Investment Companies, Insurance Products & Derivatives Flashcards
Three types of Investment Companies defined by the Investment Company Act of 1940
Face Amount Certificate, Unit Investment Trust, Management Company
Management company shares that may trade at a price more or less than their net asset value
Closed-ended Investment companies
Three types of securities that closed-end companies can issue
Common shares, preferred shares and bonds
An investment company that meets the 75-5-10 test
Diversified
Type of management company that can issue shares continuously
Open-end
Type of management company that issues a fixed number of shares in a single offering
Closed-end
Type of management company that can issue only equity shares
Open-end
Type of management company that can issue both equity and debt
Closed-end
Type of management company shares that are redeemed by the issuer
Open-end
Type of management company shares that trade in the secondary market
Closed-end
The difference between the Public Offering Price and Net Asset Value
Sales load
Type of management company shares that are priced by formula
Open-end
Type of management company shares that are priced by supply and demand
Closed-end
An investment company which issues redeemable securities and is not actively managed
Unit investment trust
The price at which an investor purchases closed-end company shares
Ask price
Type of management company that offers shares through a continuous primary offering
Open-end
Number of days mutual fund shares must be held before they can be used as collateral in a margin account
30 days
The type of securities that mutual funds can issue
Common shares
Form that mutual funds send shareholders annually to report taxability of distributions
1099
Section of the Investment Company Act of 1940 that permits funds to charge ongoing fees for marketing and distribution
Section 12b-1
Securities legislation that defines management companies and registration requirements
Investment Company Act of 1940
Maximum sales charge for mutual funds permitted by FINRA rules
8.5% of POP
Maximum annual 12b-1 fee permitted by the Investment Company Act of 1940
.75% of average annual net assets
Quantity purchase discounts that apply to individuals who purchase funds within the same fund family
Breakpoints
Document that allows an investor to receive a discounted sales charge on current and future funds invested within the same fund family
Letter of Intent
Maximum duration of a Letter of Intent
13 months
The maximum time allowed to backdate a Letter of Intent
90 days
Allows for reduction of sales charges on subsequent purchases based on combining additional purchases and with prior share appreciation
Rights of accumulation
Maximum time limit for Rights of Accumulation
There are no time limits imposed on Rights of Accumulation
FINRA violation which involves encouraging a customer to purchase shares at a point below an available sales charge reduction
Breakpoint sale
Mutual fund share class with a front end sales load
Class A shares
Mutual fund share class with a back-end load and 12b-1 fees
Class B shares
Mutual fund share class with 12b-1 fees charged quarterly
Class C shares
The pricing concept that defines the purchase and redemption of mutual fund shares at the next calculated price
Forward pricing
Life insurance contract designed to provide a stream of guaranteed income payments for life
Annuity
The insurance company account in which variable annuity payments are invested
Separate account
A directly managed variable annuity’s category of registration under the Investment Company Act of 1940
Open-end management company
The two phases of a variable annuity contract
Accumulation phase and Annuity phase
The rate established at the time of annuitization for determining the amount of income paid from month to month
Assumed Interest Rate
The impact on the monthly payment from a variable annuity, as compared to the previous month, if the separate account performance is greater than the AIR
Increase
The transition from the accumulation to the payout phase of a variable annuity
Annuitization
The penalty that applies if funds are withdrawn from an annuity before age 59 1/2.
