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Series 65 > Investment Companies, Insurance Products & Derivatives > Flashcards

Investment Companies, Insurance Products & Derivatives Flashcards

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1
Q

Three types of Investment Companies defined by the Investment Company Act of 1940

A

Face Amount Certificate, Unit Investment Trust, Management Company

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2
Q

Management company shares that may trade at a price more or less than their net asset value

A

Closed-ended Investment companies

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3
Q

Three types of securities that closed-end companies can issue

A

Common shares, preferred shares and bonds

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4
Q

An investment company that meets the 75-5-10 test

A

Diversified

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5
Q

Type of management company that can issue shares continuously

A

Open-end

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6
Q

Type of management company that issues a fixed number of shares in a single offering

A

Closed-end

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7
Q

Type of management company that can issue only equity shares

A

Open-end

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8
Q

Type of management company that can issue both equity and debt

A

Closed-end

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9
Q

Type of management company shares that are redeemed by the issuer

A

Open-end

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10
Q

Type of management company shares that trade in the secondary market

A

Closed-end

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11
Q

The difference between the Public Offering Price and Net Asset Value

A

Sales load

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12
Q

Type of management company shares that are priced by formula

A

Open-end

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13
Q

Type of management company shares that are priced by supply and demand

A

Closed-end

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14
Q

An investment company which issues redeemable securities and is not actively managed

A

Unit investment trust

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15
Q

The price at which an investor purchases closed-end company shares

A

Ask price

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16
Q

Type of management company that offers shares through a continuous primary offering

A

Open-end

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17
Q

Number of days mutual fund shares must be held before they can be used as collateral in a margin account

A

30 days

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18
Q

The type of securities that mutual funds can issue

A

Common shares

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19
Q

Form that mutual funds send shareholders annually to report taxability of distributions

A

1099

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20
Q

Section of the Investment Company Act of 1940 that permits funds to charge ongoing fees for marketing and distribution

A

Section 12b-1

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21
Q

Securities legislation that defines management companies and registration requirements

A

Investment Company Act of 1940

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22
Q

Maximum sales charge for mutual funds permitted by FINRA rules

A

8.5% of POP

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23
Q

Maximum annual 12b-1 fee permitted by the Investment Company Act of 1940

A

.75% of average annual net assets

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24
Q

Quantity purchase discounts that apply to individuals who purchase funds within the same fund family

A

Breakpoints

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25
Q

Document that allows an investor to receive a discounted sales charge on current and future funds invested within the same fund family

A

Letter of Intent

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26
Q

Maximum duration of a Letter of Intent

A

13 months

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27
Q

The maximum time allowed to backdate a Letter of Intent

A

90 days

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28
Q

Allows for reduction of sales charges on subsequent purchases based on combining additional purchases and with prior share appreciation

A

Rights of accumulation

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29
Q

Maximum time limit for Rights of Accumulation

A

There are no time limits imposed on Rights of Accumulation

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30
Q

FINRA violation which involves encouraging a customer to purchase shares at a point below an available sales charge reduction

A

Breakpoint sale

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31
Q

Mutual fund share class with a front end sales load

A

Class A shares

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32
Q

Mutual fund share class with a back-end load and 12b-1 fees

A

Class B shares

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33
Q

Mutual fund share class with 12b-1 fees charged quarterly

A

Class C shares

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34
Q

The pricing concept that defines the purchase and redemption of mutual fund shares at the next calculated price

A

Forward pricing

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35
Q

Life insurance contract designed to provide a stream of guaranteed income payments for life

A

Annuity

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36
Q

The insurance company account in which variable annuity payments are invested

A

Separate account

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37
Q

A directly managed variable annuity’s category of registration under the Investment Company Act of 1940

A

Open-end management company

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38
Q

The two phases of a variable annuity contract

A

Accumulation phase and Annuity phase

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39
Q

The rate established at the time of annuitization for determining the amount of income paid from month to month

A

Assumed Interest Rate

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40
Q

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

A

Increase

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41
Q

The transition from the accumulation to the payout phase of a variable annuity

A

Annuitization

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42
Q

The penalty that applies if funds are withdrawn from an annuity before age 59 1/2.

