Management Companies Flashcards
The sponsor of a mutual fund is also known as the:
A. Bank
B. Manager
C. Custodian
D. Underwriter
The best answer is D.
The fund underwriter is also known as the fund sponsor. The sponsor is responsible for establishing the fund in compliance with the requirements of the Investment Company Act of 1940.
The primary function of the custodian bank is to:
A. manage the fund
B. set the investment objective for the fund
C. safekeep the assets of the fund
D. prepare the financial statements of the fund
The best answer is C.
The primary function of the custodian bank is to safekeep the assets of the fund. The custodian bank can also perform the clerical functions of transfer agent and paying agent. The custodian bank does not manage the fund - this is performed by the investment adviser to the fund. The custodian bank does not set the investment objective of the fund - this is initially set by the sponsor. The financial statements of the fund are prepared by the outside accountants.
The investment adviser of a mutual fund determines all of the following EXCEPT:
A. purchases of securities into the portfolio
B. sales of the securities from the portfolio
C. percentage of cash or equivalents held in the portfolio
D. investment objective of the fund
The best answer is D.
The investment objective for a mutual fund is initially set by the sponsor; and can only be changed by majority vote of the fund’s outstanding shares. The investment adviser decides which securities to buy and sell in the portfolio; and decides the timing of these transactions.
An income fund would likely invest in which of the following securities?
A. Common stocks
B. ADRs
C. Debentures and Preferred stocks
D. Income bonds
The best answer is C.
Income funds invest primarily in bonds and preferred stocks for a high level of current income. Common stocks are not typically a choice for investment because the dividend yields are comparatively low. (ADRs are simply a means for U.S. investors to indirectly purchase foreign common shares.) Income bonds would not be chosen as an investment because they only pay interest if the corporation has enough income; otherwise no payment is made.
A growth fund would likely invest in which of the following securities?
A. Non-convertible corporate bonds
B. Government bonds
C. Convertible bonds
D. Preferred stocks
The best answer is C.
Growth funds would likely invest in common stocks for capital gains; they could also invest in convertible bonds, since they are an “equivalent” to the common stock; and if the common stock price rises substantially, their price will rise as well (because the market will force them to trade at parity with each other).
Preferred stocks and non-convertible bonds give a higher rate of current income; but little in the way of capital gains potential (unless interest rates fall by a large amount). In this case, the fund manager is not attempting to profit from market interest rate moves - he or she is simply attempting to select stocks that have excellent growth potential.
A growth fund would likely invest in which of the following securities?
A. Hi-Yield debt due to its above-market yield
B. Preferred stocks
C. Common stocks and Convertible bonds
D. Non-convertible bonds
The best answer is C.
Growth funds would likely invest in common stocks for capital gains; they could also invest in convertible bonds, since they are an “equivalent” to the common stock; and if the common stock price rises substantially, their price will rise as well (because the market will force them to trade at parity with each other).
Preferred stocks and non-convertible bonds give a higher rate of current income; but little in the way of capital gains potential (unless interest rates fall by a large amount). In this case, the fund manager is not attempting to profit from market interest rate moves - he or she is simply attempting to select stocks that have excellent growth potential.
An investor wishes to buy mutual fund shares that provide him with income and capital gains potential. Based on this information, the appropriate recommendation is a:
A. balanced fund
B. hedge fund
C. sector fund
D. dual purpose fund
The best answer is A.
A balanced fund is a type of fund that allocates assets among different types of securities - maintaining a “balance” of equities and fixed income securities. It provides both income and capital gains potential. A dual purpose fund issues 2 classes of shares - either income shares or capital shares. After choosing the class of share to invest in, the customer either has an income fund or a growth fund, but not a balance of both.
An investor wishes to buy mutual fund shares that have investments in computer and high technology companies. Based on this information, the appropriate recommendation is a:
A. balanced fund
B. hedge fund
C. sector fund
D. dual purpose fund
The best answer is C.
A sector fund invests in a specific industry or geographic area. Because of the lack of diversification, there is greater gain potential, as well as higher risk.
A mutual fund that invests primarily in Treasury Bills and other short term debt obligations is a(n):
A. income fund
B. government securities fund
C. money market fund
D. growth fund
The best answer is C.