10% penalty on earnings
Price at which open-end company shares are purchased
Public Offering Price (POP)
Price at which open-end company shares are redeemed
Net Asset Value (NAV)
An investment company with assets concentrated in a single industry
Specialized or sector fund
An investment company with no provision for redeeming outstanding shares
Closed-end
An Exchange Traded Fund that tracks the S&P 500
SPDR
An Exchange Traded Fund that tracks the Dow Jones Industrial Average
DIA
An Exchange Traded Fund that tracks the Nasdaq 100
QQQQ
Three mutual fund trading practices that are disapproved by the SEC unless stringent disclosure and financial requirements are met
Purchasing securities on margin, selling securities short and participating in joint trading accounts
Performs customer service functions on behalf of the mutual fund
Transfer agent
Responsible for the safekeeping and segregation of a mutual fund’s securities
Custodian
Implements the investment strategy and invests on behalf of the mutual fund
Investment adviser
Defines the fund’s investment objectives and oversees the direction of the fund
Board of Directors
Board Members who are independent or not connected with the mutual fund’s key functions
Noninterested Parties
The amount of mutual fund Board members that must be noninterested
Majority
Also known as the sponsor or distributor, and is responsible for selling and marketing funds shares
Underwriter
Compensated by a percentage of a mutual fund’s assets
Investment adviser
Paid a fee by a mutual fund to perform their functions
Custodian and transfer agent
Paid from sales charges to perform its function
Underwriter
Frequency that mutual funds must send financial reports to shareholders
Semi-annually
Financial document that mutual funds must provide shareholders upon written request
Balance sheet
The type of interest an investor owns in a mutual fund portfolio
Undivided
Type of security typically held by mutual funds with growth objectives
Common stock
Three types of securities that are held by mutual funds with income objectives
Bonds, preferred stock, blue chip common stock
Type of mutual fund that is focused on generating capital gains, and tends to reinvest most earnings
Growth fund
Type of mutual fund with low portfolio turnover and low expenses that tracks market performance
Index fund
Type of mutual fund that invests in stock for appreciation and bonds for income
Balanced
Type of mutual fund that authorizes the fund adviser to rebalance the percentage of holdings between cash and different investment categories
Asset allocation fund
Usually sold with no sales or liquidation fees
Money market funds
NAV of a single share of a money market fund
$1
Portfolio of securities held in tax-exempt bond funds
Municipalities (bonds and notes)
Type of mutual fund that is best suited to an investor seeking maximum safety
U.S. government bond fund
Maximum remaining maturity of funds held within a money market portfolio according to SEC rules
13 months
Maximum average portfolio maturity of securities in a money market portfolio according to SEC rules
90 days
Years of average annual performance that mutual funds must disclose in customer communications
1, 5 and 10 year, or since inception
Fund expenses/average net assets
Expense ratio
Expresses the rate at which a fund replaces the securities held in its portfolio
Portfolio turnover ratio
Type of fund that is likely to have a high expense and portfolio turnover ratio
Aggressive growth fund
The maximum amount of 12b-1 fee a no-load fund can charge
$0.0025 or 25 basis points
Fund’s NAV/Number of Shares Outstanding
NAV per share
The impact on NAV per share when portfolio securities increase
Increase in NAV
The impact on NAV per share when shares are sold or redeemed
No impact
NAV + Sales Charge
POP
Another name for a back-end load
Contingent deferred sales charge
Calculation of a mutual fund share’s POP
NAV + SC
Objective is to purchase mutual fund shares at a lower average cost per share than average price per share
Dollar cost averaging
Three types of mutual fund systematic withdrawal plans
Fixed share, fixed percentage and fixed time withdrawal plans
A risk associated with the loss of buying power from a fixed annuity’s payment
Purchasing power risk
The annuity payout option that provides the largest monthly income amount
Life income (also called life only or straight life)
The annuity payout option that guarantees that income will be paid for the lives of two individuals
Joint life with last survivor
An annuity which begins paying income within 60 days of purchase
Immediate annuity
An annuity in which purchase payments are deposited according to a premium payment schedule until payments are started
Periodic payment deferred annuity
An annuity that provides both fixed and variable annuity benefits
Combination annuity
The insurance company account in which fixed annuity payments are invested
General account
A risk assumed by the owner of a variable annuity
Investment risk
Type of annuity that guarantees the rate of return that will be earned on the investment
Fixed annuity
The fee charged by an insurance company for guaranteeing annuity income for life
Mortality fee
Disclosure document that must be provided to investors when variable annuities or mutual funds are sold
Prospectus
