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Series 7 > Investment Companies > Flashcards

Investment Companies Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Investment Company Act of 1940

A

Face Amount Certificate Company
Unit Investment Trust
Management Company

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2
Q

Face Amount Certificate Company

A

Pay a fixed monthly amount to the investment company

  • Invests in high quality, US Government Debt, AAA Municipal issues, and corporate debt
  • promises a guaranteed rate of return
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3
Q

Management Company

A
  • an investment company organized as a corporation issuing stock
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4
Q

Open End

A
  • Mutual Fund/ Redeemable
  • NON-Negotiable, cannot be traded
  • Redeemable with the issuer
  • DO NOT TRADE IN SECONDARY MARKET
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5
Q

Closed-End

A
  • Publicly Traded/ Not Redeemable
  • Negotiable
  • Traded on Exchange
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6
Q

Unit Investment Trust

A
  • Rather than set up as a corporation, set up under a trust indenture
  • Issue shares of beneficial interest
  • represent an undivided interest in units of specified securities
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7
Q

Fixed Unit Investment Trust

A
  • a fixed portfolio of securities selected by the trust sponsor, then transferred into the trust and sold to investors
  • bond trusts, broadly diversified fixed bond portfolio
  • units of $1,000
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8
Q

Unit

A

an investor buys a “unit”- interest in trust

-

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9
Q

Non-Fixed UIT

A

structure for a variable annuity contract.

- Invests in mutual fund shares instead of a unit (indirectly buying mutual fund shares)

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10
Q

Accumulation Unit Non-Fixed UIT

A
  • Interest in a separate account
  • tied to the Net Asset Value of the mutual fund held in the separate account
  • amount of annuity received is tied to the performance of the underlying security
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11
Q

Fund Sponsor

A

Underwriter

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12
Q

Public Offering Price

A

Net Asset Value per share + Sales Charge

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13
Q

Selling Group

A

Acts as an agent, selling for the sponsor

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14
Q

Investment Advisor

A

Manages the fund an earns a management fee based on % of AUM

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15
Q

Diversified Fund 75-5-10

A
  • 75% of assets invested in securities
  • max of 5% invested in any one issuer
  • max holding of 10% voting securities in one issuer
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16
Q

Growth Fund

A

Invests in equity securities of rapidly growing companies to achieve capital gains

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17
Q

Growth and Income

A
  • Invests in blue-chip funds, earning both dividend income and growth potential
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18
Q

Income Fund

A

Invests in fixed income securities such as preferred stock and bonds for current income

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19
Q

Income Fund Examples

A 
Us Govt Securities Fund
Preferred Stock Fund
Municipal bond fund
Corporate bund fund
Money market securities fund
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20
Q

Target Date Fund

A

Starts with more aggresive allocation and moves to safer securities with a fixed date in mind

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21
Q

No Load

A
  • no sales charge
  • can buy at NAV
  • Sold directly by Mutual Fund Sponsors
  • all money market funds are considered no loads
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22
Q

Sales Charge Percentage

A

Ask- Bid/ Ask

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23
Q

NAV on mutual funds is the

A

BID

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24
Q

When a customer buys a mutual fund, the customer pays

A

-PUBLIC OFFERING PRICE, THE ASK PRICE

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25
Q

PUBLIC OFFERING PRICE on mutual funds is the

A

ASK PRICE

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26
Q

Maximum POP Computation

A

Ask Price= Bid Price/ 100 - Sales Charge

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27
Q

Contingent Deferred Sales Charge

A

Sales charge only if the customer redeems her shares before a stated time period has elapsed
ex
5% sales charge if redeemed in 1 year
4% sales charge if redeemed in 2 years

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28
Q

In Order to charge the 8 1/2 percentage sales charge the firm must offer

A

Rights of Accumulation
Letter of Intent
Breakpoint

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29
Q

Breakpoint

A

Reduced Sales Charge

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30
Q

Rights of Accumulation

A
  • allows the existing holding in the fund to count towards a breakpoint
  • based upon current market value, not original cost, if fund shares have appreciated this growth may move the customer into a lower bracket
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31
Q

Letter of Intent

A

If a customer does not have enough money immediately to qualify for a breakpoint but intends to buy enough of the fund to qualify for a breakpoint within a 13 month period, then the customer can sign a Letter of Intent.