Money market funds invest in short term money market instruments, such as Treasury Bills, commercial paper and banker’s acceptances. An income fund invests in longer maturity bonds and preferred stocks which give higher yields than money market debt. A government securities fund invests in government securities only - T-Bills, T-Notes and T-Bonds.
An investor in a “Ginnie Mae” mutual fund assumes all of the following risks EXCEPT:
A. Prepayment Risk
B. Fluctuation of Net Asset Value
C. Credit Risk
D. Reinvestment Risk
The best answer is C.
Since Ginnie Maes are backed by the full faith and credit of the U.S. Government, there is no credit risk (as is the case with direct Government obligations).
Since Ginnie Mae only issues mortgage backed pass-through certificates, in periods of declining interest rates, prepayment risk exists. Homeowners tend to pre-pay their “old” high rate mortgages when rates have declined by refinancing at the new lower rates. When these pre-payments are reinvested by the fund, the monies earn lower current rates, so reinvestment risk is also present.
As with any mutual fund (other than a money fund which has a constant $1 per share NAV), there is the risk that NAV can decline - which would occur if interest rates rise, forcing Ginnie Mae certificate values down.
A Special Situations Fund invests in:
A. U.S. Government and Agency securities
B. corporate bonds and preferred stock rated below investment grade
C. a single industry or geographic area
D. companies undergoing a takeover or bankruptcy
The best answer is D.
A Special Situations Fund invests in companies in “special situations” such as bankruptcies or takeovers, to reap capital gains if the company recovers. Do not confuse a special situations fund with a specialty fund. A specialty fund is one that invests in one industry or geographic area.
Which statement is FALSE regarding a Standard and Poor’s 500 Index fund?
A. The fund must weight its investments in the same manner as the Standard and Poor’s 500 index is weighted
B. The portfolio manager must change the composition of the fund if the stocks included in the index are changed
C. The portfolio manager can overweight a position in any stock as long as it is included in the Standard and Poor’s 500 Index
D. The management fee for such a fund is typically lower than for an actively managed fund
The best answer is C.
Index funds attempt to “shadow” the performance of a designated index, such as the Standard and Poor’s 500 index; or the Value Line Index. Such funds match their composition and weighting periodically to match the designated index. Because no research is done to select stocks for the fund, the management fees are lower than for actively managed funds. It is false that the portfolio manager can overweight any stock in the Standard and Poor’s 500 index, since the fund must match the composition of the index as a whole.
Which statement is FALSE regarding a Standard and Poor’s 500 Index fund?
A. The fund must weight its investments in the same manner as the Standard and Poor’s 500 index is weighted
B. The portfolio manager must periodically re-balance the composition of the fund if the stocks included in the index are changed
C. The fund tends to have a higher portfolio turnover ratio than actively-traded funds due to the constant need to re-balance
D. The management fee for such a fund is typically lower than for an actively managed fund
The best answer is C.
Index funds attempt to “shadow” the performance of a designated index, such as the Standard and Poor’s 500 index; or the Value Line Index. Index funds tend to have less portfolio turnover than actively managed funds. Also, because no research is done to select stocks for the fund, the management fees are lower than for actively managed funds. It is false that the portfolio manager can overweight any stock in the Standard and Poor’s 500 index, since the fund must match the composition of the index as a whole.
A mutual fund sponsor has three different income funds, holding AAA rated debt securities with similar maturities. Assuming that the expense ratios for the funds are identical, which fund would tend to provide the highest yield from investment income?
A. Government Bond Fund
B. Municipal Bond Fund
C. Corporate Bond Fund
D. Government Money Market Fund
The best answer is C.
If the securities held in each of the bond funds have similar maturities and the funds have similar expense ratios, the remaining differences affecting yields are credit rating and tax status. Corporates are considered more risky than both governments and municipals, and are fully taxable, so their yield is the highest. Governments are less risky than municipals, but are taxable by the Federal government, so government yields are higher than municipal yields. The order from highest to lowest yield is: Corporates, Governments, Municipals.
The majority of open-end investment companies impose:
A. front-end load sales charges
B. no sales load
C. contingent deferred sales charges
D. negotiated sales charges
The best answer is A.
The majority of mutual funds impose a front-end sales load, though competition in the industry has forced most funds to lower the fee below the 8 1/2% maximum allowed by FINRA.