An accounting measure used to determine the owner’s interest in the separate account
Accumulation unit
Letters of intent used in connection with fund purchases are good for
13 months and can be backdated 90 days
The most suitable mutual fund share class for a substantial fund investor with a long term perspective is
Class A
Term of office for directors of mutual funds can be no greater than
5 years
A 12b-1 plan must be approved by majority vote of
shareholders, B.O.D. , and uninterested directors
To levy maximum sales charge, fund must offer both
breakpoints and rights of accumulation
A 12b-1 plan must be reapproved
annually
Distributions from 403(b) plans are
100% taxable
Amounts expended under 12b-1 plans must be reviewed
quarterly
Section of the Investment Company Act of 1940 that permits funds to charge ongoing fees for marketing and distribution
Section 12b-1
Document that allows an investor to receive a discounted sales charge on current and future funds invested within the same fund family
Letter of Intent
Mutual fund share class with a front end sales load
Class A shares
Mutual fund share class with a back-end load and 12b-1 fees
Class B shares
Primary disadvantage of most limited partnership investments
Lack of liquidity
Unique tax advantage available to investors in limited partnerships
Pass through of losses
Type of income that passive losses generated from limited partnerships can shelter
Passive income only
Has active management responsibility and acts as agent for a limited partnership
General partner
The document that must be completed by investors interested in becoming limited partners
Subscription agreement
Limited partnership loans for which a limited partner assumes repayment responsibility
Recourse loans
Document that must be signed and approved by the general partner before a limited partner is accepted
Subscription agreement
Partner in a limited partnership that assumes unlimited liability for business losses and debts
General partner
Two types of real estate limited partnerships for which tax credits may be available
Government-assisted housing; historic rehabilitation
Most risky type of oil and gas program
Exploratory (Wildcatting)
Objective is to drill near to existing oil fields to find new reserves
Developmental
Oil and gas program that provides income from sale of existing oil
Income program
Type of oil and gas program that generates the highest Intangible Drilling Costs
Exploratory
Drilling program costs that are 100% deductible in the first year of operation
Intangible Drilling Costs (IDCs)
Similar to depreciation, these allowances apply to the using up of natural resources
Depletion allowances
An oil and gas program that consists of both income and exploratory drilling
Combination program
Primary objective is to generate tax sheltered income from lease payments, and write-offs from expenses and depreciation
Equipment leasing program
Asset that cannot be depreciated
Land
A dollar-for-dollar reduction of taxes due
Tax credit
Type of limited partnership note that increases a limited partner’s cost basis
Recourse note
Impact of a cash distribution on a limited partner’s cost basis
Reduction to cost basis
Two types of Section 529 Plans
Prepaid tuition plans and college savings plans
REITs
Real Estate Investment Trust. Must invest 75% of assets in real estate and must pass through 90% of net income to investors to qualify for favorable tax treatment.
General Partner in a Limited Partnership
Manages day-to-day operations, potentially has unlimited liability
Limited Partner in a Limited Partnership
Silent partner, has limited liability
An IRA rollover must be completed within
60 days and only 1 per year is permitted
Annual contribution to a Coverdell ESA is
$2,000 per beneficiary (non-deductible)
Distributions from tax deferred annuities are
100% taxable
A plan requiring the services of an actuary is
a defined benefit plan
The penalty that applies if funds are withdrawn from an annuity before age 59 1/2.
10% penalty on earnings
Investment requirement and pass-through requirement for REITs to qualify for favorable tax treatment
75% of assets invested in real estate and 90% of income passed through to investors
Taxation that applies to a lump sum withdrawal from an IRA account at age 55
Ordinary income + 10% penalty
21 years of age; one year of full time service, minimum of 1000 hours
ERISA-defined employee eligibility requirements for plan participation
Employee Retirement Income Security Act (ERISA)
Federal regulation that specifies guidelines for private sector and certain union plans
Two types of options contracts
Calls and Puts
All options of a single issuer with the same class, exercise price and expiration month
Series
Options that can be exercised any time before contract expiration
American Style
Options that can be exercised only on the business day preceding expiration
European style
Number of shares within one option contract
$100
Has rights in an option contract
Holder (Buyer)
Has Obligations at contract exercise
Writer (Seller)
Right of a call buyer at contract exercise
Right to buy stock at exercise price
Obligation of a call writer at contract exercise
Obligation to sell stock at exercise price
Right of a put buyer at contract exercise
Right to sell stock at exercise price
Obligation of a put writer at contract exercise
