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Unit 2 > Investment Companies Part 2 > Flashcards

Investment Companies Part 2 Flashcards

1
Q

What are the three classes of mutual funds with sales charges?

A
  1. Class A (front end)
  2. Class B back end
  3. Class C level load
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2
Q

When is the sales charge collected for a class A share?

A

When customer purchases share

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3
Q

What determines the sales charge of class A and in what format is it determined?

A

How much money is invested, Breakpoint schedules

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4
Q

There are ___ (higher/lower) sales charges when investors purchase (more/less)

A

lower,more

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5
Q

What does a letter of intent do for customers’ sales charges in mutual fund shares purchases?

A

Letter of intents allow customers to pledge additional deposit in order to make it into a higher volume schedule to get a lower sales charge

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6
Q

How long does an investor have to deliver the pledged money from the letter of intent?

A

13 months

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7
Q

What does it mean if a letter of intent is backdated?

A

The investor can use deposits from up to 3 months to include in their bracket to get them lower sales charge.

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8
Q

How does backdating a Letter of intent for mutual funds affect the deadline they have to deliver the pledged money?

A

The usual 13 months is subtracted by however much they backdate.

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9
Q

How is an escrow account used in Letter of Intent pledges?

A

Financial firms keep a percentage of shares delivered as collateral in an escrow account so they can liquidate enough shares to pay for the higher sales charge if the customer doesn’t meet the deadline

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10
Q

Cann LOIs be met by asset appreciation?

A

No

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11
Q

What are rights of accumulation in Share Class A?

A

A customer can accumulate funds to into their mutual fund portfolio to bring them into a lower sales charge bracket over time.

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12
Q

What are financial firms required to disclose about Sales Charge Schedules ?

A

If they are close to the breakpoint

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13
Q

What is the breakpoint sale violation?

A

When a customer is not informed about a close breakpoint so that the firm can charge the higher sales charge

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14
Q

What is household funds in breakpoint scheduling?

A

When families add their purchases together for lower breakpoints

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15
Q

Are investment clubs granted breakpoints, what is their sales charge?

A

No breakpoints, highest sales charge

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16
Q

What is combination privelage in breakpoint scheduling?

A

If an investor purchases multiple different fund types of the same company, the purchases can be added together for lower breakpoint.

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17
Q

What type of investor are Class A shares must stuitable for?

A

Long-term investors with large amounts to invest

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18
Q

What is a Contingent Deferred Sales Charge?

A

Back-end loads

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19
Q

When do Class B shares assses their sales charge?

A

When an investor sells their shares

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20
Q

How is sales charge and years of ownership related for Class B Shares?

A

The longer you own the shares the less sales charge at selling

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21
Q

What happens to Class B shares once the cDSC period ends?

A

They are converted to Class A shares

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22
Q

What type of investor are class B share suitable for?

A

Intermediate to long-term investors with smaller amounts

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23
Q

Whats the difference between amount of money and term-ness for Class A and Class B investors.?

A

Class A: long term, large amounts
Class B: long-term small amount

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24
Q

Why is a long-term investor with a large amount of money better of paying a front-end load?

A

Because 12b1 fees

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25
Q

When are 12b1 fees paid?

A

Anually

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26
Q

What are the 12b1 fees for class A?

A

.25%

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27
Q

What are the 12b1 fees for class b?

A

1%

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28
Q

what is the most significant expense for class C shares?

A

12b-1 fees

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29
Q

What is the purpose of 12b1 fees?

A

Aims to lower a fund’s overall expenses by bringing more investors into the fund.

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30
Q

What is the purpose for growing a fund’s assets?

A

Lowering a fund’s expenses on a per-investor basis

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31
Q

What are the two types of 12b-1 fees?

A

1.Distribution Fee
2. Service fees

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32
Q

What do distribution fees pay for (two things)?

A
  1. marketing and promotional services
  2. Payments to brokers that place customers into these funds
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33
Q

What/who do service fees pay?

A

Pay representatives to answer questions and discuss attributes of these funds

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34
Q

What is the maximum service fee?

A

.25%

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35
Q

What is the maximum distribution fee?

