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Series 7 > Investment Companies > Flashcards

Investment Companies Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Issuer that is in the business of investing, reinvesting, owning, holding or trading in securities.

A

Investment Company

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2
Q

The Investment Company Act of 1940 established guidelines for the operation of investment companies and divided them into three types. What are they?

A
  1. Unit Investment Trust
  2. Management Companies
  3. Face Amount Certificates
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3
Q

Company established as a trust and operated as a holding company for the portfolio, where a designated trustee oversees the company. It features a fixed portfolio that is supervised rather than managed.

A

Unit Investment Trust (UIT)

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4
Q

Units that do not have secondary market trading and can only be taken to the issuer

A

Redeemable Units

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5
Q

Company that issues debt certificates that offer predetermined interest rates, have a maturity of at least 24 months, can be purchased either by lump sum or periodic installments, that are redeemed for a fixed amount on a specific date. They are not commonly issued.

A

Face Amount Certificate

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6
Q

Company that employs an investment adviser to manage a portfolio of securities in such a way as to achieve a specified investment objective, which outlines the types of securities and investment strategies, which the fund employs in pursuing its stated objective.

A

Management Company

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7
Q

Management company that has continuous primary offering of unlimited common shares, which must be purchased and redeemed with company, and have voting rights and dividends

A

Open-End Company, Mutual Fund

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8
Q

Management company that has a single IPO of common shares, preferred shares and debt securities, which has a secondary market or is sold OTC, priced by market supply and demand, and has voting rights, preemptive rights and dividends

A

Closed-End

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9
Q

Portfolio invested in a manner specified in the Investment Company Act of 1940 and often referred to as the 75-5-10 rule. For 75% of the portfolio, no more than 5% of the assets can be invested in one company, and the company cannot own more than 10% of voting stock for a target company. There are no restrictions on the remaining 25%.

A

Diversified Portfolio

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10
Q

Portfolio by management company that doesn’t follow 75-5-10 rule

A

Non-Diversified

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11
Q

Fund that invests in common and/or preferred stocks as opposed to debt securities. Though common stocks are generally regarded as growth-oriented investments, these funds may pursue a variety of objectives.

A

Equity Fund

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12
Q

Fund that invests in large, mature companies with high consumer recognition and brand loyalty. They have established distribution channels and products, proven earnings and consistent dividend payments. This fund is more stable and durable during declining markets. This fund would suit an investor looking for stock market exposure with less volatility. Has systematic risk.

A

Blue Chip Fund

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13
Q

Fund that has an objective of providing current income, which holds securities with dividend yield potential, that seeks to achieve its objective by holding a combination of preferred stock or common stocks from blue chip and utility companies with a history of high dividends. This fund has high credit and interest rate risk and has below average growth potential.

A

Income Fund

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14
Q

Fund with common stocks of blue-chip companies, but may include younger companies that the fund manager judges to have significant growth potential. Market risk is the biggest risk.

A

Growth Fund

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15
Q

Fund which combines two fund styles, that holds shares from well-established companies that pay some dividends, but still retain earnings for expansion. it is less volatile than growth funds, but usually under-perform growth funds during market advances. Subject to market and purchasing power risk.

A

Growth/Income Funds

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16
Q

Fund that is heavily invested in companies of cutting-edge start ups. These companies have strong research and development divisions and retain their earnings for expansion. Potential for substantial gains, but subject to market and timing risk.

A

Agressive Growth Funds

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17
Q

Fund that holds stocks considered to be undervalued and has significant upside potential. The fund manager usually utilizes a buy and hold strategy for the underlying securities in order to allow market inefficiencies to be corrected. These funds generally under-perform during a market advance and outperforms in a decline.

A

Value Funds

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18
Q

Fund that holds no fixed-income securities, but contains a mix of growth and vaule stock. These funds are designed to appreciate in value by means of capital gains.