Obligation to buy stock at exercise price
Market attitude of a call buyer
Bullish
Market attitude of a call writer
Bearish
Market attitude of a put buyer
Bearish
Market attitude of a put writer
Bullish
When a call is in the money
Market price exceeds strike price
When a put is in the money
Market price is less than strike price
Breakeven for a call
Strike price + premium
Breakeven for a put
Strike price - premium
Two factors that determine the premium of an option contract
Time value and Intrinsic value
An asset that loses all value over a period of time
Wasting asset
Maximum gain for a long call
Unlimited
Maximum gain for a short call
Premium
Maximum gain for a long put
Strike price - premium
Maximum gain for a short put
Premium
Maximum loss for a call buyer
Premium
Maximum loss for a call writer
Unlimited
Maximum loss for a put buyer
Premium
Maximum loss for a put writer
Strike price - premium
Closing transaction for a put writer
buy a put
The use of options to protect a stock position
Hedging
Full protection for a long stock position
Long put
Full protection for a short stock position
Long call
Partial protection for a long stock position
Short call
Partial protection for a short stock position
Short put
Selling calls when holding a long stock position
Covered call writing
Typical index option contract multiplier
$100
Type of index that reflects the movement of the market overall
Broad-based (OEX, SPX)
Type of index that tracks movement of a specific industry
Narrow-based
Expiration of index options
The third Friday of expiration month
Foreign currency options strategies used when value of currency is expected to rise against the US dollar
Buy foreign currency calls; sell foreign currency puts
Foreign currency options strategies used when value of currency is expected to fall against the US dollar
Buy foreign currency puts; sell foreign currency calls
Foreign currency options strategies used when U.S. dollar is expected to rise in value against the Canadian dollar
Buy Canadian dollar puts; sell Canadian dollar calls
Foreign currency options strategies used when U.S. dollar is expected to fall in value against the Canadian dollar
Buy Canadian dollar calls; sell Canadian dollar puts
Settlement of currency options
Next business day (T + 1)
Expiration of equity options
Saturday following the third Friday of the month at 11:59 p.m.
When stock must be delivered as a result of equity option exercise
T + 2 (regular way settlement) Updated for rule amendment effective Sept. 5, 2017
Clearing agent for listed options contract, issues and guarantees all listed option contracts
Options Clearing Corporation (OCC)
Disclosure document that must be provided to the customer on or before account approval
Options Disclosure Document
Deadline for return of the signed options agreement by the customer
Within 15 days of account approval
Principal required by FINRA that is accountable for options sales supervision and review of customer accounts that trade options
Registered Options Principal (ROP)
Required Percentage of Independent Directors on a Mutual Fund
At least 40% of a mutual fund’s board must be independent. Independent board members are not employees of the mutual fund or family members of employees of the mutual fund
Independent Directors
Independent board members are not employees of the company or family members of employees of the company.
How often mutual funds send shareholder reports
Mutual funds sent shareholder reports semi-annually. The report includes balance sheet, income statement, & the investment portfolio.
SEC Rule 482
SEC Rule 482 allows a mutual fund to advertise with a summary prospectus, provided it discloses fees, past performance, and where investors can obtain the full statutory prospectus.
Growth stock mutual fund
A mutual fund that invests with the primary goal of capital appreciation as opposed to income. These companies will generally reinvest most of their earnings for expansion, research or development.
Income stock mutual fund
A mutual that invests with the objective of generating regular current income by investing in securities that pay dividends.
Combination fund
A mutual fund that seeks both growth (capital gains) and income through a diversified portfolio of stocks.
Sector funds
A mutual fund that focuses on a particular geographic region, economic sector, or particular industry. Sector funds may offer higher returns with higher risk because of a lack of diversification.
Special situation funds
A mutual fund that seeks to achieve returns based on unique or unusual corporate circumstances such as spin-offs, tender offers, bankruptcy proceedings, or M&A activity.
Index fund
A mutual fund that passive tracks a market index such as the S&P 500 or NASDAQ 100. These funds generally offer low-turnover, low expenses, and tax efficiency.
International fund
A mutual fund that invests in securities issued outside the United States. International funds can seek, growth, income, or a combination of the two. An additional risk of an international fund is currency risk.
Global fund
A mutual fund that invests in securities issued both inside and outside the United States. Global funds can seek, growth, income, or a combination of the two. An additional risk of an international fund is currency risk.
