Investment Companies - Overview

Question 1

The _______ of 1940 regulates investment companies

Answer 1

the Investment Company Act of 1940

Question 2

The act defines three types of companies

Answer 2

• Face-amount certificate company
• Management company
• Unit investment trust

Question 3

Face-amount certificate company:

Answer 3

• virtually obsolete
• an investor pays a designated monthly amount
• receives a full payout at the end of a fixed time period
• invests the money in high quality debt instruments

Question 4

A management company is:

Answer 4

• organized as a company
• issues shares of stock
• discretionary management
• are either “open-ended” or “closed-ended”

Question 5

An “open-end” management company is:

Answer 5

• also typically called a “mutual fund”
• issues only common shares
• as more investors want to invest, they issue more shares (hence the name open-ended)
• shares are “non-negotiable” – CANNOT be traded
• shares are instead REDEEMABLE with the fund

Question 6

A “closed-end” mgmt company is:

Answer 6

• called “publicly traded fund”
• only issue common stock one time
• shares are negotiable (ie can be traded)
• usually invest in bonds, investors receive income distributions
• shares are NOT REDEEMABLE

Question 7

A “unit investment trust” is:

Answer 7

• organized under a trust indenture
• NOT a corporation
• issue “shares of beneficial interest” representing an undivided interest in a “unit” of securities
• two types – fixed and participating

Question 8

A fixed UIT is:

Answer 8

• selects a portfolio of securities (usually bonds)
• once portfolio is selected, it is NOT changed
• no “management”
• once the underlying bonds all mature, the trust liquidates

Question 9

A participating UIT is:

Answer 9

• trust invests in a mutual fund

- used when investors buy mutual funds within an insurance company “wrapper” to fund variable annuity contracts