Investment Companies Flashcards
An investor wants to exchange shares of one fund with shares of another fund that is within the same family of funds. Which of the following is NOT an important consideration when making such an exchange?
[A] The fund’s investment objectives
[B] The investment risk profile of the fund
[C] Tax consequences
[D] The sales load of the new fund
[D] The sales load of the new fund
When doing a conversion or switching of shares within the same family there would generally not be any sales load imposed; therefore, sales load would not be a consideration.
A client increases their investment amount from $49,000 up to $50,000 after hearing about a reduction in sales charge related to quantities over $49,999. Which of the following would be TRUE of this scenario?
[A] This would describe a broker-dealer reducing their commissions.
[B] This would describe unethical behavior, since such discounts are not permitted.
[C] This would describe an agent at the firm attempting to increase their commission with higher amounts being invested.
[D] This would describe a breakpoint offered by the mutual fund.
[D] This would describe a breakpoint offered by the mutual fund.
Which of the following types of Funds BEST describe the Fund which uses leverage, sells short, buys puts and calls, and undertakes other speculative practices to maximize capital gains.
[A] Sector Fund (Specialized Fund)
[B] Money Market Fund
[C] Aggressive Growth Fund
[D] Balanced Fund
[C] Aggressive Growth Fund
When an investor buys mutual fund shares and later redeems the shares to the fund without having to pay a Sales Load, the fund is known as which of the following?
[A] A Front-end Load Fund
[B] A No-Load Fund
[C] A 12b-1 Fee Fund
[D] A fee free fund
[B] A No-Load Fund
Which of the following types of investments should be used as a long-term investment and not for short-term trading purposes?
[A] equity options
[B] mutual funds
[C] treasury bills
[D] certificates of deposit
[B] mutual funds
Due to the Sales Load paid when purchasing a mutual fund, such investments should only be made as long-term investments.
An “exchange privilege” offered by a group of mutual funds allows the investor to
[A] sell their shares on the New York Stock Exchange.
[B] exchange shares of an open-end fund for an ETF.
[C] exchange shares of one fund in the group for another different fund in the group at a reduced or no sales charge.
[D] withdraw cash from investments in fund shares without losing the option of continuing to reinvest dividends and capital gains.
[C] exchange shares of one fund in the group for another different fund in the group at a reduced or no sales charge.
The term “net asset value plus sales charge” is synonymous with
[A] bid price.
[B] ask price.
[C] redemption price.
[D] discount price.
[B] ask price.
Crossfire Capital is a business development company (BDC) that is about to issue new shares to the public. Which of the following is true regarding the prospectus delivery requirement to the investor?
[A] The investor must receive a hard copy of the prospectus.
[B] BDCs must provide a link to the prospectus and a hard copy.
[C] Prospectus delivery is generally not required for BDC unless the offering is above $1 billion.
[D] Providing a link to the prospectus satisfies delivery requirements.
[D] Providing a link to the prospectus satisfies delivery requirements.
Business development companies (BDCs) are a type of closed-end funds. Closed-end funds are no longer required to deliver hard copies of the final prospectus to investors. There is no minimum threshold that triggers if a prospectus must be delivered or not. Delivery is satisfied when the final prospectus is filed with the SEC and the fund provides investors with access to the prospectus via the Internet. However, a hard copy must be provided if the investor requests it.
Which of the following is NOT a characteristic of a money market mutual fund?
[A] The total return must be comprised of 50% dividends and interest and 50% capital gains.
[B] The portfolio contains short-term instruments.
[C] Investments of the fund have very low credit risk.
[D] A minimum of 95% of the assets of the fund must be rated in the top two categories of a well-known ratings service.
[A] The total return must be comprised of 50% dividends and interest and 50% capital gains.
A money market fund’s portfolio contain short-term instruments (an average weighted maturity of 90 days or less), offer minimal credit risk, and invest a minimum of 95% of fund assets in securities that are rated in the top two categories of a NRSRO (Nationally recognized statistical ratings organization). There is NO requirement for percentage of income which must be earned from income. Also, given the short-term nature of the investments in the portfolio it is unlikely there will be capital gains.
Under the Investment Company Act of 1940, Which of the following is NOT an investment company?