Tax-free bond funds
A tax-free bond fund invests in municipal bonds because they generate tax-free interest income. Many investment companies offer state-specific tax-free bond funds; e.g. a New York tax-free bond fund invests only in New York municipal bonds, a New Jersey tax-free bond fund invests only in New Jersey municipal bonds.
Balanced fund
A mutual fund that invests in both stocks (for growth or income) and bonds (for income). In general, these are more conservative investments than stock mutual funds.
Money-market fund
Money-market funds are no-load (no sales charge) open-end mutual funds that invest in high-quality short-term debt. Investors choose money-market funds for safety and liquidity.
Mutual fund performance disclosures
Mutual funds must disclose their 1, 5, and 10 year average annual return, assuming the max sales load (i.e. no breakpoints).
Mutual fund expense ratio
The expense ratio is the calculated as the sum of the management fee plus operating expenses divided by the fund’s average net assets.
Annuity
A tax-deferred investment with a life insurance company to provide a stream of retirement income.
Fixed annuity
An annuity investment where the invested principal grows at a fixed rate. Fixed annuities are not securities.
Variable annuities
An annuity investment where the invested principal grows at a variable rate based on market investments. Variable annuities are securities.
Annuitization
The process that converts an annuity investment (the principal and growth) into a stream of regular payments. Upon annuitization an annuity typically loses its death benefit.
Assumed Interest Rate (AIR)
The Assumed Interest Rate (AIR) is the rate of return that an annuity’s separate account’s rate of return will be compared to in determining whether investor’s payments will increase, decrease, or stay the same.
Combination annuity
A combination annuity combines features of a variable annuity (some principal is invested in the separate account for market returns) and a fixed annuity (some principal is invested in the general account for fixed returns).
Index annuity
An index annuity is an annuity product that offers downside protection (guarantee against loss) but with limited upside through a participation rate and cap rate. These often carry higher fees and longer surrender charges.
403(b) plan
A 403(b) plan is a qualified variable annuity that offers tax-deductible (pre-tax) contributions and tax-deferred earnings & growth. All distributions are taxed as ordinary income. These are available to public sector employees.
Term life Insurance
A life insurance policy that lasts for a set number of years. After the term the policy ends. Term policies do not accumulate cash value. Term life insurance is the cheapest way to obtain life insurance.
Whole life insurance
A life insurance policy that lasts until the insured’s death. Both the death benefit and premiums are fixed and do not change during the policy’s life. Whole life insurance policies accumulate cash value (typically 3-5%).
Life insurance cash value
The cash value of a life insurance policy is a savings element attached to a policy. The cash value grows, often a fixed rate, while the insured makes premium payments. If the policy is surrendered the insured will receive the cash value.
Life insurance policy loan
An insured may take a loan against the cash value portion of a life insurance policy. While the loan is outstanding, the insured pays interest to the insurance company. If the insured dies with a loan outstanding, the amount will be subtracted from the death benefit.
Universal life insurance
A life insurance policy that offers adjustable death benefits and adjustable premium payments. Universal policies also offer higher interest rates on the cash value portion. This include a market interest rate (changes annually) and a contract rate (a fixed minimum rate).
Variable life insurance
A life insurance policy where premiums are invested in the insurance company’s separate account and invested in the market by the policy holder. Variable life carries a minimum guaranteed death benefit.
Universal variable life insurance
A life insurance policy with flexible premiums and a flexible death benefit. Premiums are invested in the market and accumulate cash value.
aggressive growth fund
An equity mutual fund that invests in stocks of riskier companies that are expected to appreciate at a much faster rate than the market average. Stocks of these companies rarely pay dividends; instead earnings are reinvested further for research and development.
rights of accumulation
Offer investors an opportunity to receive breakpoints on new mutual fund purchases based on the current value of those customers’ invested funds.
breakpoint sale
A prohibited sales practice in which a registered representative tries to earn a higher commission by encouraging the sale of mutual fund shares at an amount just below the point where the sales charge is reduced.
selling dividends
A prohibited practice in which a registered representative sells a mutual fund to an
investor right before the fund pays out a dividend. This is a violation because the dividend distribution creates a tax liability for the investor, as the investor must immediately pay taxes on the distribution.
net investment income
Net investment income is the total profits that an individual earns from their investments. For mutual fund investments, this would include any dividends plus interest income plus net capital gains (capital gains minus capital losses).
preferred stock fund
A mutual fund that invests in preferred stock in order to generate dividend income for investors.
voluntary accumulation plan
A benefit offered by a mutual fund that allows existing shareholders the right to purchase more shares at regular intervals with no additional sales charge.
back-end load
A back-end sales charge that investors pay when they redeem their mutual fund shares within a certain number of years. Generally, this fee will decrease each year the investor holds the shares.
