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Series 7 > chapter 18 > Flashcards

chapter 18 Flashcards

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Series 7 Top-off Exam flashcards
1
Q

What are three distinct advantages to investing in an open-end investment company?

A

1) Diversification 2) Professional Management 3) Liquidity

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2
Q

Investment companies must send financial statements to customers every ____ months.

A

6 months

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3
Q

What amount of an investment company’s Board of Directors must be independent/unaffiliated?

A

majority

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4
Q

What are the three different types of investment companies?

A

1) Face Amount Certificate Companies 2) Unit Investment Trusts (UITs) 3) Management Companies

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5
Q

True or False: Mutual fund shares may be purchased and sold in the secondary market.

A

False

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6
Q

Since mutual funds are considered primary market issues, they must be sold by ____________.

A

prospectus

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7
Q

Are mutual funds considered marginable securities?

A

No. Investors must pay 100% of the purchase price.

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8
Q

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

A

8.5%

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9
Q

What price is paid for mutual fund shares?

A

The Public Offering Price (POP). POP = NAV + Sales Charge (if applicable).

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10
Q

What does the following quote indicate about the fund? NAV: $9.20 POP: $9.20

A

it’s a no-load fund

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11
Q

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

A

in the secondary market

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12
Q

What terms are synonymous with a mutual fund’s Net Asset Value (NAV)?

A

bid price or redemption price

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13
Q

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

A

market price plus a commission

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14
Q

True or False: The market price of closed-end shares could be higher, lower, or equal to the NAV.

A

True. Shares can trade at a premium or discount to NAV based on supply and demand forces.

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15
Q

May closed-end funds issue more than one type of security?

A

Yes. Closed-end funds may issue common stock, preferred stock, or bonds.

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16
Q

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

A

POP (Public Offering Price)

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17
Q

To calculate the sales charge percentage for a mutual fund, the formula is: (______-______) ÷ ______

A

(POP - NAV) ÷ POP

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18
Q

To calculate the POP for a mutual fund, the formula is: ______ ÷ (______ - ___________)

A

NAV ÷ (100% - Sales Charge %)

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19
Q

Define breakpoint.

A

Dollar levels of investment purchases that qualify for a reduced sales charge

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20
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 (based on the reduced sales charge)

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21
Q

Letters of Intent are valid for ____ months.

A

13 months

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22
Q

Letters of Intent may be back-dated for _____ days.

A

90 days

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23
Q

Is a letter of intent binding on the investor?

A

No, it is binding on the investment company

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24
Q

True or False: If a mutual fund investor chooses to reinvest dividends, taxes will be deferred.

A

False

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25
Q

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

A

rights of accumulation

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26
Q

True or False: To lower sales charges, investors add mutual fund purchases in all accounts using Rights of Accumulation.

A

True, but purchases must all be from same fund family

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27
Q

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

A

sector or specialized fund

28
Q

Into what does a growth fund invest?

A

common stock

29
Q

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

A

money-market fund

30
Q

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

A

index fund

31
Q

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

A

low expenses, passive management

32
Q

___________________ is the balancing of investment classes according to an investor’s investment objectives.

A

asset allocation

33
Q

What funds are similar to an index fund, but trade in the secondary market like stock?

A

ETF

34
Q

True or False: ETFs are marginable and may be sold short.

A

True

35
Q

What is a fund’s net investment income?

A

Dividends + interest - expenses

36
Q

True or False: Regulated Investment Companies (under Subchapter M) may relieve their burden of paying tax on income.

A

True. only taxed on income retained

37
Q

What are the requirements for being considered a Regulated Investment Company?

A

The fund must be a domestic company that distributes at least 90% of its net investment income

38
Q

A Regulated Investment Company’s net investment income will ultimately be taxed to the __________________.

A

shareholders

39
Q

What is the annual fee levied against a fund’s assets to pay expenses of commissions, advertising, and sales literature?

A

12b-1 fee

40
Q

True or False: Custodian banks provide investment management service to a fund.

A

False. Custodian banks provide safekeeping for a fund’s cash and securities.

41
Q

A fund’s management fee is typically calculated based on a percentage of _________________________.

A

assets under management

42
Q

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

A

UIT

43
Q

Are breakpoints available when investing in UITs?

A

YES

44
Q

When a fund distributes a capital gain, is it the fund’s or shareholder’s holding period that is considered?

A

The fund’s holding period is used to determine whether long-term or short-term.

45
Q

A fund distributes a gain on shares held for 3 yrs. Joe has owned the fund shares for 6 months. How is Joe’s gain taxed?

A

As a long-term capital gain, since the fund held the shares for three years. Joe’s holding period is irrelevant.

46
Q

What is a REIT?

A

Real Estate Investment Trust

47
Q

What amount of net income must a REIT distribute?

A

90%

48
Q

The trading of REITs is most similar to what type of investment company?

A

Closed-end management companies, since both trade in the secondary market (exchange or OTC)

49
Q

Is a REIT a form of direct participation program (DPP)?

A

no, they do no pass through losses

50
Q

A REIT could derive income from what different sources?

A

Interest (mortgage REIT), rent from both residential and commercial property, and capital gains (equity REIT)

51
Q

If a REIT pays dividends, would the corporate dividend exclusion rule apply?

A

no

52
Q

True or False: REITs are exempt from the registration requirements of the Securities Act of 1933.

A

False

53
Q

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

A

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

54
Q

What restrictions exist in describing a fund as no load?

A

It may have no front-end or deferred sales charge, and a 12b-1 fee cannot exceed .25%.

55
Q

What do the differences in mutual fund share classes represent?

A

different methods by which sales charge is collected

56
Q

If the Hi-Tech Fund has a NAV of $4.25 and a POP of $4.50, what is its sales charge percentage?

A

5.5%

57
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

58
Q

True or False: A breakpoint sale is a prohibited action of selling shares at just under where breakpoints are available.

A

True

59
Q

What are the important numbers associated with REITs?

A

90% income distributed, 5 or less may not own more than 50%, 100+ shareholders, 75% of assets invested in real estate

60
Q

True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.

A

False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.

61
Q

Identify the acronym: ETF

A

Exchange-Traded Fund

62
Q

Identify the acronym: NAV

A

Net Asset Value

63
Q

Identify the acronym: POP

A

Public Offering Price

64
Q

If $25,000 is invested in an inverse ETF, what is the value if the market drops 10% on day 1, then rises 10% on day 2?

A

Day 1: $25,000 x 1.10 = $27,500 and Day 2: $27,500 x .90 = $24,750

65
Q

If $25,000 is invested in an inverse ETF, what is the value if the market drops 10% on day 1, then rises 10% on day 2?

A

Day 1: $25,000 x .95 = $23,750 and Day 2: $23,750 x 1.10 = $26,125

Series 7 (25 decks)

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