A

10% penalty on earnings

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43
Q

Price at which open-end company shares are purchased

A

Public Offering Price (POP)

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44
Q

Price at which open-end company shares are redeemed

A

Net Asset Value (NAV)

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45
Q

An investment company with assets concentrated in a single industry

A

Specialized or sector fund

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46
Q

An investment company with no provision for redeeming outstanding shares

A

Closed-end

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47
Q

An Exchange Traded Fund that tracks the S&P 500

A

SPDR

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48
Q

An Exchange Traded Fund that tracks the Dow Jones Industrial Average

A

DIA

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49
Q

An Exchange Traded Fund that tracks the Nasdaq 100

A

QQQQ

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50
Q

Three mutual fund trading practices that are disapproved by the SEC unless stringent disclosure and financial requirements are met

A

Purchasing securities on margin, selling securities short and participating in joint trading accounts

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51
Q

Performs customer service functions on behalf of the mutual fund

A

Transfer agent

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52
Q

Responsible for the safekeeping and segregation of a mutual fund’s securities

A

Custodian

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53
Q

Implements the investment strategy and invests on behalf of the mutual fund

A

Investment adviser

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54
Q

Defines the fund’s investment objectives and oversees the direction of the fund

A

Board of Directors

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55
Q

Board Members who are independent or not connected with the mutual fund’s key functions

A

Noninterested Parties

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56
Q

The amount of mutual fund Board members that must be noninterested

A

Majority

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57
Q

Also known as the sponsor or distributor, and is responsible for selling and marketing funds shares

A

Underwriter

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58
Q

Compensated by a percentage of a mutual fund’s assets

A

Investment adviser

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59
Q

Paid a fee by a mutual fund to perform their functions

A

Custodian and transfer agent

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60
Q

Paid from sales charges to perform its function

A

Underwriter

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61
Q

Frequency that mutual funds must send financial reports to shareholders

A

Semi-annually

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62
Q

Financial document that mutual funds must provide shareholders upon written request

A

Balance sheet

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63
Q

The type of interest an investor owns in a mutual fund portfolio

A

Undivided

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64
Q

Type of security typically held by mutual funds with growth objectives

A

Common stock

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65
Q

Three types of securities that are held by mutual funds with income objectives

A

Bonds, preferred stock, blue chip common stock

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66
Q

Type of mutual fund that is focused on generating capital gains, and tends to reinvest most earnings

A

Growth fund

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67
Q

Type of mutual fund with low portfolio turnover and low expenses that tracks market performance

A

Index fund

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68
Q

Type of mutual fund that invests in stock for appreciation and bonds for income

A

Balanced

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69
Q

Type of mutual fund that authorizes the fund adviser to rebalance the percentage of holdings between cash and different investment categories

A

Asset allocation fund

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70
Q

Usually sold with no sales or liquidation fees

A

Money market funds

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71
Q

NAV of a single share of a money market fund

A

$1

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72
Q

Portfolio of securities held in tax-exempt bond funds

A

Municipalities (bonds and notes)

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73
Q

Type of mutual fund that is best suited to an investor seeking maximum safety

A

U.S. government bond fund

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74
Q

Maximum remaining maturity of funds held within a money market portfolio according to SEC rules

A

13 months

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75
Q

Maximum average portfolio maturity of securities in a money market portfolio according to SEC rules

A

90 days

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76
Q

Years of average annual performance that mutual funds must disclose in customer communications

A

1, 5 and 10 year, or since inception

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77
Q

Fund expenses/average net assets

A

Expense ratio

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78
Q

Expresses the rate at which a fund replaces the securities held in its portfolio

A

Portfolio turnover ratio

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79
Q

Type of fund that is likely to have a high expense and portfolio turnover ratio

A

Aggressive growth fund

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80
Q

The maximum amount of 12b-1 fee a no-load fund can charge

A

$0.0025 or 25 basis points

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81
Q

Fund’s NAV/Number of Shares Outstanding

A

NAV per share

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82
Q

The impact on NAV per share when portfolio securities increase

A

Increase in NAV

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83
Q

The impact on NAV per share when shares are sold or redeemed

A

No impact

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84
Q

NAV + Sales Charge

A

POP

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85
Q

Another name for a back-end load

A

Contingent deferred sales charge

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86
Q

Calculation of a mutual fund share’s POP

A

NAV + SC

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87
Q

Objective is to purchase mutual fund shares at a lower average cost per share than average price per share

