IP - Chapter 12 - Investment Companies*

Question 1

What are the 4 basic types of investment companies?

Answer 1

1) UIT’s
2) Closed End Funds
3) ETF’s
4) Mutual Funds (Open End Funds)

Question 2

Which type of investment company is the leader in funds invested?

Answer 2

Mutual Funds (Open End Investment Companies)
(Specifically Equity Mutual Funds)

Question 3

What is becoming a more common form of retirement plans with employers?

Answer 3

Defined Contribution Plans

Question 4

Risk of outliving ones assets

Answer 4

Supperannuation

Question 5

This rule allows companies to avoid taxation by becoming Registered Investment Companies and being able to distribute interest, dividends, and capital gains to shareholders.

Answer 5

Internal Revenue Code Section 851

Question 6

What is the shareholders tax liability in a mutual fund?

Answer 6

Equal to their proportional ownership of the fund

Question 7

Who are investment companies regulated by?

Answer 7

• SEC

- Investment Company Act of 1940

Question 8

What are the requirements for an investment company to be considered tax exempt under IRS Code 851?

Answer 8

1) 90% of income must be generated for the RIC must be of income from: dividends, interest, and capital gains
2) At least 90% of taxable income must be distributed to shareholders
3) At least 50% of RIC total assets must be invested in either Cash, Cash Equivalents, or Securities
4) Total assets in RIC can not exceed 25% by any one issuer (unless issued by government)

Question 9

3 facts about UIT’s?

Answer 9

1) Passively managed
2) Cash payments immediately passed through to investors
3) Offered through a one time public offering

Question 10

Most commonly, traditional UIT’s solely invest in _________ .

Answer 10

Bonds (can also invest in equity securities)

Question 11

How is maturity determined for UIT’s containing only fixed income?

Answer 11

Maturity date uses longest term bond

Question 12

For UIT’s containing equity, when is maturity date determined?

Answer 12

At inception

Question 13

3 facts about ETF’s?

Answer 13

1) Created through UIT’s (in creation units)
2) Passively Managed
3) Can be traded throughout the day

Question 14

How do closed end funds raise capital?

Answer 14

IPO

Question 15

A fund that divides its shareholders into two classes, one that is scheduled to receive dividend payments and one that is scheduled to receive capital gains. (This allows investors to select if they want price appreciation or income but not both).

Answer 15

Equity Dual Purpose Fund (CEF)

Question 16

3 Facts about CEF’s (Closed End Funds)?

Answer 16

1) Raise capital through an IPO
2) Fixed Capitalization when funds are raised
3) Trade on an exchange and can be bought and sold throughout the day

Question 17

What is FINRA’s limit to sales loads by %?

Answer 17

8.5% is max sales load

Question 18

4 Facts about mutual funds?

Answer 18

1) Most common type of Investment company
2) Continually accept new capital
3) Valued daily according to NAV
4) NAV calculated at the end of every trading day

Question 19

What is the formula for calculating NAV?

Answer 19

(Market Value of Assets - Market Value of Liabilities) / Total Outstanding Shares

Question 20

For mutual funds (open end investment companies), at least how much of the funds board must be composed of independent directors?

Answer 20

40%

Question 21

Included when purchasing a security and paid as part of original investment?

Answer 21

Front End Load

Question 22

Charged not with the purchase but with the sale of the security. Most charge decreasing fee rate overtime, the longer security is held.

Answer 22

Back End Load

Question 23

On a back-end loaded mutual fund, there is likely a 0% fee if the fund is held ___________ or longer.

Answer 23

5 years

Question 24

What type of load is associated with an A-share?

Answer 24

Front End Load

Question 25

What type of load is associated with an B-share?

Answer 25

Back End Load

Question 26

The SEC limits redemption fees to _____ % in most situations.

Answer 26

2%

Question 27

This fee discourages frequent trading by shareholders that might be disruptive to financial goals of the fund.

Answer 27

Redemption fee

Question 28

Fee charged by a mutual fund company to pay for the services of the brokers who sell the mutual funds and who maintain the client relationships.

Answer 28

12b-1 fee

Question 29

The 12b-1 distribution fee cannot exceed ______ % of NAV of shares

Answer 29

.75%

Question 30

The 12b-1 service fee can not exceed _____ % of the NAV of shares.

Answer 30

.25%

Question 31

Extra services included in commission fees charged by mutual funds like market research tools, etc.

