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Series 65 > 2.1 Investment Company Securities > Flashcards

2.1 Investment Company Securities Flashcards

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Series 65 flashcards
1
Q

What does a management investment company do?

Two types of management investment companies. What are they?

A

Actively manages a securities portfolio to achieve a stated investment objective.

Closed-end or open-end.

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2
Q

Describe a closed-end fund.

A

Characteristics…

  • Commonly known as publicly traded funds.
  • Fixed number of shares
  • Fund has fixed capitalization unless an additional public offering is made.

After distribution…

  • Anyone can buy or sell shares in the secondary market.
  • Supply and demand determine the bid and ask price.
  • Shares may trade at a premium or discount to the shares’ net net asset value (NAV).
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3
Q

Describe a open-end fund.

A

Characteristics…

  • Open offering registered with SEC.
  • Can raise an unlimited amount of investment capital.
  • Can continuously issue new shares.
  • Investor buys shares directly from the company or its underwriters.
  • POP is the NAV per share plus any applicable sales charges.
  • Sells redeemable securities.
  • Shares redeemed by company at their NAV.
  • Mutual fund’s capital shrinks when investors redeem shares.
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4
Q

NAV?

A

Net asset value

Value of all of fund’s assets minus its liabilities divided by the number of shares outstanding.

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5
Q

75-5-10 diversified test???

A
  • 75 percent of total assets must be invested in securities issued by companies other than the investment company or its affiliates.
  • Of this 75 percent, no more than 5 percent of total assets can be invested in any one corporation’s securities.
  • Of this 75 percent, the investment company can own no more than 10 percent of an outside corporation’s voting class securities (common stock).
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6
Q

Characteristics of a mutual fund.

A
  • Pool of investor’s money
  • Must redeem shares at NAV
  • Guaranteed marketability; always a willing buyer
  • Investor owns an undivided interest
  • Issues only one class of common stock
  • Investors share mutually: gains and risk
  • Shares may be purchased in either full or fractional units, unlike stock (full units only)
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7
Q

Net redemptions?

A

Excess of shareholder redemptions over new share purchases.

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8
Q

Sales charge max (FINRA)?

A

Sales charges in excess of 8.5 percent of the POP on the purchase of open-end investment company shares are prohibited.

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9
Q

Sales charge for closed-end funds?

A

No sales charge. Investor pays commission in an agency transaction or a markdown or markup in a dealer transaction.

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10
Q

Sales charge for open-end funds? Three types.

A

Front-end loads
Back-end loads
12b-1 fees

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11
Q

Front-end loads…

A

Reflected in a fund’s public offering price
Charges added to the NAV at time of purchase

Referred to as Class A shares.

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12
Q

Back-end loads…

A

Contingent deferred sales charge (CDSC)

Charged at the time investor redeems mutual fund shares

Declining percentage charge reduced annually, usually dropping to zero after 6 to 8 years.

Referred to as Class B shares.

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13
Q

12b-1 fees…

A

Fee is determined as a flat dollar amount or as a percentage of the fund’s average total NAV during the year.

Disclosed in fund’s prospectus.

Annual fee as percentage of net assets cannot exceed 0.75 percent, and must reflect the anticipated level of distribution services.

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14
Q

Class A shares?
Class B shares?
Class C shares?

A

Class A shares:
Investors pay the charge at the time of purchase

Class B shares:
Declines over time so investors pay the charge at redemption

Class C shares:
No sales charge to purchase, generally a 1 percent CDSC for one year, with a continuous 12b-1 charge.

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15
Q

To qualify for the max sales charge, company must offer…

A

Breakpoints

and

Rights of accumulation

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16
Q

Letter of intent…

A

In the LOI, investor informs investment company that he intends to invest the additional funds necessary to reach the breakpoint within 13 months.

17
Q

Whats is considered to be a small-cap stock in terms of capitalization?

A

Market cap between $300 million and $2 billion

18
Q

Whats is considered to be a large-cap stock in terms of capitalization?

