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Unit 2 > investment companies Part 1 > Flashcards

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

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2
Q

What three investment company classifications were created with Investment Company ACt 1940?

A
  1. Management companies
  2. Unit investment trusts
  3. Face amount certificates
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3
Q

What are the two types of management companies?

A
  1. Open end management companies
  2. Closed end management companies
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4
Q

What is another word for open-end management companies?

A

mutual funds

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5
Q

Three differences between Unit Investment trusts and Management companies?

A
  1. UIT portfolios maintain fixed
  2. Not managed continuously
  3. Maintain a maturity date until portfolio is liquidated
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6
Q

What is a UIT?

A

Investors collect capital from investors and invest in basket of securities

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7
Q

Howare investors involved in FAC?

A

They make periodic payments to the issuer in return for a fixed payout at maturity.

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8
Q

What are Fully Paid FACS?

A

Investor purchases a FAC for lumpsum in return for a promised payout maturity

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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

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10
Q

What are 9 types of funds?

A
  1. Growth Funds
  2. Growth and income funds
  3. Balanced funds
  4. Income funds
  5. Specialized funds
  6. Sector funds
  7. Index funds
  8. Asset allocation funds
  9. International/global funds
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11
Q

What does a growth fund seek?

A

Capital appreciation

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12
Q

What is the main type of stocks growth funds invest in?

A

Growth focused common stock

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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

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14
Q

What size of companies are agressive growth funds?

A

Small cap and micro cap

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15
Q

What are the two types of stock Growth and Income funds invest in?

A
  1. income producing common stock
  2. Preferred stock
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16
Q

What type of stock do balanced funds invest in?

A

An even distribution between growth-focused common stock and income producing securities

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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

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18
Q

What do income funds invest in?

A

Only income producing securities

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19
Q

What are three different types of income bond funds?

A
  1. corporate bond funds
  2. Municipal bond funds
  3. US government bond funds
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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

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21
Q

What do conservative and high yield bonds seek?

A

Income

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22
Q

What 3 agencies purchase mortgages from financial institutions?

A
  1. Ginnie Mae
  2. Fannie Mae
  3. Freddie Mac
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23
Q

From what type of securities do MBS agencies seek income from?

A

Mortgage-backed securities

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24
Q

What do specialized funds invest in?

A

Securities only from a specific industry or region

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25
Q

What is another word for specialized funds?

A

Sector funds

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26
Q

Define an index

A

A list of securities that tracks and averages all of the values of the securities on the list

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27
Q

What do companies use indexes for?

A

Determine general trends in the market

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28
Q

What do index funds aim to do?

A

Give investors the same return as a specific index

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29
Q

What are the two types of management investing styles?

A
  1. Active management
  2. Passive management
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30
Q

What does active management do?

A

Picking and choosing the best investments in a market

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31
Q

What does passive management do?

A

Copying the index into a portfolio

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32
Q

What is the difference between active and passive management?

A

Active you pick stocks, passive copies an index

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33
Q

How do asset allocation funds invest?

A

Invest in a specific proportion of security types based upon expected market performance

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34
Q

What it is the structure of life cycle funds?

A

As time passes the funds become less aggressive and more conservative

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35
Q

What type of securities will asset allocation funds start with and then finish with?

A

Start with stocks and then shift to fixed income securities

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36
Q

What is the consistent price of money market funds?

A

1 dollar/share

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37
Q

What do money market accounts invest in?

A

Debt securities of 1 year or lessW

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38
Q

What is the difference between international and global funds?

A

Global funds include the US

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39
Q

What is the terminology for low bond ratings?

A

BB or below

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40
Q

What three types of securities do balanced funds hold?

A
  1. Common
  2. PReferred
  3. Debt
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41
Q

What type of bonds tend to maintain the lowest yield and why?

A

Municipal bonds because they are tax-exempt

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42
Q

What does ‘open-end’ refer to?

A

The number of outstanding shares

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43
Q

How does the purchase and sale of mutual funds affect the total amount of shares?

A

New purchases increase outstanding shares, sells decrease outstanding shares

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44
Q

What is the main difference between the sale structure of mutual funds and other securities?

A

Mutual funds, the number of outstanding shares changes daily while other securities stay fixed

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45
Q

Where do mutual funds always trade?

A

In the primary market

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46
Q

What are the rights of mutual fund shareholders?

A
  1. Voting for important issues
  2. Dividend rights
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47
Q

What are the four parties that are responsible for mutual fund functions?

A
  1. fund sponsor (underwriter)
  2. Board of directors
  3. Investment advisors and fund manager
  4. custodian bank
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48
Q

What three things is the fund sponsor responsible for?

A
  1. Establishing fund
  2. Registering it
  3. Creating market strategy
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49
Q

What two things does establishing the fund require?