A

Blend Fund

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19
Q

Fund that provides a combination of fixed-income instruments and equities, and the goal is to achieve growth in value and income, as well as preservation of capital.

A

Balanced Fund

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20
Q

Securities that provide a return of fixed periodic payments known in advance. While the income is guaranteed, the return on investment is lower than other securities. In addition to supplementing income, these securities help investors reduce volatility in their overall portfolio.

A

Fixed Income Securities

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21
Q

Funds that typically hold treasury and government agency debt and offer safety and generally less volatility, but also offers lower yields.

A

Government Fixed Income Funds

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22
Q

Funds that hold only muni bonds and offers advantages for those in high tax brackets. State or municipal government fixed income investments generate federally tax-exempt interest income and may be exempt from state tax if holder is a resident in the state.

A

Tax-Exempt Funds

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23
Q

Funds that hold corporate debt with low credit ratings, or junk bonds. Exposed to high default risk and are more volatile. Suitable for aggressive long-term investors who want yield rather than safety.

A

High-Yield Fixed Income Funds

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24
Q

Fund that invests in safe, liquid, short-term debt that attempts to maintain a stable $1 per share NAV. Investments include, commercial paper, banker’s acceptances, negotiable (jumbo) CD’s, and repurchase and reverse repurchase agreements, T-Bills, T-Notes and T-Bonds with 1 year remaining. If kept long term, this fund may not produce returns sufficient to keep up with inflation. High degree of capital preservation.

A

Money Market Funds

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25
Q

Money Market fund most suitable for lower tax bracket investors

A

Taxable Money Market Fund

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26
Q

Fund that invests in federally tax-exempt short term instruments that offer lower yields. Most suitable for high tax bracket individuals.

A

Tax-Exempt Money Market Fund

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27
Q

Fund that concentrates a major portion of assets in specific industry, market sector or geographic region. Not suitable for the average investor with a lower risk tolerance, or who needs wider diversification. Has potential for big gains in advancing markets but are vulnerable to changes in industry or sector specific trends. International sectors are vulnerable to currency exchange and legislative risk.

A

Specialied Funds (Sector, Industry)

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28
Q

Fund that purchases securities of companies from a common geographic region. Suitable for sophisticated investors who are already diversified and wish to concentrate a small portion of portfolios.

A

Geographic Concentration Fund

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29
Q

Investment style of allocating assets over the various classes such as stocks, bonds and cash. The fund reduces its risk because of diversification. Investors can reduce costs since they can purchase a single investment that is diversified in itself.

A

Asset Allocation

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30
Q

Fund that invests assets in overseas companies and markets, which have a higher degree of risk due to regulatory, political and economic factors in addition to legislative risk and currency exchange risk.

A

Internation Fund

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31
Q

Fund that invests in agency securities such as Ginnie Mae and Freddie Mac. Pays a monthly dividend to its shareholders. Most suitable for investors seeking regular income. Higher yield than government bond but also has higher default risk.

A

Mortgage-Backed Security

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32
Q

Fund whose goal is to achieve same return as market index, ex. Dow 30 or S&P 500. Invests only in securities in the index. Passively managed with no research, buying and selling. Lower expenses than actively manage funds. Suitable for investors who are skeptical that a portfolio manager can beat the market and want low expenses.

A

Index Fund

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33
Q

Fund that invests in gold, silver and platinum and are chosen in time of economic decline as a hedge against inflation.

A

Precious Metals Funds

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34
Q

Fund that holds shares in several other funds. Provides investor exposure to several different objectives in one fund. Expenses can be higher than regular funds due to double layer.

A

Fund of Funds (FOF)

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35
Q

Ratio of Board of Directors determined by Investment Company Act of 1940

A

40% Outside Directors

60% Internal Employees

51% Outside Directors with 12b-1 fee

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36
Q

Group of people that selects officers to carry out the operations of the investment company. These appointments include investment adviser, transfer agent and custodian. This group has responsibility of establishing dividend and capital gain policies.

