investment companies Part 1 Flashcards
What are two things investment company act of 1940 do?
Defined investment companies and regulated their activity
What three investment company classifications were created with Investment Company ACt 1940?
- Management companies
- Unit investment trusts
- Face amount certificates
What are the two types of management companies?
- Open end management companies
- Closed end management companies
What is another word for open-end management companies?
mutual funds
Three differences between Unit Investment trusts and Management companies?
- UIT portfolios maintain fixed
- Not managed continuously
- Maintain a maturity date until portfolio is liquidated
What is a UIT?
Investors collect capital from investors and invest in basket of securities
Howare investors involved in FAC?
They make periodic payments to the issuer in return for a fixed payout at maturity.
What are Fully Paid FACS?
Investor purchases a FAC for lumpsum in return for a promised payout maturity
What is the difference between fully paid FACs and normal?
Fully paid FACs investor pays lump sum in the beginning in return for payout at maturity
What are 9 types of funds?
- Growth Funds
- Growth and income funds
- Balanced funds
- Income funds
- Specialized funds
- Sector funds
- Index funds
- Asset allocation funds
- International/global funds
What does a growth fund seek?
Capital appreciation
What is the main type of stocks growth funds invest in?
Growth focused common stock
Why do growth funds sometimes also include convertible preferred stock and bonds?
Because their conversion into common stock provides capital gains potential
What size of companies are agressive growth funds?
Small cap and micro cap
What are the two types of stock Growth and Income funds invest in?
- income producing common stock
- Preferred stock
What type of stock do balanced funds invest in?
An even distribution between growth-focused common stock and income producing securities
What is the main difference between Balaned funds and Growth and income funds?
Balanced funds invest in BOTH stock and bonds, growth and income funds only invest in stock
What do income funds invest in?
Only income producing securities
What are three different types of income bond funds?
- corporate bond funds
- Municipal bond funds
- US government bond funds
What are high yield bond funds vs. conservative bond funds?
High yield are high risk and conservative bonds lower risk and yield
What do conservative and high yield bonds seek?
Income
What 3 agencies purchase mortgages from financial institutions?
- Ginnie Mae
- Fannie Mae
- Freddie Mac
From what type of securities do MBS agencies seek income from?
Mortgage-backed securities
What do specialized funds invest in?
Securities only from a specific industry or region
What is another word for specialized funds?
Sector funds
Define an index
A list of securities that tracks and averages all of the values of the securities on the list
What do companies use indexes for?
Determine general trends in the market
What do index funds aim to do?
Give investors the same return as a specific index
What are the two types of management investing styles?
- Active management
- Passive management
What does active management do?
Picking and choosing the best investments in a market
What does passive management do?
Copying the index into a portfolio
What is the difference between active and passive management?
Active you pick stocks, passive copies an index
How do asset allocation funds invest?
Invest in a specific proportion of security types based upon expected market performance
What it is the structure of life cycle funds?
As time passes the funds become less aggressive and more conservative
What type of securities will asset allocation funds start with and then finish with?
Start with stocks and then shift to fixed income securities
What is the consistent price of money market funds?
1 dollar/share
What do money market accounts invest in?
Debt securities of 1 year or lessW
What is the difference between international and global funds?
Global funds include the US
What is the terminology for low bond ratings?
BB or below
What three types of securities do balanced funds hold?
- Common
- PReferred
- Debt
What type of bonds tend to maintain the lowest yield and why?
Municipal bonds because they are tax-exempt
What does ‘open-end’ refer to?
The number of outstanding shares
How does the purchase and sale of mutual funds affect the total amount of shares?
New purchases increase outstanding shares, sells decrease outstanding shares
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
Where do mutual funds always trade?
In the primary market
What are the rights of mutual fund shareholders?
- Voting for important issues
- Dividend rights
What are the four parties that are responsible for mutual fund functions?
- fund sponsor (underwriter)
- Board of directors
- Investment advisors and fund manager
- custodian bank
What three things is the fund sponsor responsible for?
- Establishing fund
- Registering it
- Creating market strategy
What two things does establishing the fund require?
- Gathering capital
- Settling investment company structure
How much money do you need to assemble an open end investment company?
100 thousand dollars of net capital
What does the fund manager do?
- Investment adviser employee
- Implements investment strategy
What does the investment advisor do?
- responsible for fund inestments
- employs and appoints fund manager
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
WHat 3 things are mutual fund custodians esponsible for?
- holding
- safekeeping
- recordkeeping
What are two benefits of mutual funds?
- professional management
- diversification
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
What are the three most common fees for expense ratio in mutual funds?
- Management fee
- Custodian fee
- Legal and administrative fees
What do margin accounts allow for?
Invest in securities with borrowed money from their broker
Two limitations of mutual fund regulations
- cannot sell short
- cannot sell with margin account
What is the management fee?
Cost of investment adviser’s services
What is the largest part of the expense ration?
management fees
To whom is the custodian fee paid to?
financial firm holding fund assets
What is the formula for expense ratio?
fund expenses/total net assets
What are the five rights of mutual fund holders?
- vote for the BOD
- Vote on fund-specific matters
- Pro rata share of dividend and capital gain distributions
- Fund disclosures
- Approve investment advisor contract
What is the BOD mutual fund responsible for?
Nominating investment advisor
What is the term limit of an investment advisor of a mutual fund?