A

Dollar cost averaging

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88
Q

Three types of mutual fund systematic withdrawal plans

A

Fixed share, fixed percentage and fixed time withdrawal plans

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89
Q

A risk associated with the loss of buying power from a fixed annuity’s payment

A

Purchasing power risk

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90
Q

The annuity payout option that provides the largest monthly income amount

A

Life income (also called life only or straight life)

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91
Q

The annuity payout option that guarantees that income will be paid for the lives of two individuals

A

Joint life with last survivor

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92
Q

An annuity which begins paying income within 60 days of purchase

A

Immediate annuity

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93
Q

An annuity in which purchase payments are deposited according to a premium payment schedule until payments are started

A

Periodic payment deferred annuity

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94
Q

An annuity that provides both fixed and variable annuity benefits

A

Combination annuity

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95
Q

The insurance company account in which fixed annuity payments are invested

A

General account

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96
Q

A risk assumed by the owner of a variable annuity

A

Investment risk

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97
Q

Type of annuity that guarantees the rate of return that will be earned on the investment

A

Fixed annuity

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98
Q

The fee charged by an insurance company for guaranteeing annuity income for life

A

Mortality fee

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99
Q

Disclosure document that must be provided to investors when variable annuities or mutual funds are sold

A

Prospectus

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100
Q

An accounting measure used to determine the owner’s interest in the separate account

A

Accumulation unit

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101
Q

Letters of intent used in connection with fund purchases are good for

A

13 months and can be backdated 90 days

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102
Q

The most suitable mutual fund share class for a substantial fund investor with a long term perspective is

A

Class A

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103
Q

Term of office for directors of mutual funds can be no greater than

A

5 years

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104
Q

A 12b-1 plan must be approved by majority vote of

A

shareholders, B.O.D. , and uninterested directors

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105
Q

To levy maximum sales charge, fund must offer both

A

breakpoints and rights of accumulation

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106
Q

A 12b-1 plan must be reapproved

A

annually

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107
Q

Distributions from 403(b) plans are

A

100% taxable

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108
Q

Amounts expended under 12b-1 plans must be reviewed

A

quarterly

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109
Q

Section of the Investment Company Act of 1940 that permits funds to charge ongoing fees for marketing and distribution

A

Section 12b-1

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110
Q

Document that allows an investor to receive a discounted sales charge on current and future funds invested within the same fund family

A

Letter of Intent

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111
Q

Mutual fund share class with a front end sales load

A

Class A shares

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112
Q

Mutual fund share class with a back-end load and 12b-1 fees

A

Class B shares

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113
Q

Primary disadvantage of most limited partnership investments

A

Lack of liquidity

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114
Q

Unique tax advantage available to investors in limited partnerships

A

Pass through of losses

115
Q

Type of income that passive losses generated from limited partnerships can shelter

A

Passive income only

116
Q

Has active management responsibility and acts as agent for a limited partnership

A

General partner

117
Q

The document that must be completed by investors interested in becoming limited partners

A

Subscription agreement

118
Q

Limited partnership loans for which a limited partner assumes repayment responsibility

A

Recourse loans

119
Q

Document that must be signed and approved by the general partner before a limited partner is accepted

A

Subscription agreement

120
Q

Partner in a limited partnership that assumes unlimited liability for business losses and debts

A

General partner

121
Q

Two types of real estate limited partnerships for which tax credits may be available

A

Government-assisted housing; historic rehabilitation

122
Q

Most risky type of oil and gas program

A

Exploratory (Wildcatting)

123
Q

Objective is to drill near to existing oil fields to find new reserves

A

Developmental

124
Q

Oil and gas program that provides income from sale of existing oil

A

Income program

125
Q

Type of oil and gas program that generates the highest Intangible Drilling Costs

A

Exploratory

126
Q

Drilling program costs that are 100% deductible in the first year of operation

A

Intangible Drilling Costs (IDCs)

127
Q

Similar to depreciation, these allowances apply to the using up of natural resources

A

Depletion allowances

128
Q

An oil and gas program that consists of both income and exploratory drilling

A

Combination program

129
Q

Primary objective is to generate tax sheltered income from lease payments, and write-offs from expenses and depreciation

A

Equipment leasing program

130
Q

Asset that cannot be depreciated

A

Land

131
Q

A dollar-for-dollar reduction of taxes due

A

Tax credit

132
Q

Type of limited partnership note that increases a limited partner’s cost basis

A

Recourse note

133
Q

Impact of a cash distribution on a limited partner’s cost basis

A

Reduction to cost basis

134
Q

Two types of Section 529 Plans

A

Prepaid tuition plans and college savings plans

135
Q

REITs

A

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.

