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SIE > Ch. 7 > Flashcards

Ch. 7 Flashcards

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1
Q

What’s the advantage of reinvesting dividends back into a mutual fund?

A

In addition to compounding, most mutual funds will allow reinvestment at NAV (no sales charge)

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2
Q

On Monday at 2pm, a customer places a call to sell her closed end fund shares. What price will she receive?

A

Current bid price. Closed end funds are traded throughout the day

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3
Q

Clients redeeming mutual fund shares must be paid within ____ calendar days.

A

7

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4
Q

Identify the acronym: LOI

A

Letter of Intent

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5
Q

A mutual fund must have a minimum net worth of $_____ in order to offer its shares to the public.

A

$100,000

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6
Q

What type of investment company is priced once per business day?

A

Open-end investment companies (mutual funds)

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7
Q

Define breakpoint sales

A

Illegally inducing the purchase of mutual fund shares when combining would save money

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8
Q

May a class B share be referred to as a no-load share?

A

NO! In violation of FINRA rules

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9
Q

Is a Unit Investment Trust (UIT) considered managed or unmanaged?

A

Unmanaged since the holdings are SUPERVISED as opposed to actively managed

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10
Q

Identify NAV

A

Net Asset Value

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11
Q

A client invested $21,000 which has grown to $25,000. On what amount is his breakpoint based?

A

$21,000. Breakpoints are based on the amount contributed.

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12
Q

A fund whose portfolio is created to mirror the composition of a particular index is referred to as an ____ fund.

A

Index

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13
Q

How often must clients receive a report from her mutual fund?

A

Semi-annually

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14
Q

Will new purchases affect a fund’s NAV?

A

No. Assets and number of shares increase proportionally.

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15
Q

What is the main concern when an RR recommends that a client diversify among several fund families?

A

Client may lose out on the opportunity to receive a breakpoint

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16
Q

According to industry rules ____% is the maximum sales charge on mutual funds.

A

8.5% (just like the tax rate)

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17
Q

List some of the investors eligible for sales charge reduction in a mutual fund.

A

Individuals and members of immediate family, trustees and pension plans

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18
Q

Where can investors find information regarding how to buy, redeem or exchange their mutual fund shares?

A

Prospectus

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19
Q

A _____ is a type of investment company which has a fixed portfolio of securities and is supervised, not managed.

A

Unit Investment Trust (UIT)

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20
Q

What happens to the Contingent Deferred Sales Charge (CDSC) holding period when a client switches to a new fund family?

A

The clock is set back to “day 1”

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21
Q

T/F: Custodian banks provide investment management service to a fund

A

FALSE! Custodian banks provide safekeeping services for a fund’s cash and securities

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22
Q

Define: selling dividends

A

Prohibited practice of inducing purchases due to an impending dividend payment

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23
Q

What is a mutual fund exchange?

A

When shares of one fund are sold and shares of another fund are bought from within the same family for no sales charge

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24
Q

T/F: Exchanging mutual fund shares is non-taxable, while switching is taxable.

A

False. BOTH exchanging shares and switching mutual funds are TAXABLE events

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25
Q

With mutual fund shares, what’s the difference between switching and exchanging?

A

Switching is done OUTSIDE of the family, whereas exchanging is done WITHIN the family

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26
Q

Is a mutual fund’s redemption fee considered a sales charge?

A

No, since it does not go to the brokers but rather stays within the fund

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27
Q

Letters of Intent are valid for ____ months.

A

13 months. (weird number)

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28
Q

On Monday at 5:00pm, a customer places a sell order to redeem her mutual fund shares. What price will she receive?

A

Since it is after market close, she will receive the next day’s NAV.

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29
Q

What does the following quote indicate about the fund? NAV: $9.20 Public Offering Prcie (POP): $9.20

A

It’s a no-load fund

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30
Q

Who holds the securities and cash for a mutual fund?

A

A custodian bank

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31
Q

What is not included in a mutual fund’s expense ratio?

A

The sales charge, since only fees are included.

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32
Q

Identify POP

A

Public Offering Price

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33
Q

What are the three requirements for a mutual fund to qualify as diversified?

A

75% of investments must be invested; maximum of 5% can be in one stock; maximum of 10% of a firm’s voting stock may be owned

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34
Q

What portion of a fund’s assets must be invested in a prescribed manner in order for a fund to be diversified?

A

At least 75%

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35
Q

Identify: CDSC

A

Contingent Deferred Sales charge

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36
Q

If an investor wants exposure to a particular industry, a ____ fund is the best type of investment.

A

Sector fund

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37
Q

What happens to Class B shares after a prescribed number of years?

A

Convert to Class A shares

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38
Q

Typically, a mutual fund’s ex-dividend date is the business day ____ the record date.

