Chapter 13 Part 3

Question 1

UIT investors will pay

Answer 1

“a sales charge which is included in the offering price of the UiT. For example, if a UiT had a 3% sales charge and an offering price of$1,000, the amount of sales charge would he $30 ($1,000 x 3%). The net investment would be $970. The ongoing value of the UIT is based on the net asset value (NAV of the securities held in the trust’s portfolio. UiTs are typically sold through
broker-dealers that generally will repurchase units from investors prior to maturities. Investors may qualify for a reduced sales charge (breakpoint) if they purchase a certain dollar amount of a UiT”

Question 2

One example of a UiT is a

Answer 2

“fixed trust. Typically a broker-dealer will create a portfolio of state-specific municipal bonds having a single maturity date in the future. The investor will receive federally taxfree
dividends from the portfolio and the principal at maturity. A fixed trust represents a buy-andhold strategy where the portfolio is not traded”

Question 3

The third and most common type of investment company is the management company. A management company can be either

Answer 3

open-end or closed-end. Both manage a portfolio of securities in accordance with specified investment objectives. An open-end investment company is defined as one that continuously issues redeemable shares. A closed-end management company does not issue redeemable shares

Question 4

Open-end management companies, generally called mutual funds, continuously offer

Answer 4

new shares (primary offerings). Therefore, a prospectus must be provided at or prior to a sale or offer of mutual funds. Mutual funds stand ready to redeem at the shareholder’s request. Every share issued is a new share and shares that arc redeemed are destroyed.

Question 5

Open-End Management Companies These companies may issue

Answer 5

common shares only, and there is no secondary market for the shares. When purchasing a mutual fund, the investor will pay the public offering price (POP). When redeeming shares, the investor will receive the net asset value (NAY).

Question 6

The shareholders own the

Answer 6

mutual fund, which in turn owns a portfolio of securities. Each investor owns an undivided interest in the underlying portfolio. No one individual has a specific interest in any one asset that makes up the portfolio

Question 7

A closed-end management company usually

Answer 7

capitalizes through a one-time public offering of shares. Unlike mutual funds, a closed-end company may issue common stock, preferred stock, or bonds. The company does not continuously issue new shares, nor will it redeem its shares. Once issued, an investor purchases the shares in the open market and disposes of the shares in the same manner, paying a commission or markup or markdown to buy or sell the shares

Question 8

The market price of closed-end funds will be based on the

Answer 8

forces of supply and demand in the same manner that applies to most securities, rather than being directly related to the net asset value per share. A closed-end company can, therefore, sell at a premium above the net asset value or at a discount below the net asset value.

Question 9

A management company may be either

Answer 9

diversified or non- diversified

Question 10

In order to qualify as a diversified company, the portfolio must be invested in a specific manner

Answer 10

1. At least 75% of the assets must be invested. 2. No more than 5% of the invested assets may be invested in any one company. 3. The investment company may own no more than 10% of the voting stock of any one company. A diversified company must meet these standards at the time of investment. Subsequent market fluctuations or consolidations will not nullify the company’s status as diversified.

Question 11

Growth Funds

Answer 11

“Capital appreciation is the main objective of a growth fund. These funds invest in stocks that they believe will show above-average growth in share price. Growth stocks are more volatile than other securities since they are more vulnerable to market risk. However, they also have a higher potential for long-term appreciation. These funds are most suitable for investors
with long-term investment objectives, who can tolerate fluctuations in their principal”

Question 12

Aggressive Growth Funds

Answer 12

These funds invest in small companies, often initial public offerings. The stocks of these companies can be volatile, but historically they have also produced high returns for long-term investors.

Question 13

Equity Income Funds

Answer 13

As the name indicates, current income is the primaiy investment objective of these funds. Equity income funds invest in companies that pay high dividends in relation to their market price. These are usually mature companies that have less potential for capital appreciation but are also less likely to decline in value than growth companies

Question 14

Growth and Income Funds

Answer 14

These funds have both capital appreciation and current income as their investment objectives. Growth and income funds invest in companies that are expected to show more growth than a typical equity income stock and higher dividends than most growth stocks. The trade-off, however, is that they usually show less capital appreciation than pure growth funds and lower dividends than income funds

Question 15

Bond Funds

Answer 15

invest their assets solely in bonds. Their main objectives are current income along with presetvation of capital. These funds are susceptible to the same risks as direct investments in bonds such as credit risk, call risk, reinvestment risk, and some degree of interest- rate risk

Question 16

Bond funds are grouped into subcategories according to the type of bonds that they purchase

Answer 16

Government bond funds invest in Treasury securities. Mortgage-backed funds usually contain mortgage-backed pass-through securities issued by government agencies such as Ginnie Mae or Fannie Mae. Municipal bond funds create portfolios consisting exclusively of municipal bonds. Some invest only in the municipal bonds of one state such as California or New York, providing residents of that state with triple tax-exempt income

Question 17

Corporate hand funds invest in bonds from a variety of

Answer 17

corporate issuers. Since even highly rated corporate bonds have more credit risk than government bonds, the yields from these funds are normally higher. Some corporate bond funds buy investment-grade bonds only. High-yield bond funds invest in bonds rated below investment-grade that are commonly known as junk bonds. High-yield bond funds have the potential to pay higher returns, but they have much greater credit risk

Question 18

The funds will pass through the interest payments they receive from the bonds in their portfolios to

Answer 18

the holders of the bond funds, either monthly, quarterly, or semiannually. One of the major differences between investing in actual bonds versus bond funds is that bonds will have a maturity dale and bond funds will not mature. If a 20-year bond is purchased, 19 years later it will mature in one year. A 20-year bond fund will always have in its portfolio bonds that mature in approximately 20 years. In order to receive her principal with a bond fund, the investor is required to sell (redeem) her shares of the fund. Only by investing in actual bonds will an investor be able to have her principal returned in one lump sum when the bonds mature

Question 19

Index funds

Answer 19

“have become increasingly popular in recent years. An index fund invests its portfolio to mirror the composition of a particular benchmark, or slack or bond index, such as the S&P 500 Index. The fund attempts to produce the same return as the index. Investors cannot expect returns to outperform the relevant benchmark. Nevertheless, index funds have historically
outperformed a large percentage of actively managed funds. Index funds do not require active management and are said to be passively managed. Such funds generally have much lower fees than actively managed funds”

Question 20

Balanced Funds

Answer 20

maintain some proportion of their assets in bonds and preferred stock, as well as in common stock. The proportions will vary from lime to time as market conditions warrant, but part of the portfolio will always be in each type of security. Balanced funds tend to show less volatility than common stock funds, declining less in periods of market declines and advancing less in periods of market advances