136
Q

General Partner in a Limited Partnership

A

Manages day-to-day operations, potentially has unlimited liability

137
Q

Limited Partner in a Limited Partnership

A

Silent partner, has limited liability

138
Q

An IRA rollover must be completed within

A

60 days and only 1 per year is permitted

139
Q

Annual contribution to a Coverdell ESA is

A

$2,000 per beneficiary (non-deductible)

140
Q

Distributions from tax deferred annuities are

A

100% taxable

141
Q

A plan requiring the services of an actuary is

A

a defined benefit plan

142
Q

The penalty that applies if funds are withdrawn from an annuity before age 59 1/2.

A

10% penalty on earnings

143
Q

Investment requirement and pass-through requirement for REITs to qualify for favorable tax treatment

A

75% of assets invested in real estate and 90% of income passed through to investors

144
Q

Taxation that applies to a lump sum withdrawal from an IRA account at age 55

A

Ordinary income + 10% penalty

145
Q

21 years of age; one year of full time service, minimum of 1000 hours

A

ERISA-defined employee eligibility requirements for plan participation

146
Q

Employee Retirement Income Security Act (ERISA)

A

Federal regulation that specifies guidelines for private sector and certain union plans

147
Q

Two types of options contracts

A

Calls and Puts

148
Q

All options of a single issuer with the same class, exercise price and expiration month

A

Series

149
Q

Options that can be exercised any time before contract expiration

A

American Style

150
Q

Options that can be exercised only on the business day preceding expiration

A

European style

151
Q

Number of shares within one option contract

A

$100

152
Q

Has rights in an option contract

A

Holder (Buyer)

153
Q

Has Obligations at contract exercise

A

Writer (Seller)

154
Q

Right of a call buyer at contract exercise

A

Right to buy stock at exercise price

155
Q

Obligation of a call writer at contract exercise

A

Obligation to sell stock at exercise price

156
Q

Right of a put buyer at contract exercise

A

Right to sell stock at exercise price

157
Q

Obligation of a put writer at contract exercise

A

Obligation to buy stock at exercise price

158
Q

Market attitude of a call buyer

A

Bullish

159
Q

Market attitude of a call writer

A

Bearish

160
Q

Market attitude of a put buyer

A

Bearish

161
Q

Market attitude of a put writer

A

Bullish

162
Q

When a call is in the money

A

Market price exceeds strike price

163
Q

When a put is in the money

A

Market price is less than strike price

164
Q

Breakeven for a call

A

Strike price + premium

165
Q

Breakeven for a put

A

Strike price - premium

166
Q

Two factors that determine the premium of an option contract

A

Time value and Intrinsic value

167
Q

An asset that loses all value over a period of time

A

Wasting asset

168
Q

Maximum gain for a long call

A

Unlimited

169
Q

Maximum gain for a short call

A

Premium

170
Q

Maximum gain for a long put

A

Strike price - premium

171
Q

Maximum gain for a short put

A

Premium

172
Q

Maximum loss for a call buyer

A

Premium

173
Q

Maximum loss for a call writer

A

Unlimited

174
Q

Maximum loss for a put buyer

A

Premium

175
Q

Maximum loss for a put writer

A

Strike price - premium

176
Q

Closing transaction for a put writer

A

buy a put

177
Q

The use of options to protect a stock position

A

Hedging

178
Q

Full protection for a long stock position

A

Long put

179
Q

Full protection for a short stock position

A

Long call

180
Q

Partial protection for a long stock position

A

Short call

181
Q

Partial protection for a short stock position

A

Short put

182
Q

Selling calls when holding a long stock position

A

Covered call writing

183
Q

Typical index option contract multiplier

A

$100

184
Q

Type of index that reflects the movement of the market overall

A

Broad-based (OEX, SPX)

