Investment Companies Questions Flashcards
An open end fund has a Net Asset Value of $10 per share. The minimum price at which a share can be purchased is:
A $10
B $10 plus a commission
C $10 plus a mark-up
D any price because this is negotiated in the market
The best answer is A.
Mutual fund (open-end management company) shares are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a “sales load.” For a “no load” fund, the customer would simply pay Net Asset Value - this is the minimum price for an open-end fund. This contrasts to a closed end fund, where the fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed-end fund share is purchased at the prevailing market price plus a commission (or a mark-up if it is an OTC principal transaction).
Which of the following funds MUST be a closed end fund?
I Net Asset Value = $10 / Purchase Price = $9.50
II Net Asset Value = $10 / Purchase Price = $10
III Net Asset Value = $10 / Purchase Price = $10.50
A I only
B I and II
C II and III
D I, II, III
The best answer is A.
A closed end fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed end fund share is purchased at the prevailing market price plus a commission. This contrasts to mutual fund (open end management company) shares that are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a “sales load.” Thus, the minimum price for a mutual fund is Net Asset value; while the only type of fund that can trade for less than Net Asset Value is a closed end fund.
The minimum price at which a closed end fund share can be purchased is:
A Net Asset Value
B Net Asset Value plus a commission
C Price
D Market Price plus a commission
The best answer is D. A closed end fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed end fund share is purchased at the prevailing market price plus a commission. This contrasts to mutual fund (open end management company) shares that are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge (if the fund imposes a “sales load”).
All of the following terms apply to fixed unit investment trusts EXCEPT:
A regulated
B managed
C redeemable
D registered
The best answer is B. Fixed unit investment trusts are not managed; the portfolio is fixed and does not change. These are typically bond trusts, where a diversified portfolio of bonds is assembled and placed into trust; with units of the trust sold to investors. These are non-exempt securities that must be registered with the SEC and sold with a prospectus. They are regulated under the Investment Company Act of 1940 and are redeemable with the sponsor, who makes a market in trust units.
The term “negotiable” describes all of the following EXCEPT:
A common stock
B preferred stock
C rights
D mutual funds
D Mutual Funds
Mutual funds that have an automatic reinvestment provision will typically reinvest: I dividends at NAV II dividends at POP III capital gains at NAV IV capital gains at POP A I and III B I and IV C II and III D II and IV
The best answer is A.
If a fund offers an automatic reinvestment provision, both dividend distributions and capital gains distributions are reinvested at Net Asset Value.
Which of the following statements are TRUE regarding money market funds?
I The Net Asset Value per share is constant at $1
II The Net Asset Value per share is constant at $10
III As Total Assets in the fund increase, the shareholder has the same number of shares at an increased Net Asset Value per share
IV As Total Assets in the fund increase, the shareholder receives more shares at the same Net Asset Value per share
A I and III
B I and IV
C II and III
D II and IV
The best answer is B.
Money market funds are unusual in that the Net Asset Value per share is constant at $1.00. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each. For example, if an investor has 1,000 shares @ $1 ($1,000 total) in the fund, and the assets appreciate by 10%, then the customer will have 1,100 shares at $1 ($1,100 total).
Which of the following customers is NOT allowed a breakpoint on mutual fund purchases? I Investment Club II Omnibus Account III Corporate Purchaser IV Individual Purchaser A I and II only B III and IV only C I, II and III D I, II, III, IV
The best answer is A. Investment clubs cannot group purchases for a breakpoint, nor can investment advisers group their customers’ purchases. An individual or corporation making a purchase is considered to be “one” purchaser and qualifies for the breakpoint.
An equity REIT would most likely invest in all of the following EXCEPT:
A apartments
B office buildings
C shopping malls
D industrial parks
The best answer is D.
An equity REIT invests in income producing real estate. These include apartment buildings, shopping centers, and office buildings. The key here is that these have a large, diverse tenant pool. If any one tenant moves out, that will not have a great impact on the income stream. Industrial parks usually have only a few large tenants, not a lot of smaller tenants.
question # 3-3-39-3
Investment Companies : Fixed UITs / REITs / BDCs : Equity REIT Investments
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A 65-year old retired teacher living on a pension has $200,000 invested in 2 year certificates of deposit that are yielding 4%. $20,000 of the CDs are maturing and the customer wants to diversify into an investment that gives a higher return and a moderate level of risk. The BEST recommendation would be:
A High yield corporate bonds
B Treasury strips
C Equity REITs
D Income bonds
The best answer is C.
Equity REITs tend to pay a high dividend yield, since they are structured to generate net rental income. Because the underlying real estate investments are diversified, the risk level is moderate. This is the best of the choices offered. High yield bonds (junk bonds) have a very high risk of default and thus are unsuitable. Treasury Strips are zero-coupon Treasuries that do not provide current income and thus are unsuitable. Finally, Income bonds only pay interest if the issuer has high enough net income, so there may not be any “income.”
Which sources of REIT income are counted towards the 75% test required by Subchapter M? I Property rentals II Interest from mortgages III Capital gains on property sales IV Real estate tax refunds A I and II only B III and IV only C I, II, III D I, II, III, IV
The best answer is D.
To qualify as a regulated investment company, 75% of REIT income must be real estate related. This income includes rents, mortgage interest earned, gains on property sales, income from foreclosed properties, and real estate tax refunds received (as a source of income, an REIT can buy a property and attempt to get its tax assessment lowered - any resulting tax refund is income to the REIT).
REITs can distribute all of the following to their shareholders EXCEPT:
A capital gains
B capital losses
C cash dividends
D stock dividends
The best answer is B.
REITs can distribute net income to shareholders in the form of dividends; and can distribute capital gains under the “conduit” taxation rules of Subchapter M. They cannot distribute capital losses.
Which of the following securities CANNOT be sold by an individual holding an investment companies/variable annuities registered representative's (Series 6) license? I Municipal Investment Trusts II Real Estate Investment Trusts III Municipal Bond Funds IV Revenue Bonds
The best answer is B. A person holding an investment companies/variable annuities (Series 6) license is only allowed to sell mutual funds, unit investment trusts, and variable annuities. To sell other securities such as Real Estate Investment Trusts, municipal bonds, corporate bonds, options etc., the broader Series 7 general securities license is required.