A

.75%

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36
Q

What are the 12b-1 fee tiers for class a, class b, and class c shares

A

class A: low or no fees
class b: moderate fees
class c: maximum fees

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37
Q

What is the highest 12b-1 fee to be considered no-load?

A

.25%

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38
Q

What type of investor are class c shares suitable for?

A

short term investors

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39
Q

How frequently are 12b1 fees assessed quarterly as opposed to how they are expressed?

A

Quarterly; expressed percentage anually

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40
Q

How long do you have to hold some Class C shares to avoid backend sales charge?

A

1 year

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41
Q

What is the maximum fund load if also charging maximum 12b-1 fees? What is the maximum elsewise

A

7.25%; 8.5%

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42
Q

What cannot be used to fulfill a LOI for mutual fund shares breakpoint schedule.

A

Share Appreciation

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43
Q

How long can a mutual fund purchase LOI be backdated?

A

90 days

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44
Q

What type of individual can add their purchases together to attain a better breakpoint?

A

Investors living in the same household

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45
Q

What does the exchange privilege allow investors to do?

A

Exchange out of one fund into another within the same fund family without an imposed sales charge

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46
Q

What is the sales charged based upon in right of accumulation?

A

The initial amount invested plus the additional capital placed in the fund

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47
Q

what liquidation limit do class c shares with CDSCs impose?

A

if they are liquidated in less thana year, a sales charge is assessed

48
Q

What class is Contingent Deferred Sales Charge associated with?

A

Class B

49
Q

Does capital depreciation affect backdated breakpoints for how much future money you need to cover with an LOI?

A

no

50
Q

What is subchapter M also known as?

A

conduit rule

51
Q

What does Subchapter M allow for?

A

Allows funds to avoid taxation

52
Q

What is required for a fund to avoid Subchapter M tax avoidance?

A

Must distribute at least 90 percent of their net investment income to shareholders to qualify

53
Q

What three types of returns acquired on the securities of a fund’s portfolio are distributed to shareholders yearly?

A
  1. cash dividends from equity securities
  2. interest income from debt securities
  3. realized capital appreciation
54
Q

What are funds that engage in Subchapter M called?

A

regulated funds

55
Q

Who pays the tax on NII from Subchapter M funds?

A

The shareholder, not the fund

56
Q

What benefit does a fund manager have for fusing Subchapter M?

A

The ability to pass-through taxable income to shareholders

57
Q

what is NOT a component of a fund’s Net investment income (NII) to reach the required amount for subchapter m?

A

unrealized gains

58
Q

What market is a mutual fund always in?

A

primary market

59
Q

how are closed funds offerings different than mutual funds?

A

closed funds work like all other securities

mutual funds only primary market

60
Q

Why are mutual funds only primary market?

A

Because you’re always trading with the issuer

61
Q

What must purchasers receive when sold a closed end fund in the primary market?

A

Prospectus

62
Q

How does the NAV of closed end funds differ from mutual as a result of secondary market ?

A

The NAV doesn’t neessarily determine the basis for transaction price because closed end shares also trade in secondary market where supply and demand exists. `

63
Q

What determines the price of a Closed End Fund?

A

The Market Demand

64
Q

When is a closed end fund trading at a discount?

A

When its NAV is higher than the market price

65
Q

What what type of fee are closed end fund transactions subject to?

A

commissions

66
Q

What are three fees or expenses associated with closed-end funds?

A
  1. expense rations
  2. commissions
  3. management fees
67
Q

Are closed-end funds redeemable or negotiable?

A

negotiable

68
Q

What’s the difference in how open and closed ended funds are capitalized “structured”

A

Open end: maintain a changing number of shares outstanding

closed end: have a fixed amount of shares outstanding

69
Q

Which fund can have a Market value Below NAV?

A

closed end

70
Q

What type of securities are ETFs? Negotiable or redeemable?

A

Negotiable

71
Q

In what market do ETFs trade?

A

secondary

72
Q
A
73
Q

What is ETF arbitrage?

A

Where institutional investors perform transactions with EFT issuers to manipulate market price back to NAV if it deviates?

74
Q

What type of management company are ETF structured after?

A

Open end management companies

75
Q

Three differences between ETFs and Mutual funds?

