Investment Companies Chapter 4

Question 1

Calculate NAV open end

Answer 1

total asset - total liabilities / total outstnaindg shares.

Question 2

Calculate closed end NAV

Answer 2

supply and demand

Question 3

Diversified

Answer 3

At least 75% of assets regulated so that not more than 5% of its assets are invested in one corporation and does not own more than 10% of the outstanding voting stock of any one company

Question 4

Maximum sales load

Answer 4

Investment company act of 1940 is 9%
FINRA rules is 8 ½%

Question 5

Types of Funds

Answer 5

1.Diversified Common Stock Fund
2.Specialized/ Special situation /Sector Fund- considered the riskiest
3.Balance Fund- prospectus requires funds to be invested in a diversified mix of bonds, preferred stocks and common stocks. Most conservative and least volatile
4.Income Fund-objective is to maximize income, buys dividend-paying stocks and bonds with high yields
5. Growth Fund- generally does not pay dividends and has lower yields
6. Blue Chip funds-
7. Gold Funds- pays a little or no dividends
8. International fund invests primarily in stocks and bonds issued by foreign companies and governments. Higher income in US dollars when foreign interest rates are high and US dollar is weak
9. Global Funds- invests in stocks and bonds issued by U.S. and foreign companies.
10. Index Funds- Attempts to mirror the portfolio of a particular index, no active portfolio managers
11. Bond Funds- fluctuation in interest rates, bond prices fall when interest rates rise
12. Municipal Bond Fund- invests in municipal bond only, dividends distributions are exempt from federal taxes, capital gains are subject to federal tax( interest received)
13. Interval Fund- Investment company that periodically (3,6,9 or 12 months) offers to repurchase its shares from shareholders.
Interval funds DO NOT trade on the secondary market
Shares are re-purchased at NAV

Question 6

Money Market Funds

Answer 6

Operating Expense is high- to include management and advisory fees, which impact yield
Most liquid mutual fund
Dividends- IRS rules state that investors must report amounts received from money market funds as dividend income – fully taxable
Fund portfolio – average weight of 90 days
Offer minimal credit risk
No sales load-
Minimum withdrawal are set at $500
NAV- shares normally reman priced $1 per share
Fund investments- T-bills, CD’s Commercial paper, bankers’ acceptances, Eurodollars

Question 7

Exchange Traded Funds (ETF’s)

Answer 7

Similar to normal index funds with a portfolio that mirrors a specific index or industry sector basket of securities
Settlement is T+ 2 days

Question 8

Exchange Trade Notes

Answer 8

ETN- debt instruments issued by banks.
ETNS are unsecured debt securities that are not principal protected but do participate in the performance of a specific index or investment strategy.
Return of Principal is NOT guaranteed
Trade like a stocks can be callable
ETNS do have a final maturity
ETN Sectors- Commodities, Currencies, Emerging Markets and Strategy/Index

Question 9

Accredited Investors-

Answer 9

Net worth of 1 million ( excluding residence)
Income excess of 200,000 for a single person in each of the two most recent years
300,000 for joint income in each of the two most recent years

Question 10

ETF Margin

Answer 10

25% on a Long ETF and 30% on a Short ETF

Question 11

Maintenance Requirement etf

Answer 11

Long ETF is 25% of the market value
Short ETF is 30% of the market value

Question 12

Cost Basis

Answer 12

Several Methods in determining cost basis on the sale of a mutual fund
FIFO- First in, First Out
Specific Identification method
Average Cost

NOTE: LIFO, Last In, First Out is NOT allowed method

Question 13

IRS FORM 1099-DIV

Answer 13

NOTE: When an investment company pays dividend and capital gains distributions, the fund reports them to the shareholders and to the IRS

Form 1099-B is the IRS form that brokerage firms send to clients to report gains and losses on securities transactions including fund redemptions

Taxable Events
Dividend payments
Capital Gains distributions
Switching from one fund to another
Redemption of fund shares

Question 14

For a no-load fund, 12b-1 fees or separate shareholder cannot

Answer 14

.25% or( 25 basis points) of the funds net assets per year.

Question 15

Breakpoint- Letter of Intent(LOI)

Answer 15

A letter of intent is a means in which an investor can receive a reduced sale charge: Allows an investor 13-month period to reach the breakpoint amount
Can be backdated 90 days

MUST advise about breakout points discounts or the broker is in violation

Investment clubs and investment advisors can not purchase for their clients

Question 16

Rights of Accumulation (ROA)-

Answer 16

Some funds give the investor “Rights of Accumulation” ROA permitting a reduced sales charge on new purchases when the total value of already-held shares plus the additional amount to be invested exceeds the sales charge breakpoint.

Question 17

Regulation Of Mutual Fund Sales

Answer 17

The Securities Act of 1933
The prospectus- the issue of mutual fund shares is considered to be a continuous “ new issue” and requires delivery of a prospectus to purchasers

Question 18

Two types of Prospectus

Answer 18

Summary prospectus , just a few pages long

Statutory Prospectuses- contains all the information from the summary but more in detail
Minimum purchase requirements
Fund management fees
Fund financial statements
Quantity discount amounts
Statement of Additional Information(SAI)- not required to send SAI, but must provide for free if requested

Prospectus delivery applies to
Variable annuities
Face Amount Certificate of Companies
Unit Investment Trusts
Close-End Investment companies
Contractual Plans

Question 19

The investment Company Act of 1940

Answer 19

A primary objective of the ’40 act is to ensure that investors are provided with full and fair disclosure of all information needed to make an informed decision.

NO PROSPECTUS MAY BE USED IF THE INFORMATION CONATINED IS MORE THAN 16 MONTHS OLD

Question 20

Investment Manager

Answer 20

manages funds portfolio
Is paid a management fee based on a sliding scale computed on the average daily net assets of the fund and the fee is deducted from the gross income of the fund

Question 21

Underwriter

Answer 21

buys shares from the fund at NAV and sells them to the public with a sales charge

Question 22

Custodian

Answer 22

is responsible for the safekeeping of the cash and securities in the portfolio
Usually a bank

Main function is to provide recordkeeping and clerical services

Question 23

Transfer agent-

Answer 23

issues and redeems shares
Disbursed dividends and capital gains distributions and keeps record of those distributions
Send statements to shareholders and keeps records of purchases and redemptions