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.