  • shares are held in escrow until the LOI is complete
  • ASSET APPRECIATION DOES NOT COUNT FOR THE LOI, MUST PAY FULL AMOUNT STATED IN THE LOI
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32
Q

Switching between Family of funds

A

If a customer decides to liquidate the John Hancock Bond fund and use it to buy the John Hancock Growth fund, the switch is made at NAV and no sales charge is imposed

  • however considered a sale, so capital gains/losses is taxable
33
Q

12b-1

A

may charge its existing shareholders for the cost of soliciting new investment to the fund. The “cost” of soliciting new investments also includes compensation to registered representatives selling the fund shares.

-max is .75%

when you see an advertisement on TV, probably being paid from 12-b1 fees

34
Q

CLASS A SHARES

A
  • 1-time up-front sales charge and no, or very low, annual 12b-1 fees.
  • most suitable for long term investment and large dollar clients
35
Q

Class B Shares

A
  • have no up-front sales charge, but they do have a CDSC - Contingent Deferred Sales Charge, that is imposed if the customer redeems early.
  • Typically, the charge is reduced by 1% per year of holding investments in the fund and declines to “0” after the 5th year. These funds also impose an annual 12b-1 fee.
  • most suitable for the intermediate term investor
36
Q

Class C Shares

A
  • No Sales charge but a very high annual 12b-1

- suitable for short term investor

37
Q

Fixed Dollar

A

A fixed dollar amount is paid periodically;

38
Q

FINRA prohibits the following practices

A
  • Breakpoint sales
  • Trading Mutual Fund Shares
  • Inappropriate recommendation of Class B Shares
  • Late Trading
  • Market timing
39
Q

Breakpoint sale

A
  • the practice of not making a customer aware that he or she is close to making a breakpoint
  • customer should be aware so they have the option of an LOI
40
Q

ETF

A

shares of ownership in portfolios of common stock that track the performance of a specific index

41
Q

What type of fund is an ETF?

A
  • The majority of ETFs are registered as open-end because they allow the creation of additional shares
  • however, act and trade as a closed-end fund
42
Q

Characteristics of an ETF

A
  • Continuously priced
  • Purchased without a sales charge
  • Can be purchased on margin/ sold short
  • Tax-efficient
  • Must be delivered a prospectuc
43
Q

QQQ trades on

A

NASDAQ

44
Q

SPDRS and DIA trade on

A

AMEX

45
Q

Leveraged ETF

A
  • uses borrowing and options to leverage results
  • For example, a 200% leveraged ETF (2X) should move 2 times as fast as the reference index, in the same market direction.
46
Q

Inverse ETF

A
  • moves opposite in price to the movement of the reference index. It is also called a “short” ETF because it is similar to taking a short position.
47
Q

Equity Inverse ETF

A
  • would be expected to rise in price when stock prices are falling, and fall in price when stock prices are rising.
48
Q

Bond Inverse ETF

A
  • rise in price when interest rates are rising (because it is taking short bond positions and bond prices fall when market interest rates rise); AND fall in price when interest rates are falling.
49
Q

A leveraged inverse ETF

A

200% leveraged inverse ETF should move 2 times as fast as the reference index, but in the opposite market direction.

50
Q

Hedge Fund

A
  • lightly regulated, wealthy investors( min. $1,000,000 investments)
  • aggressive investment strategies including short selling and speculating in currencies, commodities, and futures.
  • exempt from securities regulation since the general public cannot invest, except for the anti-fraud rules.
  • completely illiquid investments
51
Q

2 and 20

A

2% annual management fee plus 20% of asset appreciation

52
Q

Funds of Hedge Funds

A
  • registered investment company under the 1940 Act that makes investments in differing hedge funds.
  • registered as closed-end funds
  • illiquid investments.
  • tax-inefficient vehicles because most gains are short term, not long term
53
Q

Shareholders receive financial statements

A
  • semi-annually

- must include the income statement, balance sheet, and all the listings of all holdings in the portfolio

54
Q

Expense Ratio

A
  • The more efficient, the lower fee.

