Chapter 4 - Investment Companies Flashcards
1
Q
Investment Company is?
Regulated by? Must register under?
A
A financial institution principally engaged in investing in securities
They pool investors money and invest the funds in securities to achieve stated goals
Regulated by the SEC and must register under the Investment Company Act of 1940
2
Q
Most appealing aspects of investment companies are? (3)
Investment companies are designed for ______ not short term trading
A
Diversification
Liquidity
Professional Management with funds
Long Term Investing
3
Q
Three Classifications of Investment Companies are?
A
Face Amount Certificate Companies
Unit Investment Trusts (UITs)
Management Companies
4
Q
Face Amount Certificate Companies issue what?
A
Debt certificates at a discount that pay purchasers a stated face value at maturity
5
Q
Unit Investment Trusts issue?
Meaning?
A
Only redeemable units
When you want your money back you don’t sell in the secondary market. You go back to the issuing investment trust and redeem your units to get money back
6
Q
Unit Investment trusts generally have a fixed portfolio of diverse _____ or _____ _____
(3 words)
UITs do ____ have a portfolio manager
A
Municipal or Corporate Bonds
Not
7
Q
UITs are ____ but not managed meaning securities in the portfolio may be sold, but the funds are not ____
UITs charge little or no ____ and a low ____
Have a ___ indenture and a Board of _____
A
Supervised
Reinvested
Management Fee, Percentage Sales Charge
Trust, Trustees
8
Q
UITs pay investors ____ not _____
UITs are terminated once all the bonds in the trust have _____
Some UITs provide investors with payment options such as _____ ______
A
Interest, Dividends
Matured
Quantity Discounts (Break Point Discounts)
9
Q
Types of Management Companies are?
A
Open End
Closed End
Diversified
Non-Diversified
10
Q
Open End Management Companies description
A
Issue and redeem shares every business day
11
Q
Closed End Management Company description
A
Issue shares once, which are then publicly traded
12
Q
Diversified Companies description?
Most funds are this
A
Has at least 75% of assets regulated so that not more than 5% of its assets are invested in one corporation and it does not own more than 10% of the outstanding voting stock of any one company
13
Q
Non Diversified Management Company description
A
Assets are not regulated
14
Q
Open End Investment Company are also referred to as?
A
Mutual Funds
15
Q
In mutual fund mutuality means?
Considered _____ liquid since shares are issued and redeemed daily
Not insured by FDIC
A
All shareholders share proportionately in the funds gains, losses, and income
Highly
16
Q
Open End Investment Companies issue only _____ shares
Meaning?
A
Redeemable
Do not trade in a secondary market and must be redeemed by investment company
17
Q
Open End Investment Companies can only issue ______. Not senior securities (proffered stock and bonds)
A
Voting Common Shares
18
Q
Net Asset Value Per Share formula (NAV)
A
(Total Assets of the fund- total liabilities)/Total # of shares outstanding
Divided by Total Number of Shares outstanding
19
Q
NAV means
A
Net Asset Value Per Share
20
Q
NAV reflects ____ value of all securities in the funds portfolio plus any ____ or ____ income received
A
Closing Market
Interest or Dividend
21
Q
Bid = ____ = _____
A
NAV/Redemption Price
22
Q
Ask=____ + ______ = Offering Price
A
NAV, Max Sales Load
23
Q
For Open End…bid and ask are calculated ____ usually at the close of NYSE trading
A
Daily
24
Q
Forward Pricing is required when buying or selling shares of Open End companies. Meaning?
A
Investors get the NEXT calculated bid or ask price (as of the market close) after the order is entered
25
Increase in NAV is best described as?
Appreciation
26
No Load Fund is a mutual fund which does not charge a ______. Thus the bid and ask are _____.
Sales Load
The same
27
Capitalization constantly changes in a mutual fund because shares are issued and redeemed ____
Daily
28
Net Redemptions means
More investors have redeemed shares (sold) than those who have purchased new shares
29
Mutual Funds can ____ be purchased on margin
Not
30
Maximum sales load under the Investment Company Act of 1940 is _____
Under FINRA rules it’s ______ (NEED TO KNOW DAY TO DAY)
9%
8.5%
31
Redeemable Only means _____
Not Redeemable means ____
Not Marketable
Marketable
32
Closed End Investment Companies do not issue _____ shares. Shares trade on an _____ or ______
Redeemable
Exchange or OTC
33
In a Closed End Investment Company NAV does not necessarily relate to _____ &______
Prices are determined by ____
Bid & Ask
Supply and Demand
34
Whenever the NAV per share of a fund is GREATER than the ASK (fund shares are selling at a discount to the NAV) fund must be a _____ fund
Closed End
35
No sales load is charged on a closed end fund. _____ are charged.
