Investment Companies

Question 1

Investment Company Act of 1940

Answer 1

Regulates investment companies

Question 2

Investment Advisor Act of 1940

Answer 2

Regulates entities that provide advice for a fee (advisors)

Question 3

UIT (unit investment trust)

Answer 3

Creates a fixed or non fixed portfolio of Securities then sells units to investors

Fixed Portfolio: contains bonds and fixed securities

Non-Fixed Portfolio: contains mutual funds shares. (Provides a way for investors who can’t reach the investment dollar minimums to still invest in the mutual funds desired)

Question 4

Face amount company

Answer 4

All they will ask you on the test is

which of the following is an example of an investment company?

=> Face amount company

Question 5

Management company with an open ended fund

Answer 5

Has

Ultimately continuos primary offering

You can buy full and fractional shares

Only offers Common stock shares

No secondary market. Shares are purchased and redeemed to the fund company

Question 6

Management Company Closed End Fund

Answer 6

Has

a single IPO

Investor can purchase full shares only no fractional

portfolio can have common and preferred stock and bonds in it

Has Secondary market trading. Not redeemed to company when investor wants to sell it.

Question 7

Diversified Fund

Answer 7

In order to market themselves as a diversified Fund they have requirements they must meet:

1) 75% of fund assets must be invested in securities other than issuers. Cash and cash equivalents (also T-bill or money market instruments) are counted as part of the 75%
2) No more than 5% can be invested in any one company
3) You cannot have more than a 10% ownership of a companies voting stock

Question 8

What are the investment company registration requirement?

Answer 8

Minimum net worth of $100k

Must maintain at least 100 share holders after 90 days from start period

Must have clearly defined investment objectives

Question 9

What components does an investment company have?

Answer 9

Board of Directors - defines investment objectives

Investment Advisor - manages the investment portfolio

Custodian Bank - holds the funds cash and securities

The transfer agent - issues cancels and redeems shares

Question 10

How are the mutual fund shares distributed?

Answer 10

It’s done 1 of 2 ways

1) No Load - mutual fund company sells to investors directly
2) Load - investment company sells the shares to the sponsor underwriter or distributors

Question 11

The Mutual Fund Prospectus

Answer 11

Must be given to investors at the time of sales presentation.

required to be updated every 13 months but should be updated every 12 months

After 16 months from publication, it should be discarded by representatives

Question 12

Statements of Additional Information

Answer 12

Contains the following:

• Funds Securities Holdings
• Balance Sheet
• Income Statements
• Portfolio Turnover Data
• Compensation paid to the board of directors and investment advisory board

Question 13

free card

Answer 13

free card

Question 14

Mutual Fund Portfolio Types

Answer 14

Equity Funds
Bond Funds
Sector Funds
Index Funds
Money Market Funds
Alternative Funds

Question 15

How Mutual Funds are valued

Answer 15

Mutual Funds must determine their net asset value at least once/ business day

Mutual Funds Prospectus will say when the funds calculate their NAV

Question 16

NAV (Net Asset Value) Formula

Answer 16

NAV = Assets - Liabilities

NAV per share means you divide the NAV by the number of shares outstanding

Question 17

Forward Pricing

Answer 17

The investor buys/ redeems shares of mutual funds at whatever the price/ share of the mutual fund is at the end of the day. (Buyer doesn’t know what the price is going to be until it’s calculated at the end of the day)

Question 18

Mutual Fund Formula

Answer 18

NAV + Sales Charge = Public Offering Price

Question 19

Max Mutual Fund Sales Charge

Answer 19

8.5% of Public Offering Price

Question 20

Requirements if the mutual fund is charging the max sales charge

Answer 20

1) Breakpoint Schedule - the more you invest, the cheaper the sales charge
2) Rights of accumulation - as investment grows it counts towards the breakpoint schedule
3) Cannot charge additional sales charge for buying more units of that fund

Question 21

12B1 Fee

Answer 21

Annual Fee charged quarterly to the shares to cover expenses like printing, advertising, commissions to sales reps

The max fee is .25%

Question 22

Combination Privileges

Answer 22

Allow the investor to invest in different funds offered by the same investment company and those investments will be seen as one investment when figuring the breakpoints and sales charges

Question 23

Conversion Privilege’s

Answer 23

The investment company will not charge an additional sales charge from moving money from one fund to another one if its still within their family of investments (or their company)

On the test you want to see if the investor can stay within the same investment company when changing funds so they don't get charged

Question 24

Dollar-Cost Averaging

Answer 24

Basically the higher the Mutual fund price the less shares you buy.

Average Cost = Total Dollars Invested / Total Shares purchased

Average Price = Total of purchase Prices / Number of Purchases

Question 25

If a mutual fund is a growth fund is it going to have higher or lower investment fees

Answer 25

Higher Fees

Question 26

If a mutual fund is a passive fund is it going to have higher or lower investment fees

Answer 26

Lower Fees