[A] A unit investment trust
[B] A variable annuity
[C] A mutual fund
[D] A face amount certificate
[B] A variable annuity
There are three types of investment companies:
face amount certificates
unit investment trusts
management companies (open-end and closed-end funds).
While variable annuity separate accounts are regulated under the Investment Company Act of 1940, they are not considered to be an investment company.
An investment company that only offers non-redeemable shares is which of the following types?
[A] Variable Life company
[B] An open-end investment company
[C] A Whole Life company
[D] A closed-end investment company
[D] A closed-end investment company
Closed-end investment company shares trade in the open market in a manner similar to common stock. These shares would not be redeemable to the investment company as is the case with open-end investment companies. Once the closed-end fund shares are issued the investor can only “redeem” them by selling them on an exchange.
In which of the following situations would the delivery of a prospectus be required?
[A] A long-standing mutual fund sells redeemable shares on a continuous basis to investors.
[B] A corporation with stock that was issued several years ago sells treasury stock to investors in the secondary market.
[C] An investor buys shares of an exchange-listed, closed-end fund from another investor.
[D] An options trader closes out an existing short position by buying an option.
[A] A long-standing mutual fund sells redeemable shares on a continuous basis to investors.
Of the choices listed, the only choice that requires the delivery of a prospectus would be the sale of mutual fund shares on a continuous basis to investors. Remember that mutual funds are open-end investment companies, Because mutual fund shares are redeemable and each issued share is considered “new,” mutual funds are required to deliver a prospectus to purchasers.
Which of the following terms are synonymous when referring to open-end investment company shares?
[A] Net asset value and redemption price
[B] Bid and offering price
[C] Ask and net asset value
[D] Net asset value and sales price
[A] Net asset value and redemption price
On an open end fund:
NAV = redemption price = Bid
Which of the following is the BEST description of the prospectus of a mutual fund?
[A] It is the best location to find current market prices for the fund and a listing of all securities contained within the fund.
[B] A document that includes details about the fund including investment objective, performance, sales load structure, fee structure, level of risk, as well as who will manage the fund and how it will be managed.
[C] A document containing all relevant accounting information for the fund up to the end of the most recent trading day.
[D] It is the best location to find a listing of all current investors who own shares of the mutual fund and the volume of shares held for each investor.
[B] A document that includes details about the fund including investment objective, performance, sales load structure, fee structure, level of risk, as well as who will manage the fund and how it will be managed.
The prospectus for a mutual fund is the best location to find relevant information about the fund such as the investment objective of the fund, performance, sales load, fee structure, risk level, and information on who and how the fund is managed. It will not contain specific pricing information for the fund or a listing of all securities within the fund, because these items will change daily. Though some accounting information may be found in the prospectus, it would not be current up to the most recent trading day. Privacy laws generally prohibit disclosure of shareholder information, so a prospectus will not have a listing of all current investors and the volume of shares held.
Which of the following is TRUE of open-end investment companies?
[A] Shares are issued and redeemed daily.
[B] A fixed number of shares is issued and then publicly traded.
[C] Upon initial issuance, the investor must be provided with a prospectus; secondary market transactions do not require a prospectus.
[D] The share price at which an investor can sell the fund is based on supply and demand.
[A] Shares are issued and redeemed daily.
The Net Asset Value of mutual fund shares is best defined as the
[A] closing market value of all the securities in the fund’s portfolio plus any interest or dividend income received on the securities in the portfolio.
[B] value of fund shares based on the average price calculated over the time the shares were owned by an investor.
[C] value determined by market-makers who make a market in the fund shares.
[D] a reflection of the best prices available during that specific trading day.
[A] closing market value of all the securities in the fund’s portfolio plus any interest or dividend income received on the securities in the portfolio.
A client increases their investment amount from $49,000 up to $50,000 after hearing about a reduction in sales charge related to quantities over $49,999. Which of the following would be TRUE of this scenario?
[A] This would describe a broker-dealer reducing their commissions.
[B] This would describe unethical behavior, since such discounts are not permitted.
[C] This would describe an agent at the firm attempting to increase their commission with higher amounts being invested.
[D] This would describe a breakpoint offered by the mutual fund.
[D] This would describe a breakpoint offered by the mutual fund.