2 years
Who approves the investment adviser’s contract?
the shareholders
What are the requirements for reelection?
Either the BOD or the majority shareholder vote must approve
What percentage of the board must be independent and what Act requires this?
at least 40%, investment company act of 1940
What are the qualifications for being an independent board member?
- No business with the fund sponsor, investment advisor, or fund affiliates within the past two years
A majority vote of shares must be obtained to make any of what four changes to management company?
- Changes to the fund’s objective
- Changes to fund’s structure
- Changes to fund’s fee schedule
- changes to funds diversified status
What are 4 mutual fund disclosures required?
- statuary prospectus
- statement of additional information
- Annual SEC report
- Semi-annual shareholder report
WHat are 7 things disclosed in the mutual fund statuary prospectus
- Investment objective
- Shareholder fees
- Past performance
- Details on investment advisor and fund manager
- Related risks
- Fund policies
- Financial highlights
Two cases where statutory prospectus be delivered?
- Financial professionals solicit investors
- An investor purchases shares unsolicited
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
What three things do fund policies include?
- minimum required investment
- Availability of shares
- Execessive trading policies
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
What 5 things must the fund’s annual SEC report include?
- Market recaps over the prvious year
- Fund manager comments
- Investment summary
- Financial statements
- Financial highlights (income, expenses, returns)
What three things are required to be on the semi-annual shareholder report/
- investment summary
- Financial statements
- Financial highlights
What are two things on the Financial Statement for Semi-annual shareholder reports?
balance sheet
income statement
What type of bonds do high yield bond funds invest in?
speculative junk bonds
What type of bond funds have the lowest yields?
Municipal Bond Funds
Shareholder reports are required to be made ____ vs. SEC Reports ___
semi-annually
Anually
What percentage of BOD according to the Investment Company Act of 1940 can be “interested”
no more than 60%
What are the three qualifications for being considered an “interested” person due to the Investment COmpany Act of 1940?
- affiliated with fund sponsor
- investment advisor
- other members associated with fund
When are investors considered “interested persons” according to the ICA of 1940?
Only if they hold 5% or more of fund’s voting shares
What must be obtained to change the investment objective of a management company?
Majority share vote
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
What three things are shareholders of management companies allowed to vote on?
- INvestment adviser’s contract
- Board of Directors seats
- 12b-1 fees
Who sets the management fee?
the Investment Advisor
When must the statutory prospectus be delivered to investors if solicited and unsolicited?
Solicited: brior to solicitation
Unsolicitated: completion of transaction
What are two important reedemable securities?
- mutual funds
- UIT
What is the Net Asset Value formula?
Assets - Liabilities/(shares outstanding)
What does a NAV reflect?
The overall value of a fund on a per-share basis
What is the most significant factor influencing the NAV?
The current market value of the portfolio’s securities
When are mutual funds allowed to be traded?
Only at market closing
What is a mutual fund’s forward price?
The NAV at which the investor will buy the fund
What’s the difference between a front end and back end load?
sales tax when customer purchases shares vs. sells
When do you use the NAV vs. POP formula?
If there is no sales charge, NAV, if there is sales charge POP
What is the sales charged based off of
What is the equation for shares purchased Without sales charge?
Overall purchase/NAV
What is the equation for overall shares purchased with Sales charge?
Overall purchase/POP
What is the equation for POP
!00% NAV - SC
What is the Sales Charge Percentage formula?
POP-NAV/POP
What is the maximum allowable sales charge for redeemable securities like mutual funds?
8.5% of POP
Do Investors sell fund shares at NAV or POP?
NAV
What charge may be assessed when fund shares are redeemed and what is the cap?
Redemption Fee at 1% cap
What are funds dividends called?
income
How does a fund make capital gain?
Liquidates a security at a profit
How frequently are mutual funds capital gains generally distributed?
Once a year
When a fund makes dividend or capital gains distribution, what happens to the value of the fund?
It declines
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
Within how many days must mutual funds full investor redemption requests?
Within 7 days
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
When do mutual fund transactions occur?
Once at the end of the day
What does the NAV calculate?
Fund value on a per share basis
What is the formula for if the mutual fund sales charge is in percent vs. dollars?
Percent: NAV/(100%-SC%)
Dollars: POP = NAV + SC
The selling group of mutual funds purchases shares from the ___ at _____ and sells them to the _____ at ____
sponsor; NAV
investor; POP
The NAV is also known as? The POP is also known as?
NAV = Bid
POP = Ask
What is the minimum price a mutual fund can be purchased at?
NAV
When must the exchange privelage be offered for mutual funds?
IF the fund assesses the maximum sales charge
What is the rule about fund familys with exchange privelages?
Exchange privelages must occur within the same fund family
What is the largest expense ratio in no-load mutual funds?
Management Fees
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
What are the three different forms in which investors make returns on mutual funds?
- capital appreciation (growth)
- Dividend distributions
- capital gains distributions
What kind of income payment is it when bond funds distribute fixed-income interest security payments to shareholders?
Dividend distribution NOT interest
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
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
Three ways to make lor lose money on a security
- Dividends
- Interest
- Capital Gain/loss
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
Equation for total return
Total Return = All gains and/or losses / Original Cost
What does total return encompass in terms of realization?
Both Realized and Unrealized gains/losses
What does total return not factor into the equation?
Inflation
In calculating total return, for the denominator what value do you use, NAV or POP?
POP