Chapter 10 - Investment Products Flashcards
What is an investment company?
A company that pools investors’ money together and invests in securities on their behalf.
What is a Face-Amount Certificate company?
Company that will get a paid a lump sum or periodically, from the investor so that the investor may get a fixed sum at a future date. Very few of these companies exist.
What is a Unit Investment Trust?
Company organized under a trust indenture, does not board of directors or investment adviser and does not actively manage their own accounts. They typically purchase other company shares/bonds and then issue shares of interest in its own portfolio.
What law corresponds with UIT’s?
How are shares bought?
- Investment Company Act of 1940
- Not traded in secondary market, only redeemed by trust
What is a Management Investment Company?
Actively managed fund or securities portfolio to achieve an investment objective. The most common and can be open/close ended.
How does a close ended fund issue shares and how would you buy shares?
Conducts a common stock offering, registers fixed number of shares with SEC, and offers to public for limited time through underwriters. Investors may buy only full shares in the secondary market. (ETF)
How does an open ended fund issue shares and how would you buy shares?
Registers with the SEC as an open offering which is essentially unlimited shares. Buy shares, can be fractional, directly from the fund at the Net Asset Value plus a sales charge. (Mutual Funds)
What’s the 75-5-10 rule for diversification?
75% of the funds assets are invested in securities of companies other than the investment company. Of the 75%, 5%, of assets aren’t invested in one issuer. Of the 75%, the fund doesn’t own 10% of outstanding voting securities of an issuer.
For open end companies what can they invest in and what is their minimum asset-to-debt ratio?
Can only invest in common stocks and must have a 3:1 ratio.
The registration statement of an investment company must have two parts, what are they?
Summary prospectus and the statement of additional information
The SEC treats an open end fund as a continuous public offering. What must accompany all sales?
A prospectus. Just as when an issuer issues its own securities in a public offering.
True or False: You can purchase shares of a mutual fund on margin?
False, as a continuous primary offering it is not allowed, but they can be used as collateral for a margin account if its been fully paid for 30 days.
The BOD of an investment management company has a few objectives, what are they?
They define the fund to offer (growth, income, sector), the fund’s objective, and approves the transfer agent, custodian, and adviser.
What is the role of the investment adviser?
invest cash, manage strategy, trading, and tax status of distributions. Hired on a two year contract, subject to annual shareholder approval.
What is the role of a custodian?
Keep the investment company assets physically separated at all times, and restrict access to the account to certain officers. Usually a bank or broker/dealer.
What is the role of the transfer agent?
Issue, redeem, cancel shares, handle name changes, send confirmations and distributions, and record outstanding shares.
What is a combination fund?
Combines the objectives of growth and income.
What is a balanced fund?
Invests in stocks for appreciation and bonds for income, according to a formula determined by the fund manager.
What is an asset allocation fund?
Split investments between stocks, bonds, and money market. Manager move in and out of the three all the time according to market conditions.
What is a dual purpose fund?
Close ended funds seek income from income shares and gains from portfolio holding.
What is a Money Market?
No load fund, no sales or liquidation fees, and are made up of securities that are short term (13 months or less) and has a NAV of $1. Investments include T-bills, commercial paper, repurchase agreements..
What is portfolio turnover?
Turnover rate reflects the funds holding period. A fund with a 100% turnover rate, holds its securities for less than a year. Gains are likely to be short term and have the max tax rate is this is the case.
True or False: Funds offer shares with 12b-1 fee of less than .25% may also be referred to a no-load fund?
True, no load funds offer their shares with no sales charge or less than .25%. The fund pays all sales expenses.
What is forward pricing?
The purchase price of the mutual fund is determined by the next day NAV.
What is the NAV calculation?
Assets(cash+current value of securities) - liabilities = NAV
Fund NAV/outstanding shares = NAV per share
Does an investor pay a sales charge when buying a close ended fund?
No, they pay a brokerage commission or a markup/markdown. Secondary market.
How does a mutual fund collect on sale of shares?
Front end load (difference between POP and NAV)
Back end load (contingent deferred sales charge, redeem)
12b-1 fees or asset based fees
An investor has $10,000 to invest and the fund has a 5% front end load. What is the amount invested?
10,000 * 5% = 500 sales charge
10,000 - 500 = 9500 invested
What is the calculation for sales charge and sales charge percentage?
Sales charge = POP - NAV
Sales charge % = Sales charge/POP
What are the formula’s for POP?
POP = NAV + Sales charge POP = Nav/(100% - Sales charge %)
True or False: Investment clubs formed for the purpose of investing get breakpoints in a mutual fund?
False, Breakpoints are available to pretty much anyone else to reduce the sales charge percentage. It is a sliding scale, the more you invest the more break you get.
How can an investor take advantage of getting breakpoints?
Lump sum investment, aggregated accounts, letter of intent stating that an investor will invest additional funds necessary within 13 months
How long can an investor back date a LOI for breakpoints?
90 days
What are Rights of Accumulation?
Similar to breakpoints but available for subsequent investments, allows for share appreciation to get to breakpoints, and does not impose time limits.
True or False: Mutual funds will usually offer multiples funds called “family of funds”?
True
What are the advantages and disadvantages to exchanging or converting into a fund of the same family?
Often times investors may do an exchange from one fund to another of the same family for no additional sales charge. However, the exchange is a taxable event.
What does Class A, B, C mean for a mutual fund?
How much and in what way an investor pays sales charge and related expenses. A is front end load and can be eliminated/reduced by breakpoints. B is back end load that declines over time combined with 12b-1. C is 12b-1 charged quarterly.
If a customer sends in a written request, that is guaranteed, to redeem a fund, what must occur?
The custodian has 7 business days to honor the request and redeem the shares.
What is the maximum sales charge of the POP?
8.5%
When are 12b-1 fees charged and approved?
Charged quarterly but they are approved annually.
Who can buy below the POP?
Member firms, not the public or non members
Does NAV change when shares are issued or redeemed?
No
What happens to mutual fund shares when redeemed?
They are destroyed and may not be sold to other owners. Investors purchasing will purchase new shares from the fund.
Customer purchases a mutual fund with a net asset value of $7.82 and an 8% sales charge. What is the sales charge?
First find the POP. NAV/(100% - sales charge %) = POP
$7.82/(100 - 8%) = $8.50
POP - NAV = Sales Charge
$8.50 - $7.82 = $0.68
If a company charges the maximum 8.5% fee what three things must it offer?
Automatic reinvestment of dividends and cap gains at NAV, breakpoints, and rights of accumulation
Redemption of a no load fund is made at what?
No load funds are redeemed at NAV.
For a mutual fund who sets the ex-dividend date?
The board of directors, and set the day after the record date.
True or False: Dividends and capital gains are taxable whether taken as cash or reinvested?
True
What is cost basis for a mutual fund?
Original purchase plus reinvested dividends and capital gain distributions.
What is Dollar Cost Averaging?
Investing identical amounts at regular intervals. Allows individual to purchase more shares when the price is low and less shares when the price is high. Over time average cost per share is lower than average price per shares.