A

Board of Directors

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37
Q
  • Voting rights/proxies
  • Approving changes in investment objectives and policies
  • Approving investment advisory agreements
  • Approving changes in fees
  • Electing directors
  • Ratifying selection of independent auditors
A

Rights of Shareholders Regarding Board Activities

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38
Q

Person employed to manage fund’s portfolio and is paid a fee for advisory services typically based on percentage of NAV under management over time, which is classified as an operating expense.

  • Supervise fund’s portfolio by obtaining diversification of securities
  • Provide investment advice in conformity with federal securities laws
  • Researching and analyzing financial and economic trends
  • Conform to investment objectives established by board
A

Investment Adviser

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39
Q

Bank, trust company or other qualified institution that

  • Safeguards physical assets of fund, performs payable and receivable
  • Performs payable and receivable functions of securities transactions
  • Register receipt of interest and dividends for the fund
  • Can perform as transfer agent
A

Custodian

40
Q

Person contracted by the fund to perform

  • Issuance of physical shares or book entry
  • Cancellation of redeemed shares
  • Disbursement of dividend and capital gains distributions to shareholders
A

Transfer Agent

41
Q

Largest expense of operating a fund that is expressed as a percentage of the fund’s NAV.

A
42
Q

Expenses of a mutual fund determined by dividing total expenses by average net assets. Factors included are management fee, fees to custodia, transfer agent and board of directors.

A

Expense Ratio

43
Q

Fund sponsor, wholesaler or distributor that has exclusive agreement with fund that allows it to purchase fund shares at NAV. Shares are then sold to public at POP. They create and pay for retail communication material to better market shares to dealers.

A

Underwriter

44
Q

Current market, or bid price, for a mutual fund. This is the price an investor receives when redeeming shares.

A

Net Asset Value (NAV)

45
Q

Expense shown as a percentage of Public Offering Price (POP). FINRA Conduct Rules limit this to maximum 8.5% of POP. If fund does not offer dividend reinvestment, breakpoints and rights of accumulation, this is limited to 6.25%.

A

Sales Charge

46
Q

1 2 3 4

AgGr 77.89 81.99 +1.56

Identify each part of this quote

A
  1. Shows the name of the fund and share class
  2. Shows NAV, which is value investor receives
  3. Shows POP, which is NAV plus sales charge
  4. Shows change in NAV from previous day
47
Q

Value determined by dividing total net assets of the fund by number of shares outstanding. The net assets consist of current market value of fund’s securities.

A

How NAV is determined

48
Q

Sales charge based on lower of share’s cost basis or current NAV at time of redemption. Funds with this charge are offered at NAV, but there is a charge if shares are redeemed within time period after purchase.

A

Contingent Deferred Sales Charge (CDSC)

49
Q

Shares purchased at POP and have no deferred sales charge

A

Class A Shares

50
Q

Shares purchased at NAV, but have potential back-end load, or CDSC. The sales charge declines each year investment is held, eventually reaching 0%. When this happens, shares conver to Class A.

A

Class B Shares

51
Q

Shares purchased at NAV, but have back-end sales charge that runs for only one year. These can be costlier since it cannot be converted.

A

Class C Shares

52
Q

Dollar levels at which the sales charge of a fund is discounted or reduced. These dollar levels must be clearly stated in the prospectus. Investment clubs and co-ops cannot receive this benefit. Investors must be notified of changes to the dollar levels within 1 year.

A

Sales Breakpoints

53
Q

Allows investor to qualify for sales discounts without initially investint the entire amount required, which states the investor’s intent to invest the required amount over the next 13 months. If backdated 90 days, less than 13 months remains. If investor does not pay, they will be charged with higher sales charge. The fund ensures it will recover charges by holding shares in escrow.