Some funds impose a “contingent deferred sales charge,” that is imposed when a customer redeems the fund. However, the fee is lowered as the fund is held longer, encouraging investors to keep monies in the fund over the long term.
Some funds are no-load. These are money market funds, and funds sold by direct marketers such as Vanguard Corporation.
Money market funds are usually:
A. no load funds
B. load funds
C. closed end funds
D. growth funds
The best answer is A.
Money market funds are usually no load. Firms count these funds as short term holding vehicles for customer monies before a longer term investment is made, and attempt to attract these funds by not imposing a sales charge.
Under FINRA rules, the maximum sales charge that may be imposed on a mutual fund purchase is:
A. 6% of the amount invested
B. 7% of the amount invested
C. 8 1/2% of the amount invested
D. 9% of the amount invested
The best answer is C.
Under FINRA rules, the maximum sales charge that may be imposed by a mutual fund is 8 1/2% of the Public Offering Price. Note that in the real world, competition among funds has forced sales charges well below this maximum permitted level. Note that the maximum is a percentage of all dollars invested; it is not a percentage of Net Asset Value.
MUTUAL FUNDS
Fund Net Asset Value Offering Price Change
Capital $9.01 $9.59 -.02
Common $6.37 $6.64 -.04
Corporate $7.72 $8.44 +.03
A customer who placed an order to buy 100 shares of Corporate Fund this day will pay:
A. $772
B. $844
C. $772 plus commission
D. $844 plus commission
The best answer is B.
Open end mutual funds are purchased at the offering price, which is inclusive of any sales charges. This is a new issue prospectus offering, so no commissions are involved. The customer pays the offering price of $8.44 per share x 100 shares = $844.
MUTUAL FUNDS
Fund Net Asset Value Offering Price Change
Capital $9.01 $9.59 -.02
Common $6.37 $6.64 -.04
Corporate $7.72 $8.44 +.03
The sales charge percentage on Corporate Fund is:
A. 6%
B. 7.75%
C. 8.25%
D. 8.50%
The best answer is D.
The formula to find the sales charge percentage is:
Ask - Bid Mutual Fnd Sls Chrg % = --------------------
Ask
A-B $8.44-$7.72 $.72
——– = —————— = ——– = 8 1/2%
A $8.44 $8.44
A mutual fund has a net asset value per share of $12.00. The maximum offering price per share is:
A. $13.11
B. $13.85
C. $14.30
D. $14.56
The best answer is A.
The maximum sales charge on a mutual fund is 8.5% under FINRA rules. The formula to find the offering price is:
Bid(NAV) Ask Price= -----------------------------
100%-Sales Chrg %
Net Asset Value $12.00 $12.00
———————— = ————- = ———— = $13.11
100%-Sls Chrg % 100-8.5 .915
To impose the maximum sales charge, under FINRA rules, mutual funds must offer investors all of the following benefits EXCEPT:
A. Breakpoints
B. Plan Completion Insurance
C. Rights of Accumulation
D. Letter of Intent
The best answer is B.
To impose the maximum sales charge of 8 1/2%, FINRA requires funds to give investors specified breakpoints (lowered sales charges for large dollar purchases), a letter of intent option (once the letter is signed, the investor has 13 months to complete a breakpoint), and rights of accumulation (the investor’s accumulated position counts towards completion of a breakpoint).
There is no requirement for the sponsor to offer plan completion insurance, which is often included in variable annuity contracts; and which funds the annuity for a beneficiary if the contract holder dies prematurely.
A customer has $50,000 to invest in a mutual fund with a Net Asset Value per share of $9.42 and a Public Offering Price of $10.30. In the prospectus is the following breakpoint schedule:
Purchase Amount Sales Charge
$0-$10,000 8 1/2%
$10,001-$25,000 7 1/4%
$25,001-over 6 1/2%
How many shares of the fund can the customer purchase?
A. 4,854
B. 4,897
C. 4,921
D. 4,963
The best answer is D.
The customer is purchasing enough ($50,000) to qualify for a 6 1/2% sales charge. To compute the new lowered offering price, the formula is:
Bid(NAV) Ask Price= -----------------------------
100%-Sales Chrg %
Net Asset Value $9.42 $9.42
———————— = ————- = ———— = $10.075
100%-Sls Chrg % 100-6.5 .935
The customer will pay $10.075 per share. A $50,000 investment will buy $50,000 / $10.075 = 4,963 shares.