A

Following

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39
Q

An investor has been purchasing mutual funds using cost-dollar averaging. Is she guaranteed against loss?

A

No

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40
Q

The purchase of a mutual fund is also known as a share ____.

A

Issuance

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41
Q

Every investment company that has more than ____ shareholders must register with the SEC.

A

100

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42
Q

May closed end funds issue more than 1 type of security?

A

Yes- common stock, preferred stock or bonds

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43
Q

Sales charge is always expressed as a percentage of the _____.

A

Public Offering Price (POP)

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44
Q

When must a mutual fund prospectus be delivered?

A

At or prior to the time of solicitation or when marketing materials are sent

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45
Q

What is the compensation paid to an investment advisor?

A

Management fee

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46
Q

When do most mutual funds calculate their NAV?

A

When the markets close

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47
Q

How may a mutual fund be capitalized?

A

Mutual (open-end) funds may only issue COMMON STOCK to raise capital

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48
Q

Who must approve a change to a mutual fund’s objective?

A

Majority of VOTING shares (not just shareholders)

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49
Q

What share class carries a back-end load?

A

Class B

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50
Q

LOIs may be back dated for _____ days.

A

90

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51
Q

Do some mutual funds issue fractional shares?

A

Yes, it is common.

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52
Q

What type of mutual fund is often issued as a safe harbor?

A

Money-market funds

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53
Q

T/F: If a mutual fund investor chooses to reinvest dividends, taxes will be deferred.

A

False.

54
Q

What share class carries a level load?

A

Class C.

55
Q

T/F: A breakpoint sale is a prohibited action of selling shares at just under here breakpoints are available?.

A

True

56
Q

Identify: SAI

A

Statement of Additional Information

57
Q

Are open-end investment companies considered managed or unmanaged?

A

Managed (mutual funds are managed by an investment advisor)

58
Q

What restrictions exist in describing a fund as no-load?

A

No front end or deferred sales charge and no 12b-1 fees in excess of .25%

59
Q

What is not included in the expense ratio of a mutual fund?

A

Sales charge

60
Q

To calculate the POP for a mutual fund, the formula is:

A

NAV / (100% - sales charge %)

61
Q

With what should a client be concerned if an RR recommends a Class B share switch between fund families?

A

Holding period reset to zero or a CDSC may apply upon redemption

62
Q

T/F: Mutual fund shares may be purchased and sold in the secondary market

A

False. Always considered new issues and are bought and sold through the fund

63
Q

If the high tech fund has a NAV of $4.25 and a POP of $4.50, what is it’s sales charge %?

A

5.5% ((4.5 - 4.25)/4.5)

64
Q

What is the name of the fee paid to the fund’s investment advisor?

A

Management Fee

65
Q

T/F: engaging in breakpoint sales is allowed when dealing with large investors?

A

False, prohibited regardless of what type of client (breakpoint (selling shares just below where a breakpoint is available)

66
Q

How may a closed-end fund be capitalized?

A

Common stock, preferred stock, bonds

67
Q

Describe a typical index fund’s expenses and management style.

A

Generally low and passively managed

68
Q

After the initial offering, where are shares of a closed-end management company purchased?

A

Secondary market (like a stock)

69
Q

What are some of the advantages of investing in open-end investment companies?

A

Diversification, professional management, liquidity

70
Q

Describe dollar cost averaging

A

Investing fixed-dollar amount at regular intervals, regardless of the price of the asset

71
Q

What are the two types of management companies?

A

Open end and closed end

72
Q

T/F: Mutual fund share purchases and redemptions settle in two business days

A

False- they don’t have a fixed settlement date, but it usually occurs on the same day

73
Q

What is the annual fee levied against a fund’s assets and used to pay expenses of commissions and retail communications?

A

12b-1 fee

74
Q

Which share class is typically appropriate for an investor with an uncertain time horizon?

A

Class C

75
Q

When must the Statement of Additional Information be distributed to clients?

A

Upon request

76
Q

A mutual fund’s POP = ____ + _____

A

NAV + sales charge

77
Q

Identify the acronym: SBI

A

Shares of Beneficial Interest (represents a clients Unit Investment Trust holdings)

78
Q

Is a letter of intent binding on the investor?

A

No, but it is binding on the investment company

79
Q

What share class carries a front-end load?

A

Class A

80
Q

The formula for a fund’s expense ratio is ____ / ____.

A

Expenses / Average Net Assets

81
Q

What must be included in a mutual fund confirmation?

A

Potential redemption fees or CDSCs that may apply

82
Q

Open-end management companies are more commonly referred to as ____.

A

Mutual funds

83
Q

Define breakpoint:

A

Dollar levels of investment purchases that qualify fora reduced sales charge

84
Q

What is a mutual fund’s largest expense?