A

Letter of Intent (LOI)

54
Q

Feature that allows investors to combine prior mutual fund purchases with current pruchases in the same fund to qualify for a breakpoint. This feature is available for immediate family and children younger than 21 in the same residence. This is also allowed for larger groups such as school and hospitals.

A

Rights of Accumulation

55
Q

Method of redeeming mutual funds through writing

A

Written Request

56
Q

How can mutual funds be redeemed?

A
  • Written Request
  • Telephonic
  • Check Writing
  • Through a Dealer
57
Q

Required by some funds in order to redeem shares by wire transfer, for redemptions to addresses different than the address of record, or for dollar amounts above certain limits.

A

Signature Guarantee

58
Q

Shareholder receives the price at the close of the next business day, if orders are received after the closing of the current day, which is 4 PM EST.

A

Forward Pricing

59
Q

When must mutual funds pay redemption proceeds, per the Investment Company Act of 1940?

A

Within 7 calendar days

60
Q

Document furnished by mutual funds to investors that contains key information about the fund. If this is provided, the fund’s long form prospectus must be available on the internet, and a paper copy must be available for free.

A

Summary Prospectus

61
Q

What happens when a customer’s money is automatically used to purchase additional mutual fund shares in the customer’s account, which benefits the investor over time?

A

Reinvestment of capital gains and dividends at NAV

62
Q

Voluntary investment plan whereby the investor systematically invests a fixed dollar amount at regular intervals, usually monthly or quarterly. The fund may require minimum investment with each deposit. A loss can still be sustained if the current market value is below average share cost.

A

Dollar Cost Averaging (DCA)

63
Q

Plan that helps an investor liquidate an account in a more predictable manner. Payments can be received at specified intervals in fixed or flexible amounts.

A

Systematic Withdrawal Plan

64
Q

Withdrawal plan where an investor requests specified dollar amount be received in each payment

A

Fixed Dollar Periodic Payments

65
Q

Withdrawal plan where an investor requests that a fixed percentage of shares be liquidated at fixed intervals

A

Fixed Percentage Period Payments

66
Q

Withdrawal Plan where an investor requests that a fixed number of shares be liquidated at specified intervals

A

Fixed Shares Periodic Payments

67
Q

Form that documents to the IRS and investor all potentially taxable events, such as dividends, realized short-term and long-term capital gains and capital losses.

A

1099

68
Q

What five criterion is used to compare funds?

A
  • Investment Objective
  • Investment Policies
  • Quality of Management
  • Risk Factors
  • Portfolio Turnover
69
Q

Return for a given holding period which includes the effect of reinvested distributions and share price appreciation, net of sales charges and expenses for the period.

A

Total Return

70
Q

Yield calculated by dividing the annual dividend by current POP. This is a snapshot of the benefit of owning the fund at this moment.

A

SEC Yield, Current Yield

71
Q

Investment companies whose objective is to achieve same return as market index, and who primarily invest in seucrities of companies in the index. Only issued in large blocks (50,000 shares), known as “creation units.” ETFs are bought and sold on an exchange. Intraday liquidity and can be purchased on margin 30 days after IPO.

A

Exchange Traded Funds (ETFs)

72
Q

Investment company that primarily invests in index securities, options, ftures and swaps. More volatile. Uses a multiplier.

A

Leveraged ETF

73
Q

Investment company that invests in various derivatives to profit when underlying benchmark or market sector declines. These are used to HEDGE portfolios against market declines and can be used instead of short positions without establishing a margin account.

A

Inverse ETFs

74
Q

Senior unsecured debt instruments issued by an underwriting bank or other large institution. Backed by credit of issuing bank. Based on and track the performance of an underlying index or benchmark. Has a maturity date. Carries market and credit risk. This is a complex investment best suited for experienced investors.

A

Exchange Traded Note (ETN)

75
Q

Security traded on the NYSE AMEX that allows investors to trade one security comprised of a bucket of stocks in a specific market sector or industry. Value fluctuates based on performance of stocks.

