Chapter 7- 5Qs Pooled Investments Flashcards
Investment Company types
Face Amount Certificate Companies
Unit Investment Trusts
Management Investment Companies (Closed and Open)
NAV
Fund valuing the total assets
Subtracting out Liabilities
Dividing by the amount of shares
Little relation to how closed end mutual funds are bought
Closed-end investment Company
Fixed number of shares
Can issue bonds and preferred stock
Supply and demand determines the bid (price investor can sell at) and ask price (buy price)
Pay brokerage commission or a markup/mark down in principal
Open-end investment company
Mutual funds, open offering
Buy shares directly from company at POP
POP= NAV plus sales charge, daily calculation
Investors redeem shares with the company, must be paid by company in 7 days
Not allowed to issue bonds or preferred stock
Sales Charges of an Open End Fund
Front End Loads- found by subtracting POP by NAV
Typically Class A Shares and lower operating expenses
Back-end Loads- Charged at redemption (CDSC fee)
Usually a declining percentage dropping to 0 in 6-8 years and converted to A shares
TYPICALLY CLASS B SHARES
12b-1 Asset-based Fees- Allows mutual fund to act as distributor of shares
Fee charged for promotion and sales related charges
Cannot exceed .75%, can be called no-load if under .25%
Class C
Fund Share Classes
Class A- Front end load, usually low op exp.
Class B- Declining backend load
Class C- No sales charge, 1% CDSC fee for one year, continuous 12 b-1 charge
Max Sales charge and break points
- 5% if the fund offers:
- Break points
- Rights of accumulation (break point for all shares in fund family)
Breakpoints- Includes Married couples, minor children and corporations. Only available on class a shares
Break point sale- Buying a dollar amount just below a breakpoint to secure higher amount
Tax-free Bond Funds
Invest in municipal bonds or notes
Capital gain distributions from these funds are still taxable, though income produced is not
Money market funds
Organized so as to not break $1 or go under $1 in NAV
Institutional prime money market funds- Now has a floating NAV that changes throughout the day
Also have gov money market funds with 99.5% of funds in gov funds
Retail funds that are geared towards natural persons
Not insured by FDIC
Factors to consider when purchasing a mutual fund
Costs Taxation Services offered Comparisons to benchmark Tenure of fund managers
Expense Ratio= Annual operating expenses / Assets under management
Dividends are taxed at ordinary income or as qualified dividend (max of 15%)
Hedge funds are considered suitable for investors with high risk tolerance
Exchange Traded Funds
Either a UIT ETF or Open-End ETF
Can be purchased on margin and sold short (unlike mutual funds which can only be used as backing for a margin account)
ETFs are not competitive with no load funds for investors seeking to invest over time
Shares are not redeemable
Are registered under the investment company act of 1940
REIT
Serve as long term financing for real estate projects
Equity REIT- owns commercial property
Mortgage REIT- Owns mortgages on commercial property
Hybrid REITs- do both
75% or more of income must be from real estate
90% or more of income must go to shareholders
Do not pass through losses and are not investment companies
Taxed at normal income rates
Exchange traded notes
ETNs are registered under 1933 act
Debt security linked to a market index return
Do not buy or hold the assets its trying to replicate performance in
Unsecured debt
Have credit, market, liquidity, call, early redemption, conflict of interest risk
Inverse funds
Attempt to produce a return that is opposite of the benchmark
Most inverse and leveraged funds try to accomplish their goal on a daily basis
Usually not suitable for long term investors
Structured Notes with principal protection
Combines a bond with a derivative component
Guarantee return of capital (only as good as the issuer behind it)
Little to no liquidity
C D C D A C A A