Commissions
36
A Closed End investment company has a ____ capitalization because a fixed number of shares are issued
Fixed
37
Closed End Companies may issue ____, _____, and _____.
Common Stock
Preferred stock
Bonds
38
When looking at a price quote for a closed end fund, the last column is the % difference. This indicates that todays closing price is X% higher or lower than the ______
Previous Days Closing Price
39
Business Development Company (BDC)
Is a closed end investment company that provides ______ to ______ that cannot otherwise easily raise capital
Targeted BDC investors are _____ with _____
Like REITS, BDCs are required to distribute at least ____ of their income as dividends
Debt Capital to Small and Medium Sized companies
Retail Clients with high risk tolerance
90%
40
BDCs provide high dividend yields but along with this comes risks like:
Credit = BDCs are sub-prime lenders. Companies they lend to are rated junk
Market = BDC shares are very volatile
Leverage = make money borrowing at low interest rates and lending at higher interest rates. Overleveraging can cause problems due to relatively illiquid portfolio
41
Both Open End and Closed End companies are subject to _____. The major difference between closed end and and open end funds is the ______
Market Risk
Capitalization
42
Voting shareholders of a fund must either attend the annual shareholders meeting or receive a proxy. And would vote to:
(3 things)
1. Elect The Board of directors of the fund
2. Change investment objectives of fund
3. Change the investment advisory firm used by the fund
43
Diversified Common Stock Fund description
Invests in common stocks of many different companies in many different industries
and fluctuate with the changing value of the common shares in the portfolio
44
Specialized/Special Situations/Sector Fund description
Invests primarily in stocks of companies in one industry or one specific geographic area (considered the riskiest type of fund) (susceptible to market risk)
45
Balanced Fund description
The most conservative and least volatile type of fund especially when compared to a stock fund
46
Income Fund description
Objective is to maximize current income.
Income funds buy dividend-paying stocks and bonds with high yields (equity income fund would combine income and capital appreciation)
47
Growth Fund description
Invest in?
Objective is appreciation of capital therefore funds generally don’t pay dividends and have lower yields
An investor in a growth fund would likely reinvest dividends and capital gains for more growth
Invest in small cap common stocks and are therefore more volatile than other funds
48
Blue Chip Fund description
Invest only in blue chip stocks
49
Gold Funds description
Invest primarily in stocks of companies in the gold industry
Could be specialized and pay little or no dividends
50
International Fund description (also called overseas funds)
Invests in stocks and bonds issued by foreign companies and governments
Will generally produce higher income in US dollars when foreign interest rates are high and US dollar is weak
51
Global Fund Description
Generally invests in stocks and bonds issued by US and Foreign Companies
52
Index Funds description
Attempt to mirror the portfolio of a particular index and do not have active portfolio managers
No manager means a lower expense ratio than other funds
53
Bond Funds description
What’s a major consideration?
Invest in portfolios that consist of bonds (some specialize while some include multiple)
Fluctuations in interest rates. Bond prices fall when interest rates rise so you’d wanna buy at high interest rates with the expectation that they will decline. Increasing the value of the fund
54
Municipal Bond Fund description
What must be kept in mind about dividend distributions and capital gains in reference to taxes?
Invests in a portfolio that consists of municipal bonds only
Dividend distributions which represent interest received are exempt from federal income tax
Capital gains are subject to federal income tax
55
Interval Fund description
A type of investment company that periodically (every 3,6, or 12 months) offers to repurchase its shares from shareholders
Shareholders are not obligated to sell shares back
56
Interval Funds are considered closed end funds but they operate differently in these ways:
1. Do not trade in the secondary market
2. Shares are re-purchased at Net Asset Value (NAV)
3. Interval funds are allowed to continuously offer their shares at a price based on the funds net asset value
57
Money Market Funds invest in?
They are?
