investment companies Part 1 Flashcards
1
Q
What are two things investment company act of 1940 do?
A
Defined investment companies and regulated their activity
2
Q
What three investment company classifications were created with Investment Company ACt 1940?
A
- Management companies
- Unit investment trusts
- Face amount certificates
3
Q
What are the two types of management companies?
A
- Open end management companies
- Closed end management companies
4
Q
What is another word for open-end management companies?
A
mutual funds
5
Q
Three differences between Unit Investment trusts and Management companies?
A
- UIT portfolios maintain fixed
- Not managed continuously
- Maintain a maturity date until portfolio is liquidated
6
Q
What is a UIT?
A
Investors collect capital from investors and invest in basket of securities
7
Q
Howare investors involved in FAC?
A
They make periodic payments to the issuer in return for a fixed payout at maturity.
8
Q
What are Fully Paid FACS?
A
Investor purchases a FAC for lumpsum in return for a promised payout maturity
9
Q
What is the difference between fully paid FACs and normal?
A
Fully paid FACs investor pays lump sum in the beginning in return for payout at maturity
10
Q
What are 9 types of funds?
A
- Growth Funds
- Growth and income funds
- Balanced funds
- Income funds
- Specialized funds
- Sector funds
- Index funds
- Asset allocation funds
- International/global funds
11
Q
What does a growth fund seek?
A
Capital appreciation
12
Q
What is the main type of stocks growth funds invest in?
A
Growth focused common stock
13
Q
Why do growth funds sometimes also include convertible preferred stock and bonds?
A
Because their conversion into common stock provides capital gains potential
14
Q
What size of companies are agressive growth funds?
A
Small cap and micro cap
15
Q
What are the two types of stock Growth and Income funds invest in?
A
- income producing common stock
- Preferred stock
16
Q
What type of stock do balanced funds invest in?
A
An even distribution between growth-focused common stock and income producing securities
17
Q
What is the main difference between Balaned funds and Growth and income funds?
A
Balanced funds invest in BOTH stock and bonds, growth and income funds only invest in stock
18
Q
What do income funds invest in?
A
Only income producing securities
19
Q
What are three different types of income bond funds?
A
- corporate bond funds
- Municipal bond funds
- US government bond funds
20
Q
What are high yield bond funds vs. conservative bond funds?
A
High yield are high risk and conservative bonds lower risk and yield
21
Q
What do conservative and high yield bonds seek?
A
Income
22
Q
What 3 agencies purchase mortgages from financial institutions?
A
- Ginnie Mae
- Fannie Mae
- Freddie Mac
23
Q
From what type of securities do MBS agencies seek income from?
A
Mortgage-backed securities
24
Q
What do specialized funds invest in?
A
Securities only from a specific industry or region
25
What is another word for specialized funds?
Sector funds
26
Define an index
A list of securities that tracks and averages all of the values of the securities on the list
27
What do companies use indexes for?
Determine general trends in the market
28
What do index funds aim to do?
Give investors the same return as a specific index
29
What are the two types of management investing styles?
1. Active management
2. Passive management
30
What does active management do?
Picking and choosing the best investments in a market
31
What does passive management do?
Copying the index into a portfolio
32
What is the difference between active and passive management?
Active you pick stocks, passive copies an index
33
How do asset allocation funds invest?
Invest in a specific proportion of security types based upon expected market performance
34
What it is the structure of life cycle funds?
As time passes the funds become less aggressive and more conservative
35
What type of securities will asset allocation funds start with and then finish with?
Start with stocks and then shift to fixed income securities
36
What is the consistent price of money market funds?
1 dollar/share
37
What do money market accounts invest in?
Debt securities of 1 year or lessW
38
What is the difference between international and global funds?
Global funds include the US
39
What is the terminology for low bond ratings?
BB or below
40
What three types of securities do balanced funds hold?
1. Common
2. PReferred
3. Debt
41
What type of bonds tend to maintain the lowest yield and why?
Municipal bonds because they are tax-exempt
42
What does 'open-end' refer to?
The number of outstanding shares
43
How does the purchase and sale of mutual funds affect the total amount of shares?
New purchases increase outstanding shares, sells decrease outstanding shares
44
What is the main difference between the sale structure of mutual funds and other securities?
Mutual funds, the number of outstanding shares changes daily while other securities stay fixed
45
Where do mutual funds always trade?
In the primary market
46
What are the rights of mutual fund shareholders?
1. Voting for important issues
2. Dividend rights
47
What are the four parties that are responsible for mutual fund functions?
