Investment Companies and Other Packaged Products Flashcards
Identify the acronym: POP
Public Offering Price
A fund’s management fee is typically calculated based on a percentage of _________________________.
A fund’s management fee is typically calculated based on a percentage of assets under management.
Is a REIT a form of direct participation program (DPP)?
No. Unlike DPPs, REITs do not pass through losses.
The trading of REITs is most similar to what type of investment company?
Closed-end management companies, since both trade in the secondary market (exchange or OTC)
True or False: If a mutual fund investor chooses to reinvest dividends, taxes will be deferred.
False
Are breakpoints available when investing in UITs?
Yes
Describe a typical index fund’s expenses and management style.
The expenses are generally low and it is passively managed.
Since mutual funds are considered primary market issues, they must be sold by ____________.
Since mutual funds are considered primary market issues, they must be sold by prospectus.
Is a mutual fund’s redemption fee considered a sales charge?
No, since it does not go to selling brokers, but rather stays within the fund.
Is a letter of intent binding on the investor?
No. However, the letter is binding on the investment company.
When a fund distributes a capital gain, is it the fund’s or shareholder’s holding period that is considered?
The fund’s holding period is used to determine whether long-term or short-term.
What does the following quote indicate about the fund? NAV: $9.20 POP: $9.20
It’s a no-load fund.
True or False: The market price of closed-end shares could be higher, lower, or equal to the NAV.
True. Shares can trade at a premium or discount to NAV based on supply and demand forces.
If the Hi-Tech Fund has a NAV of $4.25 and a POP of $4.50, what is its sales charge percentage?
The formula is (POP - NAV) divided by POP ($4.50 - $4.25 = $.25 ÷ $4.50 = 5.5%).
True or False: Mutual fund shares may be purchased and sold in the secondary market.
False. Mutual funds are always considered new issues and are bought and sold through the fund.
Sales charge is always expressed as a percentage of the ________.
Sales charge is always expressed as a percentage of the POP (public offering price).
To calculate the sales charge percentage for a mutual fund, the formula is: (______-______) ÷ ______
To calculate the sales charge percentage for a mutual fund, the formula is: (POP - NAV) ÷ POP
What is a REIT?
Real Estate Investment Trust
If a REIT pays dividends, would the corporate dividend exclusion rule apply?
No
What are the requirements for being considered a Regulated Investment Company?
The fund must be a domestic company that distributes at least 90% of its net investment income.
What do the differences in mutual fund share classes represent?
The different methods by which the sales charge is collected
A Regulated Investment Company’s net investment income will ultimately be taxed to the __________________.
A Regulated Investment Company’s net investment income will ultimately be taxed to the shareholders.
True or False: To lower sales charges, investors add mutual fund purchases in all accounts using Rights of Accumulation.
True. However, the purchases must all be from the same fund family.
Investment companies must send financial statements to customers every ____ months.
Investment companies must send financial statements to customers every 6 months.
What is the annual fee levied against a fund’s assets and used to pay expenses of commissions and retail communications?
12b-1 fee
___________________ is the balancing of investment classes according to an investor’s investment objectives.
Asset allocation is the balancing of investment classes according to an investor’s investment objectives.
True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.
False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.
May closed-end funds issue more than one type of security?
Yes. Closed-end funds may issue common stock, preferred stock, or bonds.
What price is paid for mutual fund shares?
The Public Offering Price (POP). POP = NAV + Sales Charge (if applicable).
If $25,000 is invested in an inverse ETF, what is the value if the market drops 10% on day 1, then rises 10% on day 2?
Day 1: $25,000 x 1.10 = $27,500 and Day 2: $27,500 x .90 = $24,750
To calculate the POP for a mutual fund, the formula is: ______ ÷ (______ - ___________)
To calculate the POP for a mutual fund, the formula is: NAV ÷ (100% - Sales Charge %)
True or False: Custodian banks provide investment management service to a fund.
False. Custodian banks provide safekeeping for a fund’s cash and securities.
