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SIE > Ch. 7 > Flashcards

Ch. 7 Flashcards

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
With mutual fund shares, what's the difference between switching and exchanging?
Switching is done OUTSIDE of the family, whereas exchanging is done WITHIN the family
26
Is a mutual fund's redemption fee considered a sales charge?
No, since it does not go to the brokers but rather stays within the fund
27
Letters of Intent are valid for ____ months.
13 months. (weird number)
28
On Monday at 5:00pm, a customer places a sell order to redeem her mutual fund shares. What price will she receive?
Since it is after market close, she will receive the next day's NAV.
29
What does the following quote indicate about the fund? NAV: $9.20 Public Offering Prcie (POP): $9.20
It's a no-load fund
30
Who holds the securities and cash for a mutual fund?
A custodian bank
31
What is not included in a mutual fund's expense ratio?
The sales charge, since only fees are included.
32
Identify POP
Public Offering Price
33
What are the three requirements for a mutual fund to qualify as diversified?
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
34
What portion of a fund's assets must be invested in a prescribed manner in order for a fund to be diversified?
At least 75%
35
Identify: CDSC
Contingent Deferred Sales charge
36
If an investor wants exposure to a particular industry, a ____ fund is the best type of investment.
Sector fund
37
What happens to Class B shares after a prescribed number of years?
Convert to Class A shares
38
Typically, a mutual fund's ex-dividend date is the business day ____ the record date.
Following
39
An investor has been purchasing mutual funds using cost-dollar averaging. Is she guaranteed against loss?
No
40
The purchase of a mutual fund is also known as a share ____.
Issuance
41
Every investment company that has more than ____ shareholders must register with the SEC.
100
42
May closed end funds issue more than 1 type of security?
Yes- common stock, preferred stock or bonds
43
Sales charge is always expressed as a percentage of the _____.
Public Offering Price (POP)
44
When must a mutual fund prospectus be delivered?
At or prior to the time of solicitation or when marketing materials are sent
45
What is the compensation paid to an investment advisor?
Management fee
46
When do most mutual funds calculate their NAV?
When the markets close
47
How may a mutual fund be capitalized?
Mutual (open-end) funds may only issue COMMON STOCK to raise capital
48
Who must approve a change to a mutual fund's objective?
Majority of VOTING shares (not just shareholders)
49
What share class carries a back-end load?
Class B
50
LOIs may be back dated for _____ days.
90
51
Do some mutual funds issue fractional shares?
Yes, it is common.
52
What type of mutual fund is often issued as a safe harbor?
Money-market funds
53
T/F: If a mutual fund investor chooses to reinvest dividends, taxes will be deferred.
False.
54
What share class carries a level load?
Class C.
55
T/F: A breakpoint sale is a prohibited action of selling shares at just under here breakpoints are available?.
True
56
Identify: SAI
Statement of Additional Information
57
Are open-end investment companies considered managed or unmanaged?
Managed (mutual funds are managed by an investment advisor)
58
What restrictions exist in describing a fund as no-load?
No front end or deferred sales charge and no 12b-1 fees in excess of .25%
59
What is not included in the expense ratio of a mutual fund?
Sales charge
60
To calculate the POP for a mutual fund, the formula is:
NAV / (100% - sales charge %)
61
With what should a client be concerned if an RR recommends a Class B share switch between fund families?
Holding period reset to zero or a CDSC may apply upon redemption
62
T/F: Mutual fund shares may be purchased and sold in the secondary market
False. Always considered new issues and are bought and sold through the fund
63
If the high tech fund has a NAV of $4.25 and a POP of $4.50, what is it's sales charge %?
5.5% ((4.5 - 4.25)/4.5)
64
What is the name of the fee paid to the fund's investment advisor?
Management Fee
65
T/F: engaging in breakpoint sales is allowed when dealing with large investors?
False, prohibited regardless of what type of client (breakpoint (selling shares just below where a breakpoint is available)
66
How may a closed-end fund be capitalized?
Common stock, preferred stock, bonds
67
Describe a typical index fund's expenses and management style.
Generally low and passively managed
68
After the initial offering, where are shares of a closed-end management company purchased?
Secondary market (like a stock)
69
What are some of the advantages of investing in open-end investment companies?
Diversification, professional management, liquidity
70
Describe dollar cost averaging
Investing fixed-dollar amount at regular intervals, regardless of the price of the asset
71
What are the two types of management companies?
Open end and closed end
72
T/F: Mutual fund share purchases and redemptions settle in two business days
False- they don't have a fixed settlement date, but it usually occurs on the same day
73
What is the annual fee levied against a fund's assets and used to pay expenses of commissions and retail communications?
12b-1 fee
74
Which share class is typically appropriate for an investor with an uncertain time horizon?
Class C
75
When must the Statement of Additional Information be distributed to clients?