A
  1. Gathering capital
  2. Settling investment company structure
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50
Q

How much money do you need to assemble an open end investment company?

A

100 thousand dollars of net capital

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51
Q

What does the fund manager do?

A
  1. Investment adviser employee
  2. Implements investment strategy
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52
Q

What does the investment advisor do?

A
  1. responsible for fund inestments
  2. employs and appoints fund manager
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53
Q

What are the investment constraints of fund managers?

A

They must invest in the fund of their title. ie. municipal bond fung managers in municipal bonds

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54
Q

WHat 3 things are mutual fund custodians esponsible for?

A
  1. holding
  2. safekeeping
  3. recordkeeping
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55
Q

What are two benefits of mutual funds?

A
  1. professional management
  2. diversification
56
Q

What is the threshold percentages for being able to market a fund as diversified?

A

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
Q

What are the three most common fees for expense ratio in mutual funds?

A
  1. Management fee
  2. Custodian fee
  3. Legal and administrative fees
58
Q

What do margin accounts allow for?

A

Invest in securities with borrowed money from their broker

59
Q

Two limitations of mutual fund regulations

A
  1. cannot sell short
  2. cannot sell with margin account
60
Q

What is the management fee?

A

Cost of investment adviser’s services

61
Q

What is the largest part of the expense ration?

A

management fees

62
Q

To whom is the custodian fee paid to?

A

financial firm holding fund assets

63
Q

What is the formula for expense ratio?

A

fund expenses/total net assets

64
Q

What are the five rights of mutual fund holders?

A
  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
Q

What is the BOD mutual fund responsible for?

A

Nominating investment advisor

66
Q

What is the term limit of an investment advisor of a mutual fund?

A

2 years

67
Q
A
68
Q

Who approves the investment adviser’s contract?

A

the shareholders

69
Q

What are the requirements for reelection?

A

Either the BOD or the majority shareholder vote must approve

70
Q

What percentage of the board must be independent and what Act requires this?

A

at least 40%, investment company act of 1940

71
Q

What are the qualifications for being an independent board member?

A
  1. No business with the fund sponsor, investment advisor, or fund affiliates within the past two years
72
Q

A majority vote of shares must be obtained to make any of what four changes to management company?

A
  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
Q

What are 4 mutual fund disclosures required?

A
  1. statuary prospectus
  2. statement of additional information
  3. Annual SEC report
  4. Semi-annual shareholder report
74
Q

WHat are 7 things disclosed in the mutual fund statuary prospectus

A
  1. Investment objective
  2. Shareholder fees
  3. Past performance
  4. Details on investment advisor and fund manager
  5. Related risks
  6. Fund policies
  7. Financial highlights
75
Q

Two cases where statutory prospectus be delivered?

A
  1. Financial professionals solicit investors
  2. An investor purchases shares unsolicited
76
Q

How much must a fund disclose of their past performance?

A

1, 5, 10 years, but if it is in between those, then the last target and the current year

77
Q

What three things do fund policies include?

A
  1. minimum required investment
  2. Availability of shares
  3. Execessive trading policies
78
Q

What 4 things does the statement of additional information disclose?

A

Micro details on:
1. Fund policies
2. Investment making decisions
3. FUnd’s financials
4. Board member backgrounds

79
Q

What 5 things must the fund’s annual SEC report include?

A
  1. Market recaps over the prvious year
  2. Fund manager comments
  3. Investment summary
  4. Financial statements
  5. Financial highlights (income, expenses, returns)
80
Q

What three things are required to be on the semi-annual shareholder report/

A
  1. investment summary
  2. Financial statements
  3. Financial highlights
81
Q

What are two things on the Financial Statement for Semi-annual shareholder reports?

A

balance sheet
income statement

82
Q

What type of bonds do high yield bond funds invest in?

A

speculative junk bonds

83
Q

What type of bond funds have the lowest yields?

A

Municipal Bond Funds

84
Q

Shareholder reports are required to be made ____ vs. SEC Reports ___

A

semi-annually
Anually

85
Q

What percentage of BOD according to the Investment Company Act of 1940 can be “interested”

A

no more than 60%

86
Q

What are the three qualifications for being considered an “interested” person due to the Investment COmpany Act of 1940?

A
  1. affiliated with fund sponsor
  2. investment advisor
  3. other members associated with fund
87
Q

When are investors considered “interested persons” according to the ICA of 1940?

A

Only if they hold 5% or more of fund’s voting shares

88
Q

What must be obtained to change the investment objective of a management company?

A

Majority share vote

89
Q

What’s the difference between majority vote of shares and majority of shareholders?

A

Majority of share vote, whoever has more stocks has more shares has more voting power

90
Q

What three things are shareholders of management companies allowed to vote on?

