Ch 4&5 Flashcards
According to industry rules what percent is the maximum sales charge a mutual funds
8.5
What Price is paid for mutual fund shares
Public offering price
POP=NAV+sales charge (if applicable)
What does the following quote indicate about the fund
NAV: $9.20. POP: $9.20
It’s a no load fund
Sales charge is always expressed as a percentage of the——/
Pop
To calculate the sales charge percentage for a mutual fund the formula is
(Pop-NAV)/pop
To calculate the PO P for a mutual fund the formula is
NAV/(100%-sales charge%)
Define breakpoint
Dollar levels of investment purchases that qualify for a reduced sales charge
What is the formula for determining the number of shares able to be purchased when reaching a breakpoint
Dollars invested divided by newly calculated offering price (based on the reduced sales charge)
Letters of intent are valid for blank months
13
Letters of intent may be backdated for blank days
90
Is a letter of intent binding on the investor
No. However the letter is binding on the investment company
True or false if a mutual fund investor chooses to reinvest dividends taxes will be deferred
False
Funds offer _________\to allow buyers to add all purchases made from a fund family to reduce sales charge
Rights of accumulation
True or false to lower sales charges investors add mutual fund purchases in all accounts using rights of accumulation
True however the purchases must all be from the same fund family
A _________fund is one that invest in a specific industry or geographic region
Sector of specialized
Into what does a growth fund invest
Common stock
If a client goal is preservation of the principal what fund would be most appropriate
Money market fund
A fund who’s portfolio is created to mirror the composition of a particular index is referred to as an _______fund
Index
Describe a typical Index funds expenses and management style
The expenses are generally low and it is passively managed
_______ is the balancing of investment classes according to an investors investment objectives
Asset allocation
What is a funds net investment income
Dividends + interest -expenses
True or false regulated investment companies (under subchapter M ) may relieve their burden of paying tax on income
True regulated investment companies will only be taxed on the income retained
What are the requirements for being considered a regulated investment company
The fund must be a domestic company that distributes at least 90% of its net investment income
A regulated investment companies net investment income will ultimately be taxed to the__________
Shareholders
When a fund distributes a capital gain, is it the funds or shareholders holding periodThat is considered
The funds holding period is used to determine whether long-term or short term
Is a mutual funds redemption fee considered a sales charge
No since it does not go to selling broker’s but rather stays within the fund
What restrictions exist in describing a fund as no load
It may have no front end or D furred sales charge and a 12 B – 1 fee cannot exceed .25%
What do the differences in mutual fund share classes represent
The different methods by which the sales charges collected
If the high-tech fund has a NAV of $4.25 and a PO P $4.50 what is its sales charge percentage
The formula is (PO P - NAV)/pop
$4.50 -$4.25 = $.25 /$4.50 = 5.5%
If the green son has a NAV of $12.70 and a sales charge a 5.5% what is the PO P
The formula is NAV/(100% -sales charge percent)
$12.70 /94.5% = $13.44
True or false a breakpoint sale is a prohibited action of selling shares at just under where breakpoints are available
True
The NAV of a mutual fund is like the ________price of a stock
Bid
The PO P of a mutual fund is like the _______price of a stock
Ask
The _________is synonymous with the bedframe mutual fund
Net asset value NAV
The _________is synonymous with the ask for a mutual fund
Public offering price PO P
On Monday at 11 AM because my place is a call to sell (redeem)her mutual fund shares. what price will she receive?
Monday’s NAV since she placed the order before 4 PM
On Monday at 5 PM a customer places a call to sell (redeem) her mutual fund shares what price will she receive
Tuesday’s NAV since the client missed the 4:00 PM close she will receive the next calculated NAV
On Monday at 2 PM a customer places a call to sell her closed end fund shares. what price will she receive?
The current bid price. Closed end funds are traded throughout the day
On Monday at 10 AM a customer places I called to buy an ETF.what price will she pay?