Upon request
76
A mutual fund's POP = ____ + _____
NAV + sales charge
77
Identify the acronym: SBI
Shares of Beneficial Interest (represents a clients Unit Investment Trust holdings)
78
Is a letter of intent binding on the investor?
No, but it is binding on the investment company
79
What share class carries a front-end load?
Class A
80
The formula for a fund's expense ratio is ____ / ____.
Expenses / Average Net Assets
81
What must be included in a mutual fund confirmation?
Potential redemption fees or CDSCs that may apply
82
Open-end management companies are more commonly referred to as ____.
Mutual funds
83
Define breakpoint:
Dollar levels of investment purchases that qualify fora reduced sales charge
84
What is a mutual fund's largest expense?
Management fee
85
Does a UIT have a board of directors?
No, but it has a board of trustees
86
T/F: All mutual funds must meet the SEC's definition of diversified.
False, some can be non-diversified and can invest in any manner
87
List some of the disclosures in a mutual fund's prospectus.
Investment objectives, risks, sales charges, operating expenses, and how NAV is calculated
88
On Monday at 11am, a customer places a call to sell mutual fund shares. What price will she receive?
Monday's NAV since she replaced it before market close
89
Does a mutual fund's board of directors make individual stock selections?
No
90
What is the formula for determining a mutual fund's net assets?
Total assets - total liabilities
91
What is the formula for computing NAV?
Net assets / total shares outstanding
92
What is the maximum permissible 12b-1 fee?
1%, unless it's a no-load which it is capped at .25%
93
A mutual fund shareholder's tax liability is reported on Form ____
1099
94
What is the formula for determining the number of shares able to be purchased when reaching a breakpoint?
Dollars invested / newly calculated offering price
95
T/F: To lower sales charges, investors add mutual fund purchases in all accounts using Rights of Accumulation
True, but they must be from the same family
96
Rights of accumulation benefits may be combined with LOI benefits?
False
97
Class B shares are eligible for breakpoints?
False, only Class A shares
98
What is the typical voting criteria for a mutual fund?
One vote per one share
99
To which clients is an RR required to disclose breakpoints?
All clients
100
Who disburses checks for capital gains distributions to mutual fund shareholders?
Transfer agent (also typically the paying agent)
101
T/F: Investors can exchange mutual fund shares for shares of any other funds for no sales charge
False, only within the same family of funds
102
May an RR create her own breakpoint schedule?
No, must follow fund's prospectus
103
T/F: The market price of closed-end shares could be higher, lower or equal to NAV.
True
104
Identify: FAC
Face-amount Certificate
105
Which share class typically has the lowest expense ratio?
Class A
106
Breakpoints are calculated based on all purchases made within a single ______
Fund family
107
If a client's goal is preservation of principal, what fund would be most appropriate?
Money-market fund
108
A mutual fund's sales charge is also referred to as the ____
Sales load
109
If the Green Fund has a NAV of $12.70 and a sales charge of 5.5%, what is the POP?
$13.44 (NAV / (1 - sales charge))
110
Funds offer _____ to allow buyers to add all purchases made from a fund family to reduce sales charge.
Rights of Accumulation
111
Who records the names of mutual fund shareholders?
Transfer Agent
112
Will liquidating shares in a fund at a loss affect its NAV?
No, position has already been marked to market
113
T/F: Market changes can affect whether a fund can continue to be considered diversified.
False
114
A _____ fund is one that invests in a specific industry or geographic region
Sector or specialized fund
115
Is a redemption fee the same as a CDSC?
No, CDSC is a sales charge, not a fee
116
What price is paid for mutual fund shares?
Public Offering Price (POP)
117
What price is paid for closed-end management company shares?
Market price + commission
118
The sale of a mutual fund is also known as a share _____
Redemption
119
What do differences in mutual fund share classes represent?
Different methods by which sales charge is collected
120
T/F: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable
False, can't induce share sales based on receipt of dividend
121
What's the purpose of a redemption fee?
Designed to discourage investors from redeeming shares too quickly
122
What are (3) distinct advantages to investing in an open-end investment company?
1) Diversification 2) Professional Management 3) Liquidity
123
Is a UIT actively managed?
No, supervised with a fixed portfolio
124
May a money-market fund charge a 12b-1 fee?
Yes, but no more than .25%
125
What would cause a bond fund's assets to rise?
New purchasers bringing in funds or decrease in interest rates
126
The NAV of a mutual fund is like the ____ price of a stock.
Bid
127
What are the (3) different types of investment companies?
Face Amount Certificate Companies, Unit Investment Trusts, Management Companies
128
What would cause a bond fund's assets to fall?
Redemptions or an increase in interest rates
129
What amount of an investment company's board of directors must be independent/unaffiliated?
Majority
130
An investor exchanging mutual fund shares will pay the _____.
Net Asset Value

SIE (20 decks)

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