A

Holding Company Depository Receipts (HOLDRs)

76
Q

Hybrid debt instrument linked to equity markets. Performance is linked to single stock, group of stocks or stock index. Typically guarantees principal and offers small returns based on underlying security or index. Structured as annuity, mutual fund or CD.

A

Equity-Linked Securities (ELKS)

77
Q

Security that invests at least 75% of the investment portfolio in real estate or real estate products. Assets are selected y portfolio manager, placed in a trust and monitored. Static portfolio, no trading. On designated date, the security liquidates portfolio holdings and pay each investor a share. Distributes 90% of income to avoid paying taxes. Does not distribute losses to investors. Not regulated by Investment Company Act of 1940.

A

Real Estate Investment Trust (REIT)

78
Q

Tax Code that says fund must pay out at least 90% of net investment income to the shares to avoid taxation on the distributed portion. Also called Conduit or Pipeline Theory.

A

Subchapter M

79
Q

REIT that invests in real estate, either for income or capital appreciation, provides income for investors by investing in income producing properties such as apartments, shopping centers or office buildings. These properties are often established. Property income generates dividends. REIT develops property and sells it. Objective is to profit through appreciation.

A

Equity REIT

80
Q

REIT that invests in real estate mortgages, which are typically held on commercial properties, and provides immediate income to investors.

A

Mortgage REIT

81
Q

REIT that is a combination of equity and mortgage, is more diversified, and can provide both income and potential capital appreciation.

A

Hybrid REIT

82
Q

Limited partnership that uses agressive strategies such as options, short selling and buying on margin to generate income and minimize losses in a down market. Suitable for experienced, sophisticated and wealthy investors.

A

Hedge Fund

83
Q

Fund that uses capital raised from institutional and high net worth investors to invest in privately owned securities. High minimum investment requirement and invests in high risk ventures. NOT AN INVESTMENT COMPANY per Act of 1940.

A

Private Equity Funds

84
Q

What investment should an experienced, agressive investor who is comfortable with a high level of risk and wants a higher rate of return choose?

A

Hedge Fund

85
Q

An investor’s top priority is preservation of capital and is willing to accept a small rate of return. What should the investor choose?

A

Government Bond Fund

86
Q

An investor is approaching retirement and seeks preservation of capital along with a reasonable rate of return. What should the investor do?

A

Invest in a balanced fund

87
Q

Experienced investor with a diversified portfolio is interested in a specific industry and understands the risks. What should this investor do?

A

Invest in a sector fund

88
Q

An investor is concerned about expenses and skeptical that an investment adviser can consistently outperform the market. What should the investor do?

A

Invest in an index fund

89
Q

Young investor saving for retirement has a long investment horizon and can afford to assume greater risk and apprecation potential. What should the investor do?

A

Invest in a Growth Fund

90
Q

Investor has an investment horizon of three years or less. What should the investor do?

A

Invest in a money market fund

91
Q

Investor wants stock market exposure but wishes to stay at the stable, high quality end of the stock spectrum. What should the investor do?

A

Invest in a blue chip fund

92
Q

Investor in a high tax bracket is seeking maximum tax relief. What should the investor do?

A

Invest in a muni bond

93
Q

Investor with small amount wants exposure to several investment styles. What should the investor do?

A

Invest in a Fund of Funds

94
Q

Investor seeks monthly income throug monthly principal and interest payments, preservation of capital and wants a higher yield than traditional government bonds. What should the investor do?

A

Invest in GNMA bond fund

95
Q

Investor seeks investment allocation that is appropriate for his age and life stage. What should the investor do?

A

Invest in an Asset Allocation Fund

96
Q

An investor seeks a hedge against inflation. What should the investor do?

A

Invest in a Precious Metals Fund

97
Q

Investor wishes to avoid capital gains taxes and wants a fund that is managed in a tax efficient manner. What should the investor do?

A

Invest in an ETF

Series 7 (10 decks)

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