Class A share
A type of mutual fund share that has a front-end sales charge, which investors pay when they buy into the fund. This share class tends to be the most economical for investors, as it offers breakpoints and has lower 12b-1 fees than other classes of shares.
Class B share
A type of mutual fund share that has a back-end sales charge which investors pay if they redeem their shares within a specified number of years. This share class typically has higher 12b-1 fees than class A shares and does not offer breakpoints.
Class C share
A type of mutual fund share that has a level-load sales charge. These shares typically have relatively high 12b-1 fees and do not offer breakpoints.
closed-end fund
A type of management investment company that issues a fixed number of exchange-traded shares. Similar to mutual funds, these types of investment companies are actively managed and have a net asset value. However, because an active secondary market exists for these, share prices are based on supply and demand.
contingent deferred sales charge
A back-end sales charge that investors pay when they redeem their mutual fund shares within a certain number of years. Generally, this fee will decrease each year the investor holds the shares.
expense ratio
A calculation of a mutual fund’s expenses, including management fees and operating expenses, divided by the fund’s average annual net assets.
Investment Advisers Act of 1940
A federal legislation that defines and regulates investment advisers.
letter of intent (LOI)
A contract offered by a mutual fund that allows a purchaser to invest in installments and receive breakpoints. An LOI is good for up to 13 months and can be backdated 90 days. If the customer fails to meet the terms, the otherwise applicable sales charges will apply.
load
Also referred to as the sales charge, it is the fee an investor pays when buying a mutual fund share. To calculate the public offering price, the sales load is added to the NAV.
management fee
The fee paid to the investment advisor who is responsible for actively managing the portfolio of a management investment company, such as a mutual fund or closed-end fund. It is typically the greatest expense of any management company.
management company
A type of investment company that actively manages a portfolio of securities to achieve a stated investment objective for investors. This is the most common type of investment company and includes both closed-end funds as well as mutual funds.
money market fund
A mutual fund that consists of money market securities, which are short-term debt instruments with maturities of one year or less. These funds are considered extremely safe and liquid.
open-end management company
Also known as a mutual fund, it is a management investment company that makes a continuous offering of redeemable shares. The portfolio of the fund is actively managed to achieve a clearly defined investment objective. However, because the shares are redeemable, there is no secondary market trading; instead the shares can only be bought from and sold back to the fund.
Reinvestment Privilege
Allow mutual fund investors to reinvest distributions into the fund at the NAV without having to pay any sales charges on these new purchases. Investors must still pay taxes on these distributions, however.
12b-1 fee
Annual fees paid by investors to cover a mutual fund’s marketing and distribution expenses. The maximum 12b-1 fee that a fund can charge is 1% of the fund’s average net assets, though if a fund wants to advertise itself as being no-load (not having a sales charge), then it cannot charge 12b-1 fees of more than 0.25% of the average net assets.
unit investment trust (UIT)
An investment company that issues redeemable securities representing an undivided interest in a trust. As with mutual funds, no secondary market exists for these. However, unlike management companies, there is a fixed portfolio with no active management.
balanced fund
A mutual fund that combines invests in stocks for growth and bonds for income.
dollar cost averaging
A method of purchasing shares in a mutual fund where the investor invests a fixed dollar amount at regular intervals. Over long periods of time, this will typically allow investors to have an average cost per share lower than the average price per share as they will buy more shares when prices are low and fewer when prices are high.
non-diversified management company
An investment company that does not meet the 75-5-10 diversification requirements set forth under the Investment Company Act of 1940.
ETF
An exchange-traded investment company security that is designed to closely track the performance of a specific sector, benchmark, or index. The fund is not actively managed and typically only changes when the underlying benchmark it tracks changes.