1. fund sponsor (underwriter)
2. Board of directors
3. Investment advisors and fund manager
4. custodian bank
48
What three things is the fund sponsor responsible for?
1. Establishing fund
2. Registering it
3. Creating market strategy
49
What two things does establishing the fund require?
1. Gathering capital
2. Settling investment company structure
50
How much money do you need to assemble an open end investment company?
100 thousand dollars of net capital
51
What does the fund manager do?
1. Investment adviser employee
2. Implements investment strategy
52
What does the investment advisor do?
1. responsible for fund inestments
2. employs and appoints fund manager
53
What are the investment constraints of fund managers?
They must invest in the fund of their title. ie. municipal bond fung managers in municipal bonds
54
WHat 3 things are mutual fund custodians esponsible for?
1. holding
2. safekeeping
3. recordkeeping
55
What are two benefits of mutual funds?
1. professional management
2. diversification
56
What is the threshold percentages for being able to market a fund as diversified?
atleast 75% of assets must contain:
1. no more than 10% of the voting power of one issuer
2. No more than 5% of the funds assets invested in one issuer's securities
57
What are the three most common fees for expense ratio in mutual funds?
1. Management fee
2. Custodian fee
3. Legal and administrative fees
58
What do margin accounts allow for?
Invest in securities with borrowed money from their broker
59
Two limitations of mutual fund regulations
1. cannot sell short
2. cannot sell with margin account
60
What is the management fee?
Cost of investment adviser's services
61
What is the largest part of the expense ration?
management fees
62
To whom is the custodian fee paid to?
financial firm holding fund assets
63
What is the formula for expense ratio?
fund expenses/total net assets
64
What are the five rights of mutual fund holders?
1. vote for the BOD
2. Vote on fund-specific matters
3. Pro rata share of dividend and capital gain distributions
4. Fund disclosures
5. Approve investment advisor contract
65
What is the BOD mutual fund responsible for?
Nominating investment advisor
66
What is the term limit of an investment advisor of a mutual fund?
2 years
67
68
Who approves the investment adviser's contract?
the shareholders
69
What are the requirements for reelection?
Either the BOD or the majority shareholder vote must approve
70
What percentage of the board must be independent and what Act requires this?
at least 40%, investment company act of 1940
71
What are the qualifications for being an independent board member?
1. No business with the fund sponsor, investment advisor, or fund affiliates within the past two years
72
A majority vote of shares must be obtained to make any of what four changes to management company?
1. Changes to the fund's objective
2. Changes to fund's structure
3. Changes to fund's fee schedule
4. changes to funds diversified status
73
What are 4 mutual fund disclosures required?
1. statuary prospectus
2. statement of additional information
3. Annual SEC report
4. Semi-annual shareholder report
74
WHat are 7 things disclosed in the mutual fund statuary prospectus
1. Investment objective
2. Shareholder fees
3. Past performance
4. Details on investment advisor and fund manager
5. Related risks
6. Fund policies
6. Financial highlights
75
Two cases where statutory prospectus be delivered?
1. Financial professionals solicit investors
2. An investor purchases shares unsolicited
76
How much must a fund disclose of their past performance?
1, 5, 10 years, but if it is in between those, then the last target and the current year
77
What three things do fund policies include?
1. minimum required investment
2. Availability of shares
3. Execessive trading policies
78
What 4 things does the statement of additional information disclose?
Micro details on:
1. Fund policies
2. Investment making decisions
3. FUnd's financials
4. Board member backgrounds
79
What 5 things must the fund's annual SEC report include?
1. Market recaps over the prvious year
2. Fund manager comments
3. Investment summary
4. Financial statements
5. Financial highlights (income, expenses, returns)
80
What three things are required to be on the semi-annual shareholder report/
1. investment summary
2. Financial statements
3. Financial highlights
81
What are two things on the Financial Statement for Semi-annual shareholder reports?
balance sheet
income statement
82
What type of bonds do high yield bond funds invest in?
speculative junk bonds
83
What type of bond funds have the lowest yields?
Municipal Bond Funds
84
Shareholder reports are required to be made ____ vs. SEC Reports ___
semi-annually
Anually
85
What percentage of BOD according to the Investment Company Act of 1940 can be "interested"
no more than 60%
86
What are the three qualifications for being considered an "interested" person due to the Investment COmpany Act of 1940?
1. affiliated with fund sponsor
2. investment advisor
3. other members associated with fund
87
When are investors considered "interested persons" according to the ICA of 1940?
Only if they hold 5% or more of fund's voting shares
88
What must be obtained to change the investment objective of a management company?