The current ask (offer). ETFs are treated throughout the day
What to share class carries a front end load
Class A
What to share class carries a level load
Class C
What share class carries a back and load
Class B
May a class B share be referred to as a “no load” share?
No this is a violation of FINRA rules
True or false class B shares are eligible for breakpoints
False only class a shares are eligible for breakpoints
Breakpoints are calculated based on all purchases made within a single_________
Fund family
May an RR create her own breakpoint schedule
No RR must follow the schedule found in the funds prospectus
Is a hedge fund investment considered liquid
No
May hedge fund sell stocks it short and use margin
Yes
What is a fund of funds
A mutual fund that invests in other mutual funds
What is a regulated investment company
One that distributes at least 90% of its net investment income
What types of stocks are held in a global fund
Stocks of both US and foreign issuers
What types of stocks are held in an equity income fund
Often stocks of public utilities and preferred shares
Why is an index fund considered tax efficient
Due to the low portfolio turnover that creates fewer taxable events
What is a good way to obtain broad market exposure at a low cost
Buy an index fund
Does the US government guarantee US government bond funds
No the government only guarantees the underlying bonds
May a money market fund charge a 12 B – 1 fee
Yes up to .25% (25 basis points)
May a loss be experienced by a client who invests in a US government bond fund
Yes due to interest rate risk
What is a mutual fund switch
The redemption of one fund and the purchase of another. It may be within the same or different fund families
Is a mutual fund switch a taxable event
Yes
What sales charge is assumed when computing mutual fund performance
The standard sales charge with no breakpoints
Do all money market funds maintain a stable NAV of $1.00
No this stability is a goal but it is not guaranteed
What type of mutual fund is often used as a safe harbor
Money market funds
To what risks would treasury bond funds be subject?
Interest rate, purchasing power, and market risk
What action would be taken by a mutual fund manager who is Bearish on the market
Raise cash levels in the fund
Which share class typically has the lowest expense ratio
Class a
Which share class is typically appropriate for an investor with an uncertain time horizon
Class C
What happens to class B shares after a prescribed period
The shares will automatically convert to class A shares
A measurement of frequency of trading in a mutual fund is called_________
Portfolio turnover
What is not included in a mutual fund expense ratio
The sales charge since only fees are included
What is the maximum sales charge that may be levied on a contractual plan over the life of the plan
9%
If an investor wants exposure to a particular industry, a _____fund is the best type of investment
Sector
What is the name of the fee paid to the funds investment advisor
Management fee
The _______fee is assessed against the funds assets to pay for marketing and distribution costs
12 B – 1
What happens to the CDSC holding period When a client switches within a fund family
The prior period Counts, provided the new B share investment is in the same family
What happens to the CDSC holding period when a client switches to a new fund family
The clock is reset to day one whenever the client switches to a new fund family
True or false a client who believes that rates will rise will buy a short-term bond fund
True rising rates hurt bond prices , however short maturities will fall the least
True or false a client who believes rates will fall will buy a long term Bond fund
True falling rates help bond prices and long-term bonds will rise the most
High-yield bond funds have a greater degree of _______ risk
Default
Will redemptions affect a funds NAV
No the assets and number of shares are decreased proportionally
Will new purchases affect a funds NAV
No the assets a number of shares increase proportionally
Will liquidating a fund position at a loss affect a funds NAV
No the position has already been marked to market
What is subchapter M
A section of the IRS code that defines a regulated investment companies (conduit/ Pipeline theory)
In what types of stocks when a value fund manager invest
Typically stocks of out of favor issues
May in RR state that an investor will never lose money in a principal protected fund
No clients liquidating these funds early are exposed to principal loss
Do some mutual funds issue fractional shares
Yes this is common practice
Is a redemption fee the same as a CDSC
No the CDSC is a sales charge not a fee
A client invested $21,000 which has grown to $25,000 on what amount is his break point based
$21,000 breakpoint are based on the amount contributed
Where is the best place to find information regarding share classes
The comparison table found in the funds prospectus
Does a funds yield include capital gains