A customer has $20,000 to invest in a mutual fund with a Net Asset Value per share of $9.42 and a Public Offering Price of $10.30. In the prospectus is the following breakpoint schedule:
Purchase Amount Sales Charge
$0-$10,000 8 1/2%
$10,001-$25,000 7 3/4%
$25,001-over 6 1/2%
How many shares of the fund can the customer purchase?
A. 1,942
B. 1,959
C. 2,123
D. 2,159
The best answer is B.
The customer is purchasing enough ($20,000) to qualify for a 7 3/4% sales charge. To compute the new lowered offering price, the formula is:
Bid(NAV) Ask Price= -----------------------------
100%-Sales Chrg %
Net Asset Value $9.42 $9.42
———————— = ————- = ———— = $10.21
100%-Sls Chrg % 100-7.75 .9225
The customer will pay $10.21 per share. A $20,000 investment will buy $20,000 / $10.21 = 1,959 shares.
Crane Mutual Funds offers investors the opportunity to receive breakpoints on all purchases within their family of funds. The following lists the breakpoint schedule:
Purchase Amount Sales Charge $0-$10,000 8 ½% >$10,000-$20,000 7 ½% >$20,000-$45,000 6 ½% >$45,000-$65,000 5 ½% >$65,000 5 %
An investor owns $15,000 worth of the Crane Government Fund and wishes to buy $4,000 worth of the Crane Income Fund. What will be the sales charge for this purchase?
A. 5 ½%
B. 6 ½%
C. 7 ½%
D. 8 ½%
The best answer is C.
Many families apply breakpoints to all purchases within the family, as is the case for the Crane Family of Funds. In this case, the fund has a breakpoint at $10,000, and the customer has $15,000 of one fund in the family. The customer wants to buy another $4,000 of another fund in the family. The customer will get the 7 ½% breakpoint on this purchase, since a total of $19,000 has been invested in the “family.” This places the customer in the $10,000 - $20,000 tier that qualifies for a lower 7 ½% sales charge.
A customer has purchased $5,000 of a mutual fund. Over the past 5 years, the fund has appreciated to $22,000. At this point, the customer wants to buy another $5,000 of the fund. In the prospectus, the breakpoint schedule is:
Purchase Amount Sales Charge $0-$10,000 8 ½% >$10,000-$20,000 7 ½% >$20,000-$45,000 6 ½% >$45,000-$65,000 5 ½% >$65,000 5 %
On the $5,000 purchase, the customer will pay a sales charge of:
A. 8 ½%
B. 7 ½%
C. 6 ½%
D. 5 ½%
The best answer is C.
Since this fund starts with the maximum sales charge of 8 ½%, it must offer rights of accumulation. Funds charging the maximum sales charge are required to do so under FINRA’s Conduct Rules.
To determine the breakpoint for the customer, the new purchase amount is added to the current value of the customer’s holdings in the fund. $22,000 current value plus $5,000 purchase = $27,000 total holding after the new purchase. This places the customer between the 3rd tier ($20K - $45K), so the sales charge imposed on the $5,000 purchase is 6 ½%.
A customer has purchased $5,000 of a mutual fund. Over the past 5 years, the fund has appreciated to $14,000. At this point, the customer wants to buy another $5,000 of the fund. In the prospectus, the breakpoint schedule is:
Purchase Amount Sales Charge $0-$10,000 8 ½% >$10,000-$20,000 7 ½% >$20,000-$45,000 6 ½% >$45,000-$65,000 5 ½% >$65,000 5 %
On the $5,000 purchase, the customer will pay a sales charge of:
A. 8½%
B. 7½%
C. 6½%
D. 5½%
The best answer is B.
Since this fund starts with the maximum sales charge of 8 ½%, it must offer rights of accumulation. Funds charging the maximum sales charge are required to do so under FINRA’s Conduct Rules.
To determine the breakpoint for the customer, the new purchase amount is added to the current value of the customer’s holdings in the fund. $14,000 current value plus $5,000 purchase = $19,000 total holding after the new purchase. This places the customer between the 2nd tier ($10K - $20K), so the sales charge imposed on the $5,000 additional purchase is 7 ½%.