Majority share vote
89
What's the difference between majority vote of shares and majority of shareholders?
Majority of share vote, whoever has more stocks has more shares has more voting power
90
What three things are shareholders of management companies allowed to vote on?
1. INvestment adviser's contract
2. Board of Directors seats
3. 12b-1 fees
91
Who sets the management fee?
the Investment Advisor
92
When must the statutory prospectus be delivered to investors if solicited and unsolicited?
Solicited: brior to solicitation
Unsolicitated: completion of transaction
93
What are two important reedemable securities?
1. mutual funds
2. UIT
94
What is the Net Asset Value formula?
Assets - Liabilities/(shares outstanding)
95
What does a NAV reflect?
The overall value of a fund on a per-share basis
96
What is the most significant factor influencing the NAV?
The current market value of the portfolio's securities
97
When are mutual funds allowed to be traded?
Only at market closing
98
What is a mutual fund's forward price?
The NAV at which the investor will buy the fund
99
What's the difference between a front end and back end load?
sales tax when customer purchases shares vs. sells
100
When do you use the NAV vs. POP formula?
If there is no sales charge, NAV, if there is sales charge POP
100
What is the sales charged based off of
101
What is the equation for shares purchased Without sales charge?
Overall purchase/NAV
102
What is the equation for overall shares purchased with Sales charge?
Overall purchase/POP
103
What is the equation for POP
!00% NAV - SC
104
What is the Sales Charge Percentage formula?
POP-NAV/POP
105
What is the maximum allowable sales charge for redeemable securities like mutual funds?
8.5% of POP
106
Do Investors sell fund shares at NAV or POP?
NAV
107
What charge may be assessed when fund shares are redeemed and what is the cap?
Redemption Fee at 1% cap
108
What are funds dividends called?
income
109
How does a fund make capital gain?
Liquidates a security at a profit
110
How frequently are mutual funds capital gains generally distributed?
Once a year
111
When a fund makes dividend or capital gains distribution, what happens to the value of the fund?
It declines
112
What differs in who is responsible for setting the ex-dividend date between stock dividends and mutual funds distributions?
Mutual funds: Board of Directors set ex-div dates
Stock ex-dates: FINRA and the NYSE
113
Within how many days must mutual funds full investor redemption requests?
Within 7 days
114
What is the Conversion Exchange privelage?
No new sales charge is assessed if an investor sells their shares and uses the proceeds to purchase a new fund within the same fund family
115
When do mutual fund transactions occur?
Once at the end of the day
116
What does the NAV calculate?
Fund value on a per share basis
117
What is the formula for if the mutual fund sales charge is in percent vs. dollars?
Percent: NAV/(100%-SC%)
Dollars: POP = NAV + SC
118
The selling group of mutual funds purchases shares from the ___ at _____ and sells them to the _____ at ____
sponsor; NAV
investor; POP
119
The NAV is also known as? The POP is also known as?
NAV = Bid
POP = Ask
120
What is the minimum price a mutual fund can be purchased at?
NAV
121
When must the exchange privelage be offered for mutual funds?
IF the fund assesses the maximum sales charge
122
What is the rule about fund familys with exchange privelages?
Exchange privelages must occur within the same fund family
123
What is the largest expense ratio in no-load mutual funds?
Management Fees
124
What must exist in order for the maximum allowable sales charge to be assessed on an open-end fund transaction?
Reinvestment of dividends and capital gains at the NAV
125
What are the three different forms in which investors make returns on mutual funds?
1. capital appreciation (growth)
2. Dividend distributions
3. capital gains distributions
126
What kind of income payment is it when bond funds distribute fixed-income interest security payments to shareholders?
Dividend distribution NOT interest
127
When is a mutual fund distribution a capital gains distribution?
When the fund sells a security at a gain and then distributes a portion of the gain
128
What is the difference between capital gain and captial gain distribution?
Capital gain distribution: mutual fund sells individual securities and distributed to shareholders
Captial gain: When I sell shares OF the mutual fund
129
Three ways to make lor lose money on a security
1. Dividends
2. Interest
3. Capital Gain/loss
130
What is the difference between realized and unrealized gains?
Realized is when the investment is sold and the profit is locked in
Unrealized the investment increases in value but is not yet sold
131
Equation for total return
Total Return = All gains and/or losses / Original Cost
132
What does total return encompass in terms of realization?
Both Realized and Unrealized gains/losses
133
What does total return not factor into the equation?
Inflation
134
135
In calculating total return, for the denominator what value do you use, NAV or POP?
POP