Growth Fund
An equity mutual fund that invests in stocks of companies that are expected to appreciate at a faster rate than the market average. Stocks of these companies rarely pay dividends; instead earnings are reinvested further for research and development.
Income Fund
An equity mutual fund that invests in dividend-paying companies including utility stocks, blue chip stocks, and preferred stocks.
Growth and Income Fund
Also referred to as a growth and income fund, it is an equity mutual fund that includes some stock for growth and others that pay high dividends.
mutual fund
Also known as an open-end fund, it is a management investment company that makes a continuous offering of redeemable shares. The portfolio of the fund is actively managed to achieve a clearly defined investment objective. However, because the shares are redeemable, there is no secondary market trading; instead the shares can only be bought from and sold back to the fund.
The tax that a mutual fund shareholder pays on capital gains distributions from the fund are based on
the holding period of the fund
As long as the mutual fund held the security in its portfolio for greater than one year, any capital gains that are realized are long-term capital gains for the fund investors regardless of how long they have held the shares of the fund.
A mutual fund investors decides to automatically reinvest dividends rather than take a cash distribution. Is this a taxable event?
Yes, mutual fund dividends are taxed when declared by the fund regardless if they are taken in cash or reinvested back into the fund.
Systematic withdrawal plan
A mutual fund redemption option which allows investors to withdraw a fixed amount (e.g. fixed dollar amount, fixed percentage of the account, or fixed number of shares) in regular intervals.
What investor type is best suited for municipal bond funds?
High income investors who will most benefit from the tax-free interest income provided by municipal bonds
What is the maximum amount a mutual fund can charge as sales charge?
A mutual fund can charge no more than 8.5% of the offering price.
Who determines the ex-dividend date for a mutual fund?
The board of directors of a mutual fund will set the ex-dividend date. In order to receive the dividend, an investor must purchase shares prior to the ex-dividend date.
Breakpoint
Discounts off the sales charge based on the amount of money invested within a mutual fund.
What are mutual expenses not covered in a 12b-1 fee?
Management expenses and trading fees
An investment company that pursues a sector investment strategy focuses on:
a specific industry
A sector focus strategy generally looks for securities from a particular sector or industry such as financial services, telecommunications, technology, etc.
Which types of investment companies are redeemable?
Mutual funds and unit investment trusts
What is not a benefit of investing in a fund of funds hedge fund?
lower fees
Fund of funds hedge funds typically charge much higher fees than a direct investment in a hedge fund because the manager in charge of the fund of funds adds its fee on top of the fees charged by the funds that comprise the fund of funds.
Net Asset Value
The value of a mutual fund, calculated as the total assets of the fund divided by its total liabilities. When a customer purchases a share, he pays the public offering price, which includes the NAV plus a sales charge. When a customer sells his shares back to the fund, he receives the NAV.
What is an expense ratio of a mutual fund?
The expense ratio is the total annual expenses divided by the total net assets of the fund.
This expresses how much of the fund’s return is actually being used to pay expenses and management of the fund. The higher the expense ratio – the less efficient mutual fund.
What is the formula for calculating the percentage sales charge of a mutual fund?
(POP - NAV)/POP
What percentage of net investment income must a mutual fund distribute to shareholders to avoid taxation?
90%
What are two major differences between mutual funds and ETFs?
Mutual funds are actively managed and redeemable (meaning there is no secondary market). ETFs, on the other hand, are not actively managed and are exchange-traded.
A mutual fund has an NAV of $18 and charges a sales charge of 3%, calculate the POP.
$18.56
POP = NAV/(100% - SC)
How does the portfolio turnover rate for ETFs compare to mutual funds?
Lower
Because ETFs are not actively managed, there is very little turnover of securities within the pool.
Because they are passively managed, the capital gains that ETFs generate are typically
minimized
Describe the pricing of closed-ended funds
Because they are exchange-traded, closed-end funds may trade at a premium of discount to the NAV based on the supply and demand of the shares
Futures have counterparty risk
False
Futures are guaranteed by a clearinghouse and therefore have no credit or counterparty risk.
Forwards have counterparty risk
True
Fowards are not guaranteed by a clearinghouse and therefore have credit and counterparty risk.
