Investment Companies Flashcards
A mutual fund has a POP of $9, a NAV of $8.50, and an underwriter’s concession of $0.10. How many shares could be purchased if an investor has $2,000 to invest?
A
248.4
B
222.2
C
251.6
D
219.8
B
222.2
The public offering price is $9. If the investor has $2,000 to invest, they will receive 222.2 shares. $2,000 ÷ $9 = 222.2 shares.
What are the primary advantages of investing in an investment company?
A
Principal protection with guaranteed rates
B
Tax-deferred growth with instant diversification
C
Market exposure with minimal risk
D
Diversification and professional management
D
Diversification and professional management
Diversification is one of the main advantages of an investment company offering since most investors cannot achieve this by investing on their own. Another advantage investment company offerings give to small individual investors is full-time professional money management. Investment companies hire experts who have resources to monitor the day-to-day activity in the market resources. There is market exposure but with that the investor is exposed to market risk as well as other potential risks, so the investor will not have principal protection nor guaranteed rates. The growth is not tax-deferred.
An investment company is required to file an audited financial report with the SEC regarding its investment portfolio at least:
A
Semiannually
B
Annually
C
Monthly
D
Quarterly
B
Annually
Investment companies must provide annual audited reports to the SEC. Investment companies must provide shareholders reports on a semiannual basis. Broker-dealers must provide account statements quarterly to inactive accounts, and they typically send statements monthly to active accounts.
In the sale of open-end investment company shares, the prospectus must be delivered:
A
Within 3 business days of confirmation
B
Within 5 days of solicitation
C
At or before the time of confirmation
D
At or before redemption
C
At or before the time of confirmation
Federal rules require that all customers be provided with the most current copy of a fund’s prospectus (hand delivery, traditional mail, or electronic delivery) at or before the time of confirmation. If a prospectus is delivered via electronic mail, it must have all the required information available in the paper version of the same document.
A registered representative fails to mention that a client’s investment in a fund would qualify for a reduction in sales charge if the customer increased the amount of their investment by 10%. What prohibited practice has the RR likely committed?
A
Front running
B
Acting in concert
C
Selling dividends
D
Breakpoint sale
D
Breakpoint sale
Breakpoint selling is the failure of the registered rep to disclose to a customer that the investment they are about to make in a fund is close to qualifying for a reduced sales charge. The registered representative stands to make more money from a slightly smaller investment with a larger sales load. Front running occurs when a broker-dealer or registered representative trades ahead of a large customer order that may affect the price of the security. Selling dividends is a prohibited practice that occurs when an RR recommends a purchase of shares just before the ex-dividend date.
The person or corporation responsible for the safekeeping of all securities owned by a mutual fund is the:
A
Management team
B
Custodian
C
Trustee
D
Administrator
B
Custodian
The custodian is responsible for the safekeeping of all securities owned by the fund. The custodian collects interest and dividend payments from issuers and makes payments or receives payments because of securities transactions within the portfolio.
Under the Investment Company Act of 1940, which of the following would not be considered a management company?
A
Unit investment trust
B
Open-end fund
C
Nondiversified mutual fund company
D
Closed-end fund
A
Unit investment trust
Management companies include both open- and closed-end funds, whether diversified or not. Management companies and unit investment trusts are the most common types of investment companies under the Act.
Which of the following is not a characteristic of a closed-end management company?
A
Its shares trade in the secondary market
B
Its shares are traded based on the next calculated NAV
C
It may invest in common stock, preferred stock, and bonds
D
It may issue common stock, preferred stock, and bonds
B
Its shares are traded based on the next calculated NAV
With an open-end management company (mutual fund), the NAV is calculated at the end of each business day, and they are purchased and redeemed based on the NAV and POP per share. Closed-end fund shares trade in the secondary market like stocks and are subject to intraday pricing driven by market demand. Unlike mutual funds, which only issue common stock, closed-end management companies may also issue preferred stock and bonds. Both open-end and closed-end management companies may invest in any security that meets the objective of the fund, common stock, preferred stock, bonds, money market instruments, and cash.
