Lesson 7 of Investments: Investment Companies Flashcards

Question

A Shares

Answer 1

- A shares have a **front-end load** (up front sales commission). - **Small 12b-1 fee**, which is the marketing fee used to pay distribution expenses (known better as "trailing commissions"). - **No redemption fee** or back-end load. - A shares are **appropriate for long-term investors** - because of the low 12b-1 fee.

Answer 2

- B shares contain **a back-end sales load**(redemption fee.) They also have high 126-1 fee, typically the **maximum 12b-1 fee of 1%.** - **NO front-end sales load.** - **B shares can be converted to A shares.** - The only advantage is that an investor would not pay the front-end load, but they would pay the higher 12b-1 fee until the shares are converted into A shares. - **Many funds no longer offer B shares.**

Answer 3

- C shares do **NOT charge a front-end load.** - C shares usually **charge a small back-end load** and - charge the **maximum 12-1 fee of 1%.** - C shares are usually most appropriate for **short-term** investors. C shares do **NOT convert to A shares.**

Answer 4

- ETFs are a portfolio of stocks that **represent an index.** - ETFs are **traded on an exchange similar to stocks** and can be traded intra-day, unlike traditional mutual funds. - Investors do **not have to buy and sell blindly.** - ETFs have a **low cost of ownership** because they are typically passive investments. Most ETFs have no active trading within the fund because the ETF is tracking a stock index. Only when stocks are added or removed from an index is there actually selling of assets within an ETF. Most ETFs are **tax efficient** investments because of the low asset turnover and passive investment strategy. - **Examples include:** - QQQQ -> NASDAQ 100 - SPY -> S&P 500 ETFs are structured to track an index, but they can also be actively managed to track an investment manager's top picks, or mimic an existing mutual fund. This is less likely to be tested on the exam.

Answer 5

- REITs are **attractive because of the low correlation with the stock market** and the diversification benefit that they provide to portfolios. - Similar to a **closed end mutual fund**. - Real estate is **a hedge against inflation.** - REITs must **distribute 90% of investment income to shareholders** to maintain tax-exempt status **There are three types of REITs:** 1. Equity. - Invest in real estate for capital appreciation. - Income is generated from rental income and appreciation. 2. Mortgage. - Invest mostly in mortgages and construction loans. - Make the spread between the lending and borrowing rate. 3. Hybrid. - Combo of both equity and mortgage.

Answer 6

ADRs **represent foreign stock held in domestic banks' foreign branch**. - ADRs entitle the shareholder to dividends and capital gains. - Capital gains in ADRs include currency fluctuation. - ADRs **trade on US exchanges**, are - denominated in US dollars and - trade in US dollars. Dividends are paid in US dollars. **ADRs do not eliminate exchange rate risk.** ## Footnote VERY IMPORTANT: THEY DO NOT ELIMINATE EXCHANGE RATE RISK

Answer 7

Must know that ADR do not eliminate exchange risk.

Answer 8

Answer: D Answer C is tempting, but not correct. ADRs trade in US dollars on the US markets, but the actual foreign shares are held in a domestic bank's foreign branch and the exchange of currency happens there, so **currency risk is still relevant.**

Answer 9

- Common Characteristics - Most Common Alternative investments

Answer 10

- **Not for the average investor.** - Typically high-risk investments with - Large minimum purchase requirements and high fees. - **Actively managed,** - may use leverage to enhance their returns, and - invest in illiquid assets. - **Liquidity may be limited or nonexistent.** - There is no secondary market but - it may offer redemptions at periodic times with advance notice.

Answer 11

- **Real estate, REITs. CMOs, Limited Partnerships** (addressed other areas in the reading). **Other alternative investments and highlights**: - **Hedge funds-**No regulations, self-report, seek positive performance, available to accredited investors only. - **Collectibles**- Fine art, antiques, baseball cards. High risk of fraud, subject to demand and consumer tastes. Net long-term gains from sales of collectibles are subject to a federal income tax rate of 28%. - **Precious metals -**Gold, or silver can be purchased directly, through exchange-traded funds, or futures contracts. Often considered inflation hedges. - **Cryptocurrency :** - Virtual currency not assoicated with any country or central bank. - Number of "coins" are limited" - Not widely accepted as a form of payment. - Considered a high-risk investment.

Answer 12

**Can be speculative and volatile investments,** and this volatility can have a particularly negative effect on investors; **Are difficult to analyze** and present challenges to CFP professionals seeking to make informed investment decisions (with even knowledgeable investors experiencing difficulty evaluating these assets and separating "facts from the hype"); **May present unique custodial risks** that expose investors to heightened risk of theft or loss **Raise valuation issues** because they may not be subject to commonly-accepted valuation methodologies and may not be subject to consistent accounting treatment or traditional reporting requirements: **May be unregistered** or otherwise offered by or through providers who are operating outside of or not complying with existing regulatory frameworks; and **May be subject to additional regulation,** which may evolve in unpredictable ways.