No capital gains are part of the funds total return
Is a funds total return calculated on a pretax or post tax basis
Total return is calculated on a pretax basis
When does a mutual fund begin to trade ex-dividend
On the funds record date
Identify the acronym NAV
Net asset value
Identify the acronym LOI
Letter of intent
Identify the acronym SAI
Statement of additional information
Identify the acronym C DSC
Contingent deferred sales charge
Identify the acronym BA
Bankers acceptance
Identify the acronym PO P
Public offering price
Identify the acronym V UL
Variable universal life
With what should a client be concerned if an RR recommends a class B shares switch between fund families
The holding period will be reset to zero in the new fun family and/or a CDSC may apply on the redemption
What is a suitable investment for a conservative client seeking monthly income
A GNMA fund since income is typically paid monthly
What happens to class B shares after a prescribed number of years
They convert to class A shares
What is the maximum permissible 12 B – 1 fee
.75% ( 75 basis points) however for no load funds the maximum 12B – 1 fee is capped at .25%
What may an RR recommend to a non-accredited investor wishing to participate in hedge fund investing
A fund of hedge funds. However these funds do not offer daily redemption rights
To which clients is an RR required to disclose breakpoints
All clients regardless of the size of the proposed investment
What would cause a bond funds assets to rise
Either new purchasers bringing in funds or a decrease in rates causing an increase in the portfolios value
What would cause a bond funds assets to fall
Either redemptions causing the loss of funds or an increase in rates causing a decrease to the portfolios value
What must be included in a mutual fund confirmation
Potential redemption fees or CDSCs that may apply
What is the formula for determining a mutual fund net assets
Total assets(eg, stocks, bonds, and cash)-total liabilities(eg, expenses)
What is the formula for computing a mutual funds net asset value
Net assets divided by total shares outstanding
True or false rights of accumulation benefits may be combined with a letter of intent benefits
False
List some of the investors eligible for sales charge a reduction in a mutual fund
In individual and the members of her immediate family (spouses/dependent children), trustees and pension plans
How often does a GNMA mutual fund make income distributions
Monthly
What is the formula for determining the average cost per share
Total dollars invested divided by total shares purchased
What is the formula for determining the average price per share
Total of the prices paid divided by total number of purchases
For what type of investor is a large cap mutual fund most suitable
Conservative equity investors since the portfolio consists of stocks of large, established companies
For what type of investor is a small cap mutual fund most suitable
Aggressive investors since the portfolio consists of stocks of small companies that are often volatile
For what type of investor is a micro cap Mutual funds most suitable
Speculative investors since the portfolio consists of stocks a very small companies that are typically quite volatile
Who typically buys hedge funds
Accredited (sophisticated) investors through Reg D offerings
What is the annual fee levied against a funds assets and used to pay expenses of commissions and retail communications
12 B – 1 fee
What periods must be covered in retail communication regarding mutual fund performance
1, 5 and 10 years
What is some of the important information to obtain when opening a new clients account
Name, address, Age, occupation, SSN, citizenship, income, net worth, objectives, risk tolerance, investment experience
What is not pertinent when opening an account a clients educational or financial background
Educational background
If a client refuses to provide certain information may the account still be opened
Yes although name and address are required
True or false clients need not sign the account form for a cash account
True but signature would be required for an option or a margin account
If a client wins $1 million what should a RR do
Update the account form
True or false only one person must provide information to open a joint account
False each owner must provide information to open a joint account
Who may enter orders in a joint account
Any owner named on the account
For a joint account how many account numbers and SSNs are used for tax reporting
One
What is a TOD account
An account in one persons name that allows a beneficiary to gain control upon the account holder’s death
True or false money may be withdrawn from a joint account and one owners name
False any checks should be in both parties names
What happens to the deceased’s portion in a joint account with tenants in common
The deceased’s portion goes to his estate for tax purposes
What happens to the deceased sports and in a joint account with right of survivorship
Her portion passes to the survivor