Low risk debt securities with short term maturities of 12 months or less
```
T-Bills
CDs
Commercial Paper
Bankers Acceptance
Eurodollars
```
58
Largest operating expense of a Money Market fund is ____ and _____ fees.
Which impact the ____ of the money market fund.
Management, Advisory
Yield
59
Money market funds are the _____ form of a mutual fund because they offer ____ and _____
Most Liquid
Liquidity (investor can make deposits and withdrawals at any time without penalty)
Safety (securities are all short term)
60
Money Market funds credit dividends to customer accounts _____ and pays them out ____
IRS rules state that investors must report amounts received from money market funds as _____ which is ____ even if reinvested
Unlikely that a money market investment generates ____
Daily/Monthly
Dividend Income/Fully Taxable
Capital Gains
61
Money Market Fund Portfolios must:
(3 things)
No requirement for a % of income which must be earned from ____ and _____
1. Have an average weighted maturity of 90 days or less
2. Offer Minimal Credit Risk
3. At least 95% of the funds total assets invested in securities rates in the top two categories by a Nationally Recognized Statistical Rating Organization (NRSRO)
Dividends/Interest
62
Money Market Funds do not charge a _____
Most minimum withdrawals are set at _____
The Net asset value of money market fund shares normally remains priced at ____ per share
Mutual funds are permitted to invest in ____ in the portfolios they manage (as long as that’s within the objectives of the fund)
Sales Load
$500
$1.00 per share
Warrants
63
Hedge Funds are an investment vehicle established for ____ and semi ____ investors
Not considered _____ and are not as heavily regulated (sometimes referred to as unregulated)
Affluent/Affluent
Investment Companies
64
Hedge Funds are normally established in the form of a ______
They take on long and short positions, use leverage and derivatives, as well as private equities and currencies but in allowing these investments they subject investors to a larger ______
Limited Partnership
Degree of Risk
65
Hedge funds are not usually as ____ as other securities. Most allow for the sale or redemption of hedge fund shares ____, _____, or ______.
Daily training/ pricing is generally ____ offered
Liquid
Monthly, Quarterly, Annually
Not
66
Hedge Fund investments are generally limited to ____ and _____ investors and have a high ______ investment which varies with each hedge fund
Accredited, and Qualified
Minimum
67
Exchange Traded Funds (ETFs) are similar to normal index funds with a portfolio that mirrors a _____ or _______
Main difference between ETF and index fund is ETFs have ___ that trade like _____
ETFs can be _____ or _____
Specific Index/Industry Sector basket of securities
Shares, Common Stock Shares
Passive, Active
68
Passive ETFs are?
Active ETFs are?
Key Difference is?
Typically created to mimic the components of the index or benchmark they track
Intend to outperform their index by using the services of a portfolio manager
Active ETFs conduct far more trading than Passives and consequently are more expensive and volatile (management costs and transaction costs)
69
ETFs trade like a ____ and can be bought and sold anytime during normal market hours
Mutual funds are only priced at the ____ of the market. Therefore a ____ pricing structure
ETFs can be purchased on ____ and can be sold ____
Stock
Close/Forward
Margin/Short
70
With ETFs _____ are charged on transactions just like with common stock and ETFs have no ____
ETF settlement is ____ business days
_____ are available on most ETFs
Industry Sector ETF would be ___ affected by overall changes in the market and offers less ____ when compared to a broad-based ETF but would prove _____ within a particular sector
Commissions/Sales Load
T+2
Options
Less, Diversification, Diversification
71
Examples of common ETFs (4)
SPDR - Standard and Poors Depository Receipts
DIAMONDS - represents the Dow Jones industrial average
QQQ - represents NASDAQ 100 Index
HOLDERS -represents 16 trusts related to largest European companies traded on NYSE, Amex, and Nasdaq
72
Exchange Traded Notes (ETN) are?
