whether each statement describes an open-end or a closed-end company.
Investors may purchase fractional shares

Answer 2

open-end

Question 3

Determine whether each statement describes an open-end or a closed-end company.
May issue common stock, preferred stock, and bonds

Answer 3

closed-end.

Question 4

Determine whether each statement describes an open-end or a closed-end company.
Are sold with prospectus during IPO only

Answer 4

closed-end.

Question 5

Determine whether each statement describes an open-end or a closed-end company.
Issues a fixed number of shares

Answer 5

closed-end.

Question 6

Determine whether each statement describes an open-end or a closed-end company.
Ex-date is set by the board of directors

Answer 6

open-end

Question 7

Determine whether each statement describes an open-end or a closed-end company.
Do not trade in the secondary market; shares are redeemable

Answer 7

open-end

Question 8

Determine whether each statement describes an open-end or a closed-end company
Price is set by supply and demand

Answer 8

closed-end.

Question 9

Determine whether each statement describes an open-end or a closed-end company
Usually called mutual funds

Answer 9

open-end

Question 10

Determine whether each statement describes an open-end or a closed-end company
Selling price usually includes a sales charge

Answer 10

open-end

Question 11

Which of the following are covered under the Investment Company Act of 1940?
I. All broker/dealers
II. Municipal bond brokers
III. Open-end management companies
IV. Closed-end management companies
A. I and II
B. I and III
C. II and IV
D. III and IV

Answer 11

D. III and IV
Unit investment trusts, face-amount, and management companies are all mentioned
in the Act. Open-end and closed-end management companies are subclassifications of management investment companies.

Question 12

Which of the following investment companies has no provision for redemption of outstanding shares?
A. Open-end company
B. Closed-end company
C. Unit investment trust
D. Mutual fund

Answer 12

B. Closed-end company
The closed-end company does not redeem the shares it issues. The closed-end company has a fixed capitalization and, as with other corporations, outstanding shares trade on the open market.

Question 13

Which of the following statements regarding the investment practices of diversi- fied management companies are TRUE?
I. They may own no more than 5% of the voting stock of a single company.
II. No more than 5% of their assets are invested in any one company.
III. They may own no more than 10% of the voting stock of any one company.
IV. If they own more than 25% of a target company, they do not vote the stock.
A. I and II
B. I and III
C. II and III
D. III and IV

Answer 13

C. II and III
A diversified investment company must have at least 75% of its assets invested in cash and securities; have no more than 5% of its total assets invested in one company; and may own no more than 10% of the voting stock of any one company.

Question 14

According to the Investment Company Act of 1940, an investment company with a fixed portfolio, redeemable shares, and no management fee is
A. a face-amount certificate company
B. a management company
C. a unit investment trust
D. a closed-end investment company

Answer 14

C. a unit investment trust
Unlike unit investment trusts (which issue redeemable securities), face-amount certificate companies issue installment certificates with guaranteed principal and interest. A unit investment trust has a diversified portfolio that, once established, does not change. Therefore, it is not called a management company. A closed- end investment company is a type of management company.

Question 15

Which of the following statements are TRUE regarding open-end, but not closed- end, investment companies?
I. They may make continuous offerings of shares provided the original registra- tion statement and prospectus are periodically updated.
II. They may be listed on registered national exchanges.
III. They do not redeem their shares.
IV. They may issue only common stock.
A. I and II
B. I and IV
C. II and III
D. III and IV

Answer 15

B. I and IV
Open-end (but not closed-end) investment companies may make continuous offerings of shares, redeem their shares, and issue only common stock.

Question 16

Hedge funds and mutual funds are similar in that
A. both are required to register with the SEC
B. neither may take short positions for profit in a bearish market
C. both offer professional investment management
D. neither is available to ordinary investors

Answer 16

C. both offer professional investment management
Mutual funds and hedge funds both offer professional investment management to the investor. Unlike hedge funds, mutual funds may not take up short positions to make profit in a bearish market, because the risk is inappropriately high. Unlike mutual funds, hedge funds are not currently required to register with the SEC and are available to accredited investors only.

Question 17

True or False?

Mutual funds are generally prohibited from using covered options strategies.

Answer 17

False

Mutual funds may use covered option strategies but typically not naked or uncovered options.

Question 18

True or False?

A majority vote of the outstanding shareholders is required to change the investment objectives of a mutual fund.

Answer 18

False

A change in the investment objectives of the fund requires a majority vote of the outstanding shares, not shareholders.

Question 19

True or False?

Mutual fund shares may be purchased on margin but may not be used as collateral in margin accounts.

Answer 19

False

Mutual funds may be used as collateral in margin accounts but may not be purchased on margin.

Question 20

True or False?

Open-end companies must have at least $100,000 of net assets before they may operate as an investment company.

Answer 20

True

Open-end companies must have at least $100,000 of assets before they may operate as an investment company.

Question 21

True or False?

Mutual funds are required to file registration statements with the SEC before shares are sold to the public.

Answer 21

True

Mutual funds are required to file registration statements with the SEC before shares are sold to the public.

Question 22

True or False?

Mutual funds make continuous secondary offerings of securities.

Answer 22

False

Mutual funds make continuous primary or new offerings of securities and must be sold by prospectus.

Question 23

True or False?

Open-end investment companies must maintain a 3:1 debt-to-asset ratio.

Answer 23

False

The debt-to-asset ratio of a mutual fund may not exceed 1:3, or 33%.

Question 24

True or False?

Closed-end companies are generally considered mutual funds.

Answer 24

False

Open-end companies are called mutual funds.