Only ________ custodian is allowed per miners account
One
True or false custodial accounts are solely carried in the name of the minor
False the account is in the custodians name for the benefit of the minor
The ______is responsible for taxes on income in a custodial account
Minor
When do gifts become the property of the minor in a custodial account
When gifted
True or false gifts made to minors are irrevocable
True
Is margin permitted in a miners account
No securities must be fully paid
Custodians have a _______\duty to do what is best for the minor
Fiduciary
Me a custodian make speculative investments in a minors account
Yes provided they are suitable based on the objectives
What age must be attained for the minor to gain control over his account
Age of majority
RRs must examine what document to open any corporate account
Corporation resolution
True or false all corporate officers may effect transactions for the corporation
False only those named in the corporate resolution
Both the _______and the _______are required for a corporation to open an option or margin account
Corporate resolution and corporate chapter
What is needed to exercise discretion over a clients account
Written power of attorney
Is discretionary authorization required to enter a not held order
No since discretion is limited to time and price on not held orders
What three items must be specified on a not held order
Action (Buy/sell), amount(quantity), and asset(security)
For how long may not held order be maintained
A not held order will be considered a day order
Chew or false principles must approve discretionary orders prior to entry
False the orders must be approved promptly afterwords
What may an RR do with full discretion but not with limited discretion
Withdraw money from the account
A ________ is required to open an account for partnership
Partnership agreement
May a wife and her trades in a husbands account
Yes with written third party authorization
Describe a wrap account
An account that charges the client a single fee that covers transactions and management
True or false using a PO Box as an address is not acceptable to open an account
True an actual address is required however mail may be sent to a PO Box
________protects customers from BD bankruptcy
Securities investor protection Corporation (SIPC)
Does SIPC protect separate customers or separate accounts
Separate customers. A customer with both a cash and margin account with a BD would be covered once
True or false gems joint account with his wife is considered a separate customer by SIPC
True. EXample, jim’s cash and margin account our combined for coverage but Jim’s joint account with his spouse is separate
Customers become _______if their cash or securities positions exceed SIPC coverage
General creditors
If a BD goes bankrupt what happens to securities registered in the customers name
They are returned to the customer without regard to SIPC limitations
What steps are taken if a customer dies
Market the account deceased, cancel open orders and await instructions
Account statements must be sent to customers at least________
Quarterly
For active accounts account statements must be sent
Monthly
What triggers a BDs filing of a currency transaction report (CTR)
Any cash transaction executed by a customer during one day that exceeds $10,000
What triggers a BD’s filing of a suspicious activity report
Any suspicious transactions of $5000 or more
What triggers a BD’s filing of a Currency and monetary instrument report (CMIR)
When anyone physically transports or receives cash (or equivalents ) exceeding $10,000 into, or out of, the US
What items are acceptable as proof of identity under the customer identification program (CIP)
Passport or drivers license both have a picture
What steps should be taken when an RR executes a trade but uses the wrong account number
Do we cancel and re-bill. Transfer the trade to the correct account number with permission of a supervising principal
Custodial accounts were opened under who’s Social Security number
The minors
What type of order gives discretion as to price and time of execution
Not held
When must customer confirmations be sent
By the completion of the transaction (usually the settlement date)
In the process of opening an account for an employee or another firm what must be done by the carrying firm
Provide written notification to the employer
For accounts opened for employees of another firm what is provided to the individuals employer upon request
Duplicate confirmations and statements
True or false F I NRA regulates accounts of member firm employees opened at another firm
True the rule also covers accounts for the employees spouse or dependent children
What program must be established by BD’s to verify the identity of each customer opening an account
Customer identification program or CIP
What list must be checked to identify suspected terrorist in criminals
0FAC List. ( treasury department’s office of foreign assets control)