The bank promises to repay the principal amount less ____ at final maturity
Performance of ETN is linked to a specific ___ or a particular strategy of investing
Debt instruments issued by banks
Investor Fees
Index
73
ETNs are ____ debt securities that are not _____ but do participate in the performance of a specific index or investment strategy for which it was issued
If the index or strategy appreciates in value, the unit holders work participate in the appreciation less ____ which normally accumulate annually
If the index or strategy depreciates in value unit holders see ____ associated with their ETN holdings and would still be subject to ____ so return of all principal is not guaranteed
Unsecured, Principal Protected
Investor fees
Losses, Investor Fees
74
ETN units trade like a ____ and can be sold ____
However they do have a ____ and can be ____
Primary benefit of an ETN for individual investors is they allow the investor to participate and access markers and sectors which were previously ____ or may have been ____
Stock, short
Final Maturity, Callable
Unavailable, Unsuitable
75
ETNs are issued on four basic sectors
Commodities
Currencies
Emerging Markets
Strategy/Index (like the S&P 500 index)
76
Some companies will allow investors to exchange shares of one fund for those of another fund under the same management family at ____
May involve a nominal charge for conversion but does not require ______
Switch may also result in a ____ or _____ to the investor because the IRS classified it as a sale and a purchase
NAV
Additional Sales Charges
Tax gain or loss
77
What’s the most cost effective move for the client when reallocating fund investments?
Stay within the same fund family
78
Class A Shares description (3-4 things)
Charge investors an upfront sales charge which can not exceed 8.5%
Offer lowest expense charges and have lower 12b-1 fees
Generally best choice for long term investors
(Investors investing large amounts at one time benefit from the sales charge breakpoint discounts)
79
Class B Shares description
Back end loaded funds that have a contingent deferred sales load
Expense charges are higher for B than for A
Sales load is charged on a declining scale
(Redeem in one year= 5%, Redeem in two = 4%)
Sales charge is based either on % if the NAV at the time of purchase or the NAV at the time of redemption whichever is less
(Higher 12b-1 fees than class A shares)
80
Class C Shares description
No upfront sales load and no back end load
Highest annual expense charges
(Best choice for short term investors)
81
Funds objectives just be stated in the ____
Prospectus is the ____ reliable source of all information for mutual funds including performance statistics
Management May change objectives if a ____ of the holders of the outstanding voting shares authorize the change
Success of fund is measured by the degree it’s ___
Prospectus
Most
Majority
Met stated objectives
82
Funds Standard deviation is?
Numerical measure of how the return on a fund has varied from its historical average
83
R Squared is?
The measure on a scale of 1-100 the % of the funds movement that can be explained by the movement of its benchmark index
84
____ purchase amounts and ___ discounts must be disclosed in the ____
During a sales presentation, the funds ____ must be stated
Minimum/Quantity/Prospectus
Objectives
85
Mutual funds generally provide customers with _____, _______, and ______
Account statements
Dividend Reinvestment Plans
Withdrawal Fees
86
A mutual fund 12b-1 charge is?
Under FINRA rules 12b-1 fees can not exceed _____ (75 basis points) of the funds average net assets per year
For a No Load Fund 12b-1 fees of separate shareholder fees can not exceed ____ (25 basis points) of the funds average net assets per year
An annual charge against the funds assets covering the mutual funds costs of advertising and marketing
.75%
.25%
87
An investor purchasing a mutual fund will generally submit a completed and signed _____ not an order ticket
Breakpoint occurs when an investor receives a ____ based on a ____ investment
Fund Application
Reduced Sales Charge/Quantity Investment
88
Letter of Intent (LOI) is a means in which an investor can receive a _____
Allows an investor a ___ month period to reach the breakpoint amount
Can be backdated ____ days
Investor must be advised about breakpoint discount or the broker is in violation of ____ rules
Reduced Sales Charge
13 month
90 days
FINRA
89
Investment clubs and advisers purchasing for their clients are not eligible for quantity discounts
However the following can be with either lump sum purchase or signing a letter of intent (7):
Individual
Married couple as joint tenants
A parent for a mint child
Corporation
Pension Fund
Fiduciaries (Trustees)
An escrow established in case the investor does not invest the amount needed the meet the discount level
90
Breakpoint sales are prohibited
Breakpoint sales occur when an investor is ___ properly informed about how to achieve the breakpoint discount amount
Some funds give the investor “Rights of Accumulation” (ROA) permitting a reduced sales charge on new purchases when the _____ of already held shares plus _____ exceeds the sales charge breakpoint
Family accounts can be ____ when determining breakpoint discount levels including UGMAs
Not
Total Value/additional amount to be invested
Combined
91
If the value of the fund share goes down the shares can not be valued ____ than the original purchase price when determining ____
Under ____ work from the original amount the client invested
Under ____ work from the ____ market value if appreciated. If value has decreased work from the _____ invested
Lower/ Rights of Accumulation
Letter of intent
Rights of accumulation/Current/original amount invested
92
Rights of Reinstatement (ROR) is?