Which of the following is not true of no-load mutual funds?
A
No deferred sales loads are charged
B
No 12b-1 plan fees can be charged
C
No up-front sales loads are charged
D
The investment company sells the fund directly
B
No 12b-1 plan fees can be charged
A fund may charge up to .25% in 12b-1 plan fees and still call itself a no-load fund.
All the following are activities of the custodian for a mutual fund, except:
A
Collecting dividends from issuers
B
Safekeeping of securities
C
Receiving funds raised through securities sales
D
Recommending selling the worthless securities
D
Recommending selling the worthless securities
The custodian is responsible for the safekeeping of a fund’s cash and securities. It will also collect dividends from issuers of the securities that the fund holds. The custodian does not take part in any trading activity.
Which of the following describes a quote for a closed-end fund?
A
NAV plus sales charge
B
NAV and POP
C
Bid and ask
D
Forward pricing
C
Bid and ask
When thinking of a closed-end fund, think of a common stock. How does a common stock trade? It trades on an exchange continually throughout the day. It is priced using a bid and ask price, sometimes referred to as a bid and offer. This is the same way that closed-end funds are quoted and traded. NAV and POP refer to the way that open-end funds are quoted and priced.
What is the maximum 12b-1 fee that can be charged in a no-load fund?
A
0.25% is the maximum allowable in a no-load fund
B
None, as a no-load fund that means there are no sales charges including 12b-1 fees
C
There is no maximum 12b-1 fee provided there is no sales charge imposed
D
0.75% is the maximum allowable in a no-load fund
A
0.25% is the maximum allowable in a no-load fund
No-load fund shares are purchased directly from the fund are not sold through an underwriter or broker-dealer eliminating the sales load. Even though a sales charge is not imposed, the fund still charges management and administrative fees, and can assess a 12b-1 fee no greater than 0.25% or 25 basis points per year.
Open-end management company shares increase in value as a result of an increase in:
A
Market value of portfolio securities
B
Number of shares
C
Cost of living
D
Trading volume of securities
A
Market value of portfolio securities
Market movement for the underlying securities in the portfolio affects the value (NAV) of fund shares in either a positive or negative way. Trading volume and number of outstanding shares has no effect on NAV. If the fund receives dividends or interest from securities held, this will cause an increase in NAV. When the fund distributes dividends to shareholders, that will decrease the NAV. Shareholder redemptions and purchases have no effect on NAV.
Which of the following statements are true regarding open- and closed-end funds?
A
When selling a closed-end fund in the secondary market, a prospectus must be delivered to investors
B
When selling a closed-end fund in the primary market, investors can purchase full or fractional shares
C
When selling an open-end fund in the secondary market, investors can sell full or fractional shares
D
When selling an open-end fund, a prospectus must be delivered at or prior to the time of purchase
D
When selling an open-end fund, a prospectus must be delivered at or prior to the time of purchase
Closed-end funds are issued in the same manner as common stock. There is a one-time issuance of a set number of shares. According to the Securities Act of 1933, a fund is required to make a prospectus delivery with any new shares sold in the primary market. Once shares are sold, they will trade in the secondary market, which does not require a prospectus to be delivered. Investors can only purchase full shares of closed-end funds. Open-end funds (mutual funds) have a continuous issuance of shares, with no set number of shares offered. Mutual fund purchases are always new issue offerings that require a prospectus to be delivered. Mutual funds are redeemed with the issuer and never trade in the secondary market.
When an investor fails to satisfy the terms of a letter of intent, what is the disposition of the shares that are held in escrow?
A
Enough shares are liquidated to pay the appropriate sales charge
B
The shares are returned to the investor
C
The shares are converted into cash based on the NAV at the time they were purchased, and the underwriter receives the additional sales charge with the balance being refunded to the investor
D
The shares are kept by the underwriter in lieu of an additional sales charge
A
Enough shares are liquidated to pay the appropriate sales charge
When an investor fails to complete an LOI, the fund will liquidate enough of the customer’s shares held in escrow to pay the charge. The liquidation is performed at the current NAV.