185
Q

Type of index that tracks movement of a specific industry

A

Narrow-based

186
Q

Expiration of index options

A

The third Friday of expiration month

187
Q

Foreign currency options strategies used when value of currency is expected to rise against the US dollar

A

Buy foreign currency calls; sell foreign currency puts

188
Q

Foreign currency options strategies used when value of currency is expected to fall against the US dollar

A

Buy foreign currency puts; sell foreign currency calls

189
Q

Foreign currency options strategies used when U.S. dollar is expected to rise in value against the Canadian dollar

A

Buy Canadian dollar puts; sell Canadian dollar calls

190
Q

Foreign currency options strategies used when U.S. dollar is expected to fall in value against the Canadian dollar

A

Buy Canadian dollar calls; sell Canadian dollar puts

191
Q

Settlement of currency options

A

Next business day (T + 1)

192
Q

Expiration of equity options

A

Saturday following the third Friday of the month at 11:59 p.m.

193
Q

When stock must be delivered as a result of equity option exercise

A

T + 2 (regular way settlement) Updated for rule amendment effective Sept. 5, 2017

194
Q

Clearing agent for listed options contract, issues and guarantees all listed option contracts

A

Options Clearing Corporation (OCC)

195
Q

Disclosure document that must be provided to the customer on or before account approval

A

Options Disclosure Document

196
Q

Deadline for return of the signed options agreement by the customer

A

Within 15 days of account approval

197
Q

Principal required by FINRA that is accountable for options sales supervision and review of customer accounts that trade options

A

Registered Options Principal (ROP)

198
Q

Required Percentage of Independent Directors on a Mutual Fund

A

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

199
Q

Independent Directors

A

Independent board members are not employees of the company or family members of employees of the company.

200
Q

How often mutual funds send shareholder reports

A

Mutual funds sent shareholder reports semi-annually. The report includes balance sheet, income statement, & the investment portfolio.

201
Q

SEC Rule 482

A

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.

202
Q

Growth stock mutual fund

A

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.

203
Q

Income stock mutual fund

A

A mutual that invests with the objective of generating regular current income by investing in securities that pay dividends.

204
Q

Combination fund

A

A mutual fund that seeks both growth (capital gains) and income through a diversified portfolio of stocks.

205
Q

Sector funds

A

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.

206
Q

Special situation funds

A

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.

207
Q

Index fund

A

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.

208
Q

International fund

A

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.

209
Q

Global fund

A

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.

210
Q

Tax-free bond funds

A

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.

211
Q

Balanced fund

A

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.

212
Q

Money-market fund

A

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.

213
Q

Mutual fund performance disclosures

A

Mutual funds must disclose their 1, 5, and 10 year average annual return, assuming the max sales load (i.e. no breakpoints).

214
Q

Mutual fund expense ratio

A

The expense ratio is the calculated as the sum of the management fee plus operating expenses divided by the fund’s average net assets.

215
Q

Annuity

A

A tax-deferred investment with a life insurance company to provide a stream of retirement income.

216
Q

Fixed annuity

A

An annuity investment where the invested principal grows at a fixed rate. Fixed annuities are not securities.

217
Q

Variable annuities

A

An annuity investment where the invested principal grows at a variable rate based on market investments. Variable annuities are securities.

218
Q

Annuitization

A

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.

219
Q

Assumed Interest Rate (AIR)

A

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.

220
Q

Combination annuity

A

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).

221
Q

Index annuity

A

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.

222
Q

403(b) plan

A

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.

223
Q

Term life Insurance

A

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.

224
Q

Whole life insurance

A

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%).

225
Q

Life insurance cash value

A

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.

226
Q

Life insurance policy loan

A

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.

227
Q

Universal life insurance

A

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).

228
Q

Variable life insurance

A

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.

229
Q

Universal variable life insurance

A

A life insurance policy with flexible premiums and a flexible death benefit. Premiums are invested in the market and accumulate cash value.

230
Q

aggressive growth fund

A

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.

231
Q

rights of accumulation

A

Offer investors an opportunity to receive breakpoints on new mutual fund purchases based on the current value of those customers’ invested funds.

232
Q

breakpoint sale

A

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.