Answer 31

Soft Dollars

Question 32

``` Any fund that... - Charges a front end load - Charges a back end sales charge - Charges a 12b-1 fee exceeding .25% must _______________________________ . ```

Answer 32

Be advertised as a loaded fund

Question 33

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

Answer 33

12b-1 distribution fee | 12b-1 service fee

Question 34

2 details about Class-B Shares?

Answer 34

- Most have 'conversion feature' to Class A after a specified period of time - No breakpoints available

Question 35

3 facts about Class-C shares?

Answer 35

- Backend load waived if held longer than 1 year - No discounts, breakpoints, or conversions - No front end loads

Question 36

What are the time horizons for A, B, and C shares?

Answer 36

A shares: Long Term B shares: Mid Term (5-7 years) C shares: Short Term (1-2 years)

Question 37

Securities that appreciate in value, are held and not sold tend to have large ______________ .

Answer 37

Built-in gains

Question 38

2 downsides of mutual funds

Answer 38

- Often maintain large cash reserves for investors liquidating which often hinders performance - Cannot be sold throughout the trading day

Question 39

What are the 4 main types of Mutual Funds?

Answer 39

1) Money Market 2) Equity Funds (DOMINATE... over 1/2 of funds) 3) Fixed Income Funds 4) Hybrid Funds

Question 40

Money market funds (3 key facts):

Answer 40

- Mature in a year or less - Almost always trade at a discount - Average maturity in fund must be 90 days or less

Question 41

Examples of Money Market Mutual Funds include:

Answer 41

1) T-Bills ($100 minimum) 2) Commercial Paper ($100k minimum) 3) Bankers Acceptances 4) Negotiable CD's ($100k minimum) 5) Repurchase Agreements 6) Short Term Municipal Debt

Question 42

What kind of funds should investors be using in retirement accounts?

Answer 42

Taxable funds

Question 43

Issued by governments, agencies or corporations that have maturity dates from 5 to 30 years

Answer 43

Fixed Income Securities

Question 44

Funds that seek capital appreciation by investing in companies in related fields or specific industries?

Answer 44

Sector Funds

Question 45

Funds that seek to provide capital appreciation while minimizing risk by employing long/short, market neutral, leveraged, or inverse strategies.

Answer 45

Alternative Strategy

Question 46

Three types of 'capital appreciation' funds?

Answer 46

1) Growth 2) Sector 3) Alternative Strategy

Question 47

Invest primarily in those companies that are out of favor with investors, appear underpriced by the market relative to their earnings/intrinsic value, or have high dividend yields.

Answer 47

Value Funds

Question 48

Funds invest primarily in companies based in less developed countries?

Answer 48

Emerging Markets Funds

Question 49

Funds invest primarily in equity securities traded worldwide, including equity securities of US companies

Answer 49

Global Equity Funds

Question 50

These types of funds must invest in equity securities of companies located outside of the United States and cannot invest in US companies stocks.

Answer 50

International Equity Funds

Question 51

Invest in companies that are based in a specific part of the world.

Answer 51

Regional Equity Funds

Question 52

Invest in companies trading worldwide including companies based in the United States, specific regions, or emerging markets while employing long/short, market neutral , leveraged, or inverse strategies

Answer 52

Alternative Strategies World equity funds

Question 53

Funds that seek high total return by investing in a mix of equities, fixed income securities, and money market instruments.

Answer 53

Asset Allocation Funds

Question 54

These funds invest in a specific mix of equity securities and bonds with the objective of conserving principal, providing income, and achieving long term growth of both principal and income

Answer 54

Balanced Funds

Question 55

Funds are designed to provide high total return by investing in common stock, bonds, other debt securities, and money market securities. The portfolio may hold up to 100% of any one of these types of securities and may easily change depending on market conditions.

Answer 55

Flexible Portfolio

Question 56

Funds invest in a variety of income producing securities including equities of fixed income securities. They seek a high level of current income for shareholders. Capital appreciation is not a primary objective.

Answer 56

Income Mixed Funds

Question 57

Funds that seek to provide capital appreciation while minimizing risk by investing in a mix of equity and fixed income securities while employing long/short, market neutral, leverage, inverse, or commodity strategies.

Answer 57

Alternative Strategies Funds

Question 58

Funds that seek current income by investing in primarily investment grade securities. These funds may be short term, intermediate term, or long-term focused.

Answer 58

Investment Grade Funds

Question 59

Funds that seek current income by investing two thirds of their portfolio or more in lower rated corporate bonds (Baa or lower by Moodys and BBB or lower by Standard and Poor's rating services).

Answer 59

High Yield Funds

Question 60

Funds pursue an objective of high current income by investing in taxable bonds issued or backed by the US government. Funds may be short, intermediate, or long term.

Answer 60

Government Bond

Question 61

Funds that seek to provide high current income for the shareholders by investing predominantly in a combination of domestic fixed income securities, including mortgage backed securities and high yield bonds, and may invest up to 25% in bonds issued by foreign companies and governments.

Answer 61

Multi-sector Bond Fund

Question 62

Funds that invest primarily in bonds of a single state or across various states. The bonds are exempt from federal income tax as well as state taxes for residents of that state.

Answer 62

Municipal Bond Funds

Question 63

Unsystematic risk can be broken down into 3 risk categories, which are?

Answer 63

- Company Risk - Concentration Risk - Liquidity Risk

Question 64

These funds have a balanced exposure to all types of mutual funds and invest in a combination of money market, fixed income, and equity securities.

Answer 64

Hybrid/Balanced Funds

Question 65

3 most common traits of UIT's?

Answer 65

- Fixed Capitalization - Passive Management - Fixed Termination Date

Question 66

3 most common traits of ETFs?

Answer 66

- Passively Managed - Index or Sector Exposure - Inexpensive

Question 67

3 common traits of CEFs?

Answer 67

- Funded through IPO - Fixed number of shares - Trade at discount or premium to NAV

Question 68

Mutual funds are the most popular type of investment company in terms of assets under management and always trade at ______ .

Answer 68

NAV

Question 69

Most mutual funds require a minimum investment of at least ___________ .

Answer 69

$1,000

Question 70

Are there more mutual funs or individual stocks?

Answer 70

Mutual Funds