True or false names appearing on the OFA C list are customers who had a previous business relationship with the firm
False the list that shows the names of suspected terrorist and criminals
What’s regulation protects the nonpublic personal information of customers
Regulation S – P
Regulation S – P requires clients be provided with a ___________\detailing how BDs handle personal client information
Privacy notice
What is the appropriate investment for a Doctor Who is undecided about his long-term asset allocation
A tax-free money market fund
When a client dies, instructions will be provided by the________
Executor/administrator
True or false clients concerned about inflation should purchase a precious metals fund
True a precious metals fund is a good head against inflation
If a client is unsure about a specific investment strategy his funds should be parked in a _______
fund
Money market
May an R R have an outside brokerage account
Yes but the caring firm must notify the RRs employer
Must the custodian in an UGMA account be a parent
No any adult may be custodian
Who’s Social Security number is listed on a custodial account
The minors
May a custodian remove funds from a custodial account
Yes but only for the benefit of the minor
Is an UGMA account considered a joint account
No the assets are the property of the child
What protects a brokerage client from theft or embezzlement
The posting of a fidelity bond by the BD
What is in RRs concern if her client moved to a new state
Ensuring that the RR is properly registered in the new state (uniform securities act)
What advice should be given to a newly married couple that wishes to begin investing
Put aside cash reserves before buying long-term investments
What advice should be given to a prospective client who wishes to begin saving for retirement
Take advantage of any employer-sponsored retirement plan
What is the best investment for a part-time teacher who is undecided about a long-term allocation
A taxable money market fund since the teacher may be in a lower tax bracket
What is a suitable investment in a college fund for a three-year-old
Growth funds since the child has a long time horizon
What is a suitable investment in a college fund for a 17-year-old
Hi grade bond funds since individual has a short time horizon
What must be done if a client is too ill to manage his own affairs
I obtain a court appointed naming someone to manage the account
What is a suitable asset mix for a 65-year-old retiree
85% fixed income and 15% equity
What is a suitable investment for a client whose goal is capital preservation
T-bills or a US government money market fund
May client information be given to a third-party
Only if the third-party has legal authority (eg, IRS) or the client provides written consent
True or false SIPC provides coverage for market losses
False SIPC protects against BD bankruptcy
What are the permissible hours of operation for a customer helpline
24 hours a day seven days a week. Client call in lines are not bound by the telephone consumer protection act
When must the Reg S – P privacy notice be provided to a customer
At the time of the account opening and annually thereafter
A bond funds NAV has fallen from $9.87 to $8.11 what has probably happened to interest rates
Rates have probably risen which has caused the funds price decline
A bond funds NAV has risen from $7.87 to a dollar $8.88 what is probably happened to interest rates
Rates have probably fallen which has caused the funds price increase
Is SIPC part of the US government
No it is a nonprofit entity funded by assessments on BD members
Made a client to use a numbered account instead of her name
Yes provided the clients identity is known to the firm
What violation may have occurred if in RR informs the client of a trade after the execution of the trade
Unauthorized trading
If a young couple is seeking to find their infants education what needs should an RR address first
The RR should be assured that the couple has adequate insurance coverage
Identify the acronym CTR
Currency transaction report
Identify the acronym SAR
Suspicious activity report
Identify the acronym SIPC
Securities investor protection Corporation
Does SIPC insure client assets
No SIPC protects against firm bankruptcy
Make clients in TIC accounts have unequal interests
Yes also TIC accounts may have more than two account holders
What you should an RR recommend to a client who is looking for an exciting investment
Nothing since exciting is not a valid objective
Is market timing a suitable recommendation for mutual fund investors
No since market time is a short-term trading strategy
SIPC provides coverage of $________ of which no more than $__________ can be cash
$500,000
$250,000
The ________must sign the account form
Supervising principal…. Clients are not required to sign
Where me a firm display it’s SIPC membership
On letterhead, business cards, websites, in retail communication, and on signs displayed in its offices
Investment companies must send financial statements to customers every ——months
Six