233
Q

selling dividends

A

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.

234
Q

net investment income

A

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).

235
Q

preferred stock fund

A

A mutual fund that invests in preferred stock in order to generate dividend income for investors.

236
Q

voluntary accumulation plan

A

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.

237
Q

back-end load

A

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.

238
Q

Class A share

A

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.

239
Q

Class B share

A

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.

240
Q

Class C share

A

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.

241
Q

closed-end fund

A

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.

242
Q

contingent deferred sales charge

A

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.

243
Q

expense ratio

A

A calculation of a mutual fund’s expenses, including management fees and operating expenses, divided by the fund’s average annual net assets.

244
Q

Investment Advisers Act of 1940

A

A federal legislation that defines and regulates investment advisers.

245
Q

letter of intent (LOI)

A

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.

246
Q

load

A

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.

247
Q

management fee

A

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.

248
Q

management company

A

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.

249
Q

money market fund

A

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.

250
Q

open-end management company

A

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.

251
Q

Reinvestment Privilege

A

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.

252
Q

12b-1 fee

A

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.

253
Q

unit investment trust (UIT)

A

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.

254
Q

balanced fund

A

A mutual fund that combines invests in stocks for growth and bonds for income.

255
Q

dollar cost averaging

A

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.

256
Q

non-diversified management company

A

An investment company that does not meet the 75-5-10 diversification requirements set forth under the Investment Company Act of 1940.

257
Q

ETF

A

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.

258
Q

Growth Fund

A

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.

259
Q

Income Fund

A

An equity mutual fund that invests in dividend-paying companies including utility stocks, blue chip stocks, and preferred stocks.

260
Q

Growth and Income Fund

A

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.

261
Q

mutual fund

A

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.

262
Q

The tax that a mutual fund shareholder pays on capital gains distributions from the fund are based on

A

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.

263
Q

A mutual fund investors decides to automatically reinvest dividends rather than take a cash distribution. Is this a taxable event?

A

Yes, mutual fund dividends are taxed when declared by the fund regardless if they are taken in cash or reinvested back into the fund.

264
Q

Systematic withdrawal plan

A

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.

265
Q

What investor type is best suited for municipal bond funds?

A

High income investors who will most benefit from the tax-free interest income provided by municipal bonds

266
Q

What is the maximum amount a mutual fund can charge as sales charge?

A

A mutual fund can charge no more than 8.5% of the offering price.

267
Q

Who determines the ex-dividend date for a mutual fund?

A

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.

268
Q

Breakpoint

A

Discounts off the sales charge based on the amount of money invested within a mutual fund.

269
Q

What are mutual expenses not covered in a 12b-1 fee?

A

Management expenses and trading fees

270
Q

An investment company that pursues a sector investment strategy focuses on:

A

a specific industry

A sector focus strategy generally looks for securities from a particular sector or industry such as financial services, telecommunications, technology, etc.

271
Q

Which types of investment companies are redeemable?

A

Mutual funds and unit investment trusts

272
Q

What is not a benefit of investing in a fund of funds hedge fund?

A

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.

273
Q

Net Asset Value

A

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.

274
Q

What is an expense ratio of a mutual fund?

A

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.

275
Q

What is the formula for calculating the percentage sales charge of a mutual fund?

A

(POP - NAV)/POP

276
Q

What percentage of net investment income must a mutual fund distribute to shareholders to avoid taxation?

A

90%

277
Q

What are two major differences between mutual funds and ETFs?

A

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.

278
Q

A mutual fund has an NAV of $18 and charges a sales charge of 3%, calculate the POP.

A

$18.56

POP = NAV/(100% - SC)

279
Q

How does the portfolio turnover rate for ETFs compare to mutual funds?

A

Lower

Because ETFs are not actively managed, there is very little turnover of securities within the pool.

280
Q

Because they are passively managed, the capital gains that ETFs generate are typically

A

minimized

281
Q

Describe the pricing of closed-ended funds

A

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

282
Q

Futures have counterparty risk

A

False

Futures are guaranteed by a clearinghouse and therefore have no credit or counterparty risk.

283
Q

Forwards have counterparty risk

A

True

Fowards are not guaranteed by a clearinghouse and therefore have credit and counterparty risk.

Series 65 (6 decks)

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