A investor has signed a letter of intent and backdated the document 2 months. Which statement is TRUE regarding the mutual fund purchase?
A. The letter of intent may only be backdated 30 days, so any purchases in the first month won’t count toward the total invested
B. The letter of intent must be completed within the next 11 months in order to obtain the breakpoint
C. The letter of intent must be completed within the next 12 months in order to obtain the breakpoint
D. The letter of intent must be completed within the next 13 months in order to obtain the breakpoint
The best answer is B.
The letter of intent to receive a breakpoint can be backdated 90 days. The letter can extend for a maximum time period of 13 months, inclusive of the 90-day backdating. Since the client has already “used up” 2 months, he or she has 11 more months to buy the additional shares
A customer sells stock out of his account receiving net proceeds of $28,000. The customer wishes to use the proceeds to buy ACME mutual fund shares. The fund has breakpoints at $5,000 intervals. The customer has no additional funds available for investment. You should recommend that the customer:
A. reinvest $25,000 ACME fund, and use the remaining $3,000 to buy common stocks
B. sign a Letter of Intent to buy $30,000 of ACME fund
C. invest an additional $2,000 in ACME fund in addition to the proceeds from the stock sale
D. refrain from investing in ACME fund until $30,000 has been accumulated
The best answer is B.
Since the customer needs to invest $30,000 to achieve the next breakpoint, and has $28,000 now, an additional $2,000 is required. The customer may not have this money at this time. If the customer signs a Letter of Intent to complete the $30,000 breakpoint, he or she has 13 months to make payment of the additional $2,000, and will still receive the lower sales charge
A customer has the following holdings in the ACME Fund Family:
ACME Growth Fund: $225,000
ACME Balanced Fund: $120,000
ACME International Fund: $15,000
ACME Funds has the following breakpoint schedule:
$0-$50,000 5%
$50,001-$100,000 4%
$100,001 -$250,000 3%
$250,001-$1,000,000 2%
The customer wishes to buy another $60,000 of ACME Growth Fund. The sales charge that will be imposed is:
A. 4%
B. 3%
C. 2%
D. 0%
The best answer is C.
Mutual fund breakpoints are applied to the entire “family” of funds offered by a sponsor. This customer has a total $360,000 investment in the ACME fund family. Another $60,000 purchase brings the customer’s position up to $420,000; and the applicable breakpoint on the $60,000 purchase is 2% from the breakpoint schedule shown.
A customer has signed a Letter of Intent (LOI) to buy $25,000 of XYZ mutual fund to qualify for a breakpoint that reduces the sales charge from 7% to 6%. The customer deposits $15,000 into the fund over the next 13 months. At the end of 13 months, the NAV is $20,000. How much does the customer have to deposit to complete the LOI?
A. 0
B. $5,000
C. $10,000
D. $15,000
The best answer is C.
The Letter Of Intent (LOI) provision operates separately from Rights of Accumulation and takes precedence over Rights of Accumulation. Because of this, the customer must deposit new money in the dollar amount required by the LOI to get the lowered sales charge. Since the customer has deposited $15,000 of the $25,000 required by the LOI already, the remaining $10,000 must be deposited to retain the reduced sales charge.
After the LOI is completed, the additional NAV from the asset appreciation is added to the account balance, and establishes a new higher base level ($25,000 deposited plus $5,000 asset appreciation = $30,000) from which the sales charge will be calculated on any future purchases.
A client sells $28,000 of various stocks and wishes to use the proceeds to buy a mutual fund that has breakpoints at $5,000 intervals. What must the registered representative do?
A. Inform the client the he or she must sign a letter of intent to reach the $30,000 breakpoint
B. Invest the $28,000 in different mutual funds within the same family for diversification
C. Explain to the client that investing an additional $2,000 will provide the benefit of a breakpoint
D. Invest the $28,000 in the mutual fund specified by the client without making any additional disclosures to the client
The best answer is C.
If a customer is “close” to a breakpoint, it is a violation to not make the customer aware that putting in the additional funds to reach that level will result in a lower sales charge. If the disclosure is not made, the registered representative has committed a violation known as a “breakpoint sale.”
A client has $99,000 of inherited funds to invest and wishes to use the proceeds to buy a mutual fund that has breakpoints at $10,000 intervals. The registered representative accepts the customer purchase order without making any additional disclosures. Which statement is TRUE?