A

Market cap of more than $10 billion

19
Q

Expense ratio of a fund…

A

Expresses the management fees and operating expenses as a percentage of the fund’s net assets.

(Management fees + operating fees) / net assets = exp. ratio

20
Q

Information to be reviewed regarding a mutual fund…

A 
Performance
Costs
Taxation
Portfolio turnover
Services offered
21
Q

Services offered by mutual funds

A 
Retirement accounts
Investment plans
Check-writing privileges
Phone transfers
Conversion privileges
Combination investment plans
Withdrawal plans
22
Q

Advantages to investing in mutual funds?

A 
Diversification
Professional management
Convenience
Liquidity
Minimum initial investment
23
Q

Disadvantages to investing in mutual funds?

A

Risks

Fees and expenses

24
Q

ETF.

What does it invest in?
Similar to what?
What kind of charges?

A

Invests in a specific index. Any asset class that has a published index around it and is liquid can be made into an ETF.

Similar to a closed-end investment company.

Charge brokerage commissions on each trade.

25
Q

What is an annuity stage?

A

The payout period for an annuity.

26
Q

Annuity payout options…

A 
Life Annuity / Straight Life / Pure Life
Life Annuity with Period Certain
Joint Life with Last Survivor Annuity
Refund Annuity
Mortality Guarantee
Operating Expense Guarantee
27
Q

Summary…

Life Annuity / Straight Life / Pure Life
Life Annuity with Period Certain
Joint Life with Last Survivor Annuity
Refund Annuity
Mortality Guarantee
Operating Expense Guarantee
A

Life Annuity / Straight Life / Pure Life:
Annuitant receives periodic payments (usually monthly) over lifetime.

Life Annuity with Period Certain:
Annuitant receives payments for life, with a certain minimum period guaranteed.

Joint Life with Last Survivor Annuity:
Payment is conditioned on two or more people, and payment is conditioned on both (all) lives.

Refund Annuity:
Payments continue after death of the insured until the full value of the initial premium (principal) has been returned.

Mortality Guarantee:
Guaranteed payments for as long as the annuitant lives, even if it is for longer than estimated by insurance company.

Operating Expense Guarantee:
Company sets ceiling for expenses charged to separate account. Anything above that ceiling is paid by the insurance company.

28
Q

Variable annuity payments.

How are payments determined?
Are payment guaranteed? Why?

A

Using mortality tables and the value of the annuitant’s account.

No payment amount guarantee, because insurance company cannot guarantee the separate account’s performance.

29
Q

Investor cost basis?

A

Money invested in an annuity.

30
Q

Can taxes be applied on annuity payments to the annuitant? Are contributions to an annuity taxable?

On withdrawal, what portion of the annuitant’s account is taxable? What taxes apply?

A

Contributions to an annuity is made with after-tax dollars, and therefore, the total amount contributed is not taxable when the account is annuitized.

On withdrawal, the amount exceeding the investor’s cost basis (deferred interest, dividends, and capital gains) is taxed as ordinary income.

31
Q

Taxes on random withdrawals…

A

LIFO method

32
Q

How are taxes applied on lump-sum withdrawal before age 59 1/2?

A

The earnings portion withdrawn is taxed as ordinary income and is subject to an additional 10 percent penalty under most circumstances.

33
Q

Advantages of investing in variable annuities?

A
  • Tax-deferred growth
  • Guaranteed death benefit
  • Lifetime income
  • IRS Section 1035 transfers
  • No age 70 1/2 restrictions or req.
  • No contribution limits
  • Choice of separate account objectives
  • Tax free transfers between sub accounts
  • No probate
34
Q

Disadvantages to investing in variable annuities?

A
  • Earnings are taxed as ordinary income
  • Expense fees are typically much higher than fees incurred by owning a mutual fund.
  • 10 percent penalty for withdrawals before age 59 1/2
  • Conditional deferred sales charge
  • Carry same investment risks as mutual funds

Series 65 (3 decks)

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