A
  1. ETFs are negotiable while MF are redeemable
  2. ETFs have lower expense ratios
  3. ETFs are more tax efficient
76
Q

What type of fee do ETFs charge?

A

Commission

77
Q

What’s the difference in when you can purchase shares between ETFs and Index Funds?

A

Index funds you can only purchase once per day
ETFs can be purchased anytime

78
Q

Can ETFs sell on margin?

A

yes

79
Q

What ETF tracks the NASDAQ index?

A

Qubes

80
Q

ETFs do ____ and Mutual Funds do ____ commision/sales charge

A

ETF : Commission
Mutual FUnd: Sales Charge

81
Q

What ETF tracks the Dow Jones?

A

DIAmonds

82
Q

What does passive management involve?

A

It involves tracking an index instead of picking specific securities

83
Q

Are ETFs usually utilized by investors seeking active or passive management?

A

Passive

84
Q

How frequently are ETF NAV calculated and based on what?

A

Once per day based on closing market value

85
Q

What ETF tracks the S and P 500?

A

Spyders

86
Q

What is the goal of active management in terms of the market?

A

To Beat the market

87
Q

What do actively managed ETFs allow for?

A

Allows fund manager to deviate from their benchmark index

88
Q

Do Active ETFs have higher or lower expense ratios than Passive and why?

A

Higher because the research and asset management services come at a cost

89
Q

What does an inverse ETF bet on?

A

Market fall of an index they track

90
Q

What do leveraged ETFs provide?

A

Amplified gains and losses to their investors

91
Q

What are the most common percentage leverages for ETF leverages?

A

200% and 300%

92
Q

What are leveraged inverse ETFs?

A

They combine the two concepts

93
Q

What do Active ETFs aim to do?

A

Aim to outperform the returns of a benchmark index

94
Q

What is an investor doing when they purchase an ETN?

A

They loan money to a financial institution

95
Q

What does the ETN represent?

A

The promise from an issuer to pay its investors the return of an index

96
Q

What happens at the maturity date of an ETN?

A

The issuer must pay the index’s return to the ETN holder

97
Q

Are ETFs negotiasble or redeemable?

A

negotiable

98
Q

When are ETNs taxable and why only then?

A

Only at sale or maturity because there is no ownership and dividends/capital gain

99
Q

Are ETFs or ETNs more tax efficient and why?

A

ETFs because they are almost always passively managed

100
Q

What risk are ETNs subject to that ETFs are not?

A

Default risk

101
Q

Can ETNs be sold short?

A

yes

102
Q

What risk to both ETF and ETN lack?

A

Liquidity risk

103
Q

Between ETFs and ETNs, which one is a management company?

A

ETFs

104
Q

What do UITs create?

A

Create fixed portfolios of securities

105
Q

With whom are UITs required to be registered?

A

SEC

106
Q

What are three things the UIT prospectus contains?

A
  1. investment objective
  2. investor fees
  3. related risks
107
Q

What is the issuer for a UIT called?

A

Trust sponsor

108
Q

What is the role of the Trust Sponsor? (2)

A

To register the UIT and picks investements for portfolio

109
Q

What three fees do UITs assess? and what fee do they not?

A
  1. sales charge
  2. C&D fees
  3. Operating expenses

Management Fees

110
Q

WHat are the two options for investors of UITs?

A
  1. hold the UIT to maturity
  2. Redeem their units at their current NAV
111
Q

What value does the payment received by the UIT when liquidated represent?

A

the NAV

112
Q

What do “in-kind” UITs allow?

A

They send their investors at maturity the shares instead of liquidation

113
Q

Can UITs trade in the secondary market?

A

Yes

114
Q

Three similarities to UIT and Mutual Funds

A
  1. Registered investment companies
  2. PRospectus provides key disclosures
  3. Redeemable with the issuer
115
Q

UIT and Mutual FUnd differences

A
  1. UITs may trade in the secondary market; MF only redeemable
  2. UITs maintain fixed portfolios; MF portfolios are managed
  3. UITs have no management fee; almost all MF do
116
Q

Are UITs active or passively managed?

A

Passively

Unit 2 (18 decks)

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