A. The representative has acted properly - no additional disclosures are required to be made to the customer
B. The representative was required to tell the customer about the family of funds feature
C. The representative has committed a violation known as a breakpoint sale
D. The representative has committed a violation known as backing away
The best answer is C.
If a customer is “close” to a breakpoint, it is a violation to not make the customer aware that putting in the additional funds to reach that level will result in a lower sales charge. If the disclosure is not made, the registered representative has committed a violation known as a “breakpoint sale.” A “backing away” violation is where a firm quote is given to a customer and then not honored - the representative has “backed away” from that quote.
Which statement is TRUE under FINRA rules?
A. The maximum annual 12b-1 fee is .25%
B. The maximum annual 12b-1 fee is .75%
C. The maximum annual 12b-1 fee is 7.25%
D. The maximum annual 12b-1 fee is 8.50%
The best answer is B.
12b-1 fees are permitted under SEC Rule 12b-1. If a fund adopts a 12b-1 plan it may charge its existing shareholders for the cost of soliciting new investment to the fund. For example, if you see a television or web advertisement for a mutual fund, it is being paid for by 12b-1 fees. The “cost” of soliciting new investment also includes compensation to registered representatives selling the fund shares. The maximum annual 12b-1 fee is .75% of net assets per year under FINRA rules.
If a fund imposes a 12b-1 fee, FINRA limits to maximum up-front sales charge to 7.25% instead of 8.50%.
Which statement is TRUE under FINRA rules?
A. The maximum 12b-1 fee is limited to .25% if the fund charges the maximum 8.5% up-front sales charge
B. The maximum combined 12b-1 fee and up-front sales charge is 9.25%
C. If a fund imposes a 12b-1 fee, FINRA limits to maximum up-front sales charge to 8.50%.
D. If a fund imposes a 12b-1 fee, FINRA limits to maximum up-front sales charge to 7.25%
The best answer is D.
12b-1 fees are permitted under SEC Rule 12b-1. If a fund adopts a 12b-1 plan it may charge its existing shareholders for the cost of soliciting new investment to the fund. For example, if you see a television or web advertisement for a mutual fund, it is being paid for by 12b-1 fees. The “cost” of soliciting new investment also includes compensation to registered representatives selling the fund shares.
The maximum annual 12b-1 fee is .75% of net assets per year under FINRA rules. If a fund imposes a 12b-1 fee, FINRA limits to maximum up-front sales charge to 7.25% instead of 8.50%.
Under FINRA rules, a “no load” mutual fund:
A. cannot charge a 12b-1 fee
B. can charge a maximum annual 12b-1 fee of .25%
C. can charge a maximum annual 12b-1 fee of .50%
D. can charge a maximum annual 12b-1 fee of .75%
The best answer is B.
FINRA allows a mutual fund to call itself “no load” (as in no sales charge) as long as the maximum annual 12b-1 fee does not exceed .25%.
Note, in contrast, that if a fund wishes to advertise itself as a “pure no-load fund” then it cannot charge any 12b-1 fees.
A customer is considering the purchase of $40,000 of ABC Income Fund and intends to use the money within 1 year to make the down payment needed to buy his first house. The fund offers the following share classes:
Class A shares:
5% initial sales charge
No 12b-1 fees
Breakpoint Schedule:
$0 - $10,000 5% sales charge
$10,001 - $30,000 3% sales charge
$30,001 - $50,000 2% sales charge
$50,001 - $100,000 1% sales charge
Class B shares: No initial sales charge .40% annual 12b-1 fee CDSC if the customer redeems within the following time periods: Redeem within Year 1: 5% redemption fee Redeem within Year 2: 4% redemption fee Redeem within Year 3: 3% redemption fee Redeem within Year 4: 2% redemption fee Redeem within Year 5: 1% redemption fee Redeem after Year 5: 0% redemption fee
Class C shares:
No initial sales charge
.75% annual 12b-1 fee
No CDSC
The best recommendation for this customer is:
A. purchase Class A shares
B. purchase Class B shares
C. purchase Class C shares
D. divide the purchase equally into $20,000 each for Class A and Class B shares
The best answer is C.