Letters of Intent are valid for ____ months.
Letters of Intent are valid for 13 months.
What funds are similar to an index fund, but trade in the secondary market like stock?
Exchange-Traded Funds (ETFs)
True or False: A breakpoint sale is a prohibited action of selling shares at just under where breakpoints are available.
True
After the initial offering, where are shares of a closed-end management company purchased?
In the secondary market (like shares of stock)
What are the important numbers associated with REITs?
90% income distributed, 5 or less may not own more than 50%, 100+ shareholders, 75% of assets invested in real estate
What amount of net income must a REIT distribute?
90%
What price is paid for closed-end management company shares?
Market price plus a commission
If a client’s goal is preservation of principal, what fund would be most appropriate?
Money-market fund
What are three distinct advantages to investing in an open-end investment company?
1) Diversification 2) Professional Management 3) Liquidity
A ______ is a type of investment company which has a fixed portfolio of securities and is supervised, not managed.
A UIT is a type of investment company which has a fixed portfolio of securities and is supervised, not managed.
A fund whose portfolio is created to mirror the composition of a particular index is referred to as an ________ fund.
A fund whose portfolio is created to mirror the composition of a particular index is referred to as an Index fund.
True or False: REITs are exempt from the registration requirements of the Securities Act of 1933.
False. Registration is required for REITs.
What restrictions exist in describing a fund as no load?
It may have no front-end or deferred sales charge, and a 12b-1 fee cannot exceed .25%.
Define breakpoint.
Dollar levels of investment purchases that qualify for a reduced sales charge
If the Green Fund has a NAV of $12.70 and a sales charge of 5.5%, what is the POP?
The formula is NAV ÷ (100% - Sales Charge %). $12.70 ÷ 94.5% = $13.44.
A _______________________ fund is one that invests in a specific industry or geographic region.
A Sector or Specialized fund is one that invests in a specific industry or geographic region.
A REIT could derive income from what different sources?
Interest (mortgage REIT), rent from both residential and commercial property, and capital gains (equity REIT)
A fund distributes a gain on shares held for 3 yrs. Joe has owned the fund shares for 6 months. How is Joe’s gain taxed?
As a long-term capital gain, since the fund held the shares for three years. Joe’s holding period is irrelevant.
Identify the acronym: NAV
Net Asset Value
What is the formula for determining the number of shares able to be purchased when reaching a breakpoint?
Dollars invested ÷ newly calculated offering price (based on the reduced sales charge)
According to industry rules, _____% is the maximum sales charge on mutual funds.
According to industry rules, 8.5% is the maximum sales charge on mutual funds.
What amount of an investment company’s Board of Directors must be independent/unaffiliated?
A majority
What are the three different types of investment companies?
1) Face Amount Certificate Companies
2) Unit Investment Trusts (UITs)
3) Management Companies
Identify the acronym: ETF
Exchange-Traded Fund
True or False: ETFs are marginable and may be sold short.
True
Are mutual funds considered marginable securities?
No. Investors must pay 100% of the purchase price.
Into what does a growth fund invest?
Common stock
True or False: Regulated Investment Companies (under Subchapter M) may relieve their burden of paying tax on income.
True. Regulated Investment Companies will only be taxed on the income retained.
Letters of Intent may be back-dated for _____ days.
Letters of Intent may be back-dated for 90 days.
What terms are synonymous with a mutual fund’s Net Asset Value (NAV)?
Bid price or Redemption price
What is a fund’s net investment income?
Dividends + interest - expenses
If $25,000 is invested in an inverse ETF, what is the value if the market rises by 5% on day 1, then drops 10% on day 2?
Day 1: $25,000 x .95 = $23,750 and Day 2: $23,750 x 1.10 = $26,125
Funds offer ______________________ to allow buyers to add all purchases made from a fund family to reduce sales charge.
Funds offer Rights of Accumulation to allow buyers to add all purchases made from a fund family to reduce sales charge.