= total expense/ total net assets

55
Q

Management Fee

A
  • the largest expense of running a mutual fund.

- Actively managed funds have much higher management fees than passively managed index funds.

56
Q

Subchapter M

A
  • distributes at least 90% of NII to shareholders
  • pays no tax on income that is distributed to shareholders, tax liability is that of shareholders

-shareholders receive Net Investment Income as a dividend distribution; and receive capital gains as a capital gains distribution, and include this on their individual tax returns.

57
Q

Ex-Date

A
  • set by the BOD for mutual funds
  • set by the exchange for closed-end funds
  • set at the business day following the payable date.
58
Q

Dividends received from a mutual fund are taxable

A
  • Federal level, unless the securities that are the source of the dividends are exempt from Federal tax (e.g., municipals).
59
Q

Shareholder Rights

A
  • Vote for the Board of Directors;
  • Vote for the Investment Adviser;
  • Vote to change the investment objective of the fund;
  • Receive financial statements from the fund.
60
Q

% of Board Directors that must be non-interested

A

40%

61
Q

Units of FIXED UITs are

A

reedemable at NAV at any time

62
Q

Accumulation account

A
  • holds bonds until a trust account is created
63
Q

Expense Ratios on Fixed UITS

A

-usually low, no management or brokerage fee

64
Q

Municipal trusts are insured by

A

AMBAC

65
Q

REIT

A
  • similar to closed-end funds
  • invest in Real Estate
  • registered and trade on stock exchanges
  • Registered under SEC act of 1933
66
Q

Percentage of REIT’s assets that must be invested in real estate or mortgages

A
  • 75%
67
Q

REITs and margin

A
  • can be bought on margin and sold short, liquid
68
Q

Equit REIT dividends

A
  • Net income > borrowing costs = income for shareholders

- do not receive lower tax rate

69
Q

Investments of REITs

A
  • apartment houses, office buildings, shopping centers and hotels
  • income comes from large group of smaller rentals, so if one defaults, it isnt that much
70
Q

Equity REITS and stock movements

A
  • move opposite

- stock prices are flat or negative, investors shift to alternative non-financial investments such as real estate

71
Q

Equity REITS and capital gains

A
  • long term capital gains can be achieved if the property appreciates
72
Q

Mortgage REIT

A
  • Invest mainly in mortgages and construction loans
  • interest rate earned on these loans should exceed the borrowing costs equaling the income for shareholders
  • highly leveraged
  • invest in CMOs, can be safe to risky
73
Q

REIT to be regulated under Subchapter M of the Internal Revenue Code

A

rents, mortgage interest earned, and real estate tax refunds received (as a source of income, an REIT can buy a property and attempt to get its tax assessment lowered

74
Q

REIT must distribute at least ___ of Net Investment Income to shareholders.

A

90%

  • if it fails to invest this, ALL income is taxable
75
Q

REITs and Pass throughs

A
  • can pass on capital gains 1 time per year, but not capital losses
76
Q

REITS and RELPs

A
  • REITS are exchange-traded like any other stock, liquid, only distribute capital gains NOT capital losses
  • RELPs are illiquid, can be traded but with great difficulty, can pass on BOTH capital gains and capital losses
77
Q

Business Development Company

A
  • trades like any stock, SEC registered
  • invests in privately-held start-up companies
  • means not reliable cash flow, risky! however can offer a superior return
  • same tax rules as REITs
78
Q

Venture Capital Fund

A
  • limited partnerships that also invest in privately-held start-up companies, however, only available to the very accredited investors
  • minimum investment of $1 mil
  • investors must agree to tie up investments for 10 years, so they ar ehighly illiquid and DO NOT TRADE, NOT REGISTERED

Series 7 (16 decks)

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