A fund family may allow customers to redeem or sell shares in a fund and reinvest all or some of the proceeds without paying a sales charge
Or recoup some or all of the contingent deferred sales charge (CDSC)
93
To be eligible for ROR:
1. Reinvestment must be made within a specified period of time
2. Redemption and reinvestment must occur in the same account
3. The redeemed shares must have been subject to a front-end or deferred sales charge
4. Redemption and investment must comply with any other terms and conditions required by the investment company
94
Net Asset Value Transfers description
Most fund families that allow for NAV transfers require the customer to invest proceeds from the sale within ____ to ___ days
Some fund families allow customers to purchase class A shares without paying the front-end sales charge if the customer purchase such shares using proceeds from the sale of shares in a different fund family for which the investor paid a front end or back end sales charge
30-90 days
95
Redemptions and Redemption Fees are?
Redemption fees are based on the ___ and are usually charged by ____
Closed end companies do not issue redeemable shares and therefore would not have ____
Registered Representatives can not offer to buy back fund shares from a customer if the value does not ____
Any redemption fees and penalties must be disclosed in the ______
Fees charged on the redemption/liquidation of mutual fund shares
NAV/No Load Funds
Redemption fees
Increase
Funds Prospectus
96
If an investor tenders a mutual fund or variable annuity for redemption within 7 business days of the purchase date what happens?
All parties give up their compensation
(Broker dealer refunds the underwriter
Underwriter refunds the fund or variable annuity)
97
When shares of stock or mutual funds are being sold that were inherited: (2 things)
1. The holding period is automatically long term
2. IRS allows for a step up in the cost basis from the original cost to the market value of the securities (or NAV for fund shares) at the date of the death of the decedent
If you inherit them when priced at 25 the cost basis for the inheritor is 25 not whatever the initial buyer paid for the
98
Securities Act of 1933
The Prospectus
99
Summary Prospectus
Just a few pages long and contains key information about the fund including
investment objectives, fee table, investments,risks and performance, management, purchase and sales of fund shares, tax info, financial intermediary compensation
100
Summary Prospectus Cover page (or beginning of summary must include) (4 things)
The funds name and class or classes of the funds shares
Identify that the document is a summary and that statutory is available and where it can be found
Date of first use of the summary prospectus
Legend (provide website address and email address that can be used to obtain statutory and other info)
101
Statutory Prospectus
Fund prospectus would not include ____
Long form prospectus which contains all items the summary does buy in detail such as
Minimum purchase requirements
Quantity discount amounts
Fund management fees
Fund financial statements
NAV as it changes based on daily fluctuations
102
A mutual fund may satisfy its prospectus delivery obligations by sending or giving directly to investors the _____ and posting the _____ and other info on the internet
Both of the above plus the _____ just be required accessible free of charge at a website specified on the prospectus cover page and must remain on site for ____ days
Statement of Additional information includes information about an open or closed end fund that some investors may find useful. Must be provided for free upon investors _____
Summary Prospectus/Statutory Prospectus
Statement of additional information/90 days
Request
103
How long after receiving request must funds supply the prospectus, SAI, and most recent annual and semi annual reports?
How long must the info remain available?
3 business days
6 months
104
Prospectus Delivery requirements apply to new issues of?
```
Variable Annuities
Face Amount Certificate Companies
Unit Investment Trusts
Closed-End Investment Companies
Contractual plans
```
105
Closed end funds satisfy delivery when the final prospectus is filed with the ___ and the fund provides investors with access to the prospectus via the ___
Hard copy must be provided if investor _____
SEC/Internet
Requests it
106
Investment Company Act of 1940 does?
Investment companies must file complete financial statements with the ___ when requested to do so by the SEC(minimum annually) and must send financial information to shareholders at least ______
Funds current prospectus is the ____ reliable source of information on the fund
Mutual funds must update prospectus at least ____. No prospectus may be used if the information contained on it is more than ____ months old
Ensures investors are provided with full and fair disclosure of all information needed to make an informed decision
SEC/Semi Annually
Most
Annually/16 months
107
When ____ fund shares a customer must pay in ____ business days after purchase. After redemption or shares customers must be paid within ___ calendar days
Purchasing/2 business days
7 calendar days