A
  1. INvestment adviser’s contract
  2. Board of Directors seats
  3. 12b-1 fees
91
Q

Who sets the management fee?

A

the Investment Advisor

92
Q

When must the statutory prospectus be delivered to investors if solicited and unsolicited?

A

Solicited: brior to solicitation
Unsolicitated: completion of transaction

93
Q

What are two important reedemable securities?

A
  1. mutual funds
  2. UIT
94
Q

What is the Net Asset Value formula?

A

Assets - Liabilities/(shares outstanding)

95
Q

What does a NAV reflect?

A

The overall value of a fund on a per-share basis

96
Q

What is the most significant factor influencing the NAV?

A

The current market value of the portfolio’s securities

97
Q

When are mutual funds allowed to be traded?

A

Only at market closing

98
Q

What is a mutual fund’s forward price?

A

The NAV at which the investor will buy the fund

99
Q

What’s the difference between a front end and back end load?

A

sales tax when customer purchases shares vs. sells

100
Q

When do you use the NAV vs. POP formula?

A

If there is no sales charge, NAV, if there is sales charge POP

100
Q

What is the sales charged based off of

A
101
Q

What is the equation for shares purchased Without sales charge?

A

Overall purchase/NAV

102
Q

What is the equation for overall shares purchased with Sales charge?

A

Overall purchase/POP

103
Q

What is the equation for POP

A

!00% NAV - SC

104
Q

What is the Sales Charge Percentage formula?

A

POP-NAV/POP

105
Q

What is the maximum allowable sales charge for redeemable securities like mutual funds?

A

8.5% of POP

106
Q

Do Investors sell fund shares at NAV or POP?

A

NAV

107
Q

What charge may be assessed when fund shares are redeemed and what is the cap?

A

Redemption Fee at 1% cap

108
Q

What are funds dividends called?

A

income

109
Q

How does a fund make capital gain?

A

Liquidates a security at a profit

110
Q

How frequently are mutual funds capital gains generally distributed?

A

Once a year

111
Q

When a fund makes dividend or capital gains distribution, what happens to the value of the fund?

A

It declines

112
Q

What differs in who is responsible for setting the ex-dividend date between stock dividends and mutual funds distributions?

A

Mutual funds: Board of Directors set ex-div dates

Stock ex-dates: FINRA and the NYSE

113
Q

Within how many days must mutual funds full investor redemption requests?

A

Within 7 days

114
Q

What is the Conversion Exchange privelage?

A

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
Q

When do mutual fund transactions occur?

A

Once at the end of the day

116
Q

What does the NAV calculate?

A

Fund value on a per share basis

117
Q

What is the formula for if the mutual fund sales charge is in percent vs. dollars?

A

Percent: NAV/(100%-SC%)

Dollars: POP = NAV + SC

118
Q

The selling group of mutual funds purchases shares from the ___ at _____ and sells them to the _____ at ____

A

sponsor; NAV

investor; POP

119
Q

The NAV is also known as? The POP is also known as?

A

NAV = Bid
POP = Ask

120
Q

What is the minimum price a mutual fund can be purchased at?

A

NAV

121
Q

When must the exchange privelage be offered for mutual funds?

A

IF the fund assesses the maximum sales charge

122
Q

What is the rule about fund familys with exchange privelages?

A

Exchange privelages must occur within the same fund family

123
Q

What is the largest expense ratio in no-load mutual funds?

A

Management Fees

124
Q

What must exist in order for the maximum allowable sales charge to be assessed on an open-end fund transaction?

A

Reinvestment of dividends and capital gains at the NAV

125
Q

What are the three different forms in which investors make returns on mutual funds?

A
  1. capital appreciation (growth)
  2. Dividend distributions
  3. capital gains distributions
126
Q

What kind of income payment is it when bond funds distribute fixed-income interest security payments to shareholders?

A

Dividend distribution NOT interest

127
Q

When is a mutual fund distribution a capital gains distribution?

A

When the fund sells a security at a gain and then distributes a portion of the gain

128
Q

What is the difference between capital gain and captial gain distribution?

A

Capital gain distribution: mutual fund sells individual securities and distributed to shareholders

Captial gain: When I sell shares OF the mutual fund

129
Q

Three ways to make lor lose money on a security

A
  1. Dividends
  2. Interest
  3. Capital Gain/loss
130
Q

What is the difference between realized and unrealized gains?

A

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
Q

Equation for total return

A

Total Return = All gains and/or losses / Original Cost

132
Q

What does total return encompass in terms of realization?

A

Both Realized and Unrealized gains/losses

133
Q

What does total return not factor into the equation?

A

Inflation

134
Q
A
135
Q

In calculating total return, for the denominator what value do you use, NAV or POP?

A

POP

Unit 2 (18 decks)

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