A

Management fee

85
Q

Does a UIT have a board of directors?

A

No, but it has a board of trustees

86
Q

T/F: All mutual funds must meet the SEC’s definition of diversified.

A

False, some can be non-diversified and can invest in any manner

87
Q

List some of the disclosures in a mutual fund’s prospectus.

A

Investment objectives, risks, sales charges, operating expenses, and how NAV is calculated

88
Q

On Monday at 11am, a customer places a call to sell mutual fund shares. What price will she receive?

A

Monday’s NAV since she replaced it before market close

89
Q

Does a mutual fund’s board of directors make individual stock selections?

A

No

90
Q

What is the formula for determining a mutual fund’s net assets?

A

Total assets - total liabilities

91
Q

What is the formula for computing NAV?

A

Net assets / total shares outstanding

92
Q

What is the maximum permissible 12b-1 fee?

A

1%, unless it’s a no-load which it is capped at .25%

93
Q

A mutual fund shareholder’s tax liability is reported on Form ____

A

1099

94
Q

What is the formula for determining the number of shares able to be purchased when reaching a breakpoint?

A

Dollars invested / newly calculated offering price

95
Q

T/F: To lower sales charges, investors add mutual fund purchases in all accounts using Rights of Accumulation

A

True, but they must be from the same family

96
Q

Rights of accumulation benefits may be combined with LOI benefits?

A

False

97
Q

Class B shares are eligible for breakpoints?

A

False, only Class A shares

98
Q

What is the typical voting criteria for a mutual fund?

A

One vote per one share

99
Q

To which clients is an RR required to disclose breakpoints?

A

All clients

100
Q

Who disburses checks for capital gains distributions to mutual fund shareholders?

A

Transfer agent (also typically the paying agent)

101
Q

T/F: Investors can exchange mutual fund shares for shares of any other funds for no sales charge

A

False, only within the same family of funds

102
Q

May an RR create her own breakpoint schedule?

A

No, must follow fund’s prospectus

103
Q

T/F: The market price of closed-end shares could be higher, lower or equal to NAV.

A

True

104
Q

Identify: FAC

A

Face-amount Certificate

105
Q

Which share class typically has the lowest expense ratio?

A

Class A

106
Q

Breakpoints are calculated based on all purchases made within a single ______

A

Fund family

107
Q

If a client’s goal is preservation of principal, what fund would be most appropriate?

A

Money-market fund

108
Q

A mutual fund’s sales charge is also referred to as the ____

A

Sales load

109
Q

If the Green Fund has a NAV of $12.70 and a sales charge of 5.5%, what is the POP?

A

$13.44 (NAV / (1 - sales charge))

110
Q

Funds offer _____ to allow buyers to add all purchases made from a fund family to reduce sales charge.

A

Rights of Accumulation

111
Q

Who records the names of mutual fund shareholders?

A

Transfer Agent

112
Q

Will liquidating shares in a fund at a loss affect its NAV?

A

No, position has already been marked to market

113
Q

T/F: Market changes can affect whether a fund can continue to be considered diversified.

A

False

114
Q

A _____ fund is one that invests in a specific industry or geographic region

A

Sector or specialized fund

115
Q

Is a redemption fee the same as a CDSC?

A

No, CDSC is a sales charge, not a fee

116
Q

What price is paid for mutual fund shares?

A

Public Offering Price (POP)

117
Q

What price is paid for closed-end management company shares?

A

Market price + commission

118
Q

The sale of a mutual fund is also known as a share _____

A

Redemption

119
Q

What do differences in mutual fund share classes represent?

A

Different methods by which sales charge is collected

120
Q

T/F: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable

A

False, can’t induce share sales based on receipt of dividend

121
Q

What’s the purpose of a redemption fee?

A

Designed to discourage investors from redeeming shares too quickly

122
Q

What are (3) distinct advantages to investing in an open-end investment company?

A

1) Diversification 2) Professional Management 3) Liquidity

123
Q

Is a UIT actively managed?

A

No, supervised with a fixed portfolio

124
Q

May a money-market fund charge a 12b-1 fee?

A

Yes, but no more than .25%

125
Q

What would cause a bond fund’s assets to rise?

A

New purchasers bringing in funds or decrease in interest rates

126
Q

The NAV of a mutual fund is like the ____ price of a stock.

A

Bid

127
Q

What are the (3) different types of investment companies?

A

Face Amount Certificate Companies, Unit Investment Trusts, Management Companies

128
Q

What would cause a bond fund’s assets to fall?

A

Redemptions or an increase in interest rates

129
Q

What amount of an investment company’s board of directors must be independent/unaffiliated?

A

Majority

130
Q

An investor exchanging mutual fund shares will pay the _____.

A

Net Asset Value

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