If this customer invested $40,000 in Class A shares, he pays a 2% sales charge and no annual 12b-1 fees for the 1 year investment time horizon. If the customer invested $40,000 in Class B shares, there is no up-front sales charge; but because the customer will redeem after year 1, he will be hit with a 4% redemption fee on these shares. In addition, the customer must pay .40% in annual 12b-1 fees for 1 year. If the customer invested the $40,000 in Class C shares, then the customer must pay .75% annually in 12b-1 fees for just 1 year. The lowest fee purchase is, therefore, Class C shares.
A customer redeems 1,000 shares of XYZ Fund. The computed Net Asset Value per share is $13 and the Public Offering Price is $13.68. The fund has a 1/2% redemption fee. The customer will receive:
A. $12,905
B. $12,915
C. $12,925
D. $12,935
The best answer is D.
Redemption is at Net Asset Value or 1,000 shares x $13 NAV = $13,000. Since there is a redemption charge of 1/2% x $13,000 = $65 redemption fee that is subtracted from the $13,000, the customer will receive $12,935 at redemption.
The bid price of a mutual fund is $14.30 and the ask price is $15.50. The fund has the following breakpoint schedule:
Purchase Amount Sales Charge
$0 - $10,000 7.75 %
$10,001 - $25,000 7.25 %
$25,001 - over 6.50 %
The fund charges a redemption fee of 1/2%. A customer who redeems 200 shares this day will receive:
A. $2,846
B. $2,846 less a commission
C. $2,860
D. $2,860 less a commission
The best answer is A.
Mutual funds are redeemed at NAV less a redemption fee (if any). No commissions are charged on purchases or redemptions. The redemption fee of 1/2% must be deducted to get the net proceeds.
$14.30 NAV x .995 x 200 shares = $2,846
The net asset value of a mutual fund is $15.00 and the ask price is $15.96. The fund has the following breakpoint schedule:
Purchase Amount Sales Charge
$0 - $10,000 8 %
$10,001 - $25,000 7%
$25,001 - over 6 1/4 %
The fund charges a redemption fee of 1/2%. A customer who redeems 200 shares this day will receive:
A. $2,975
B. $2,985
C. $3,000
D. $3,015
The best answer is B.
Mutual funds are redeemed at NAV less a redemption fee (if any). The redemption fee of 1/2% must be deducted to get the net proceeds.
$15.00 NAV x .995 x 200 shares = $2,985
An investor purchases 1,000 mutual fund shares with a Net Asset Value of $10 each, where the fund imposes a 5% contingent deferred sales charge if the shares are redeemed within the first year. The sales charge decreases by 1% for each year the investor remains invested in the fund. If the investor were to redeem his shares during the second year of holding the fund, based upon the NAV of $10, he or she will receive:
A. $10,000
B. $9,600
C. $9,500
D. $9,400
The best answer is B.
Deferred sales charges are imposed only if a customer redeems, with the amount of the sales charge typically being reduced the longer the investor remains in the fund. This investor is redeeming his $10,000 investment after holding it for 1 full year; therefore the fund is being redeemed during the 2nd year. This means the Contingent Deferred Sales Charge is 4% (it is 5% if redeemed in year 1; 4% in year 2; 3% in year 3; 2% in year 4; 1% in year 5; 0 thereafter). If the investor redeems during year 2, he or she must pay the 4% deferred sales charge, and the investor will receive $10,000 x .96 = $9,600 upon redemption.
A client places an order to redeem DEFF Mutual Fund at 5:45 PM on a Friday. The redemption price that the customer will receive is the:
A. NAV calculated as of the 4:00 PM close that occurred that Friday
B. POP calculated as of the 4:00 PM close that occurred that Friday
C. NAV calculated as of the 4:00 PM close that will occur the following Monday
D. POP calculated as of the 4:00 PM close that will occur the following Monday
The best answer is C.
Mutual fund shares do not trade. Orders to buy are filled by the fund at the next computed POP; and orders to sell are filled at the next computed NAV. Because this customer placed the order to redeem (sell) after the Friday 4:00 PM close, the customer redemption request will be filled at the next closing NAV, which will happen the following Monday.
Which statement is TRUE regarding mutual funds?
A. That day’s opening price is the basis for fund purchase price and redemption computations
B. The next day’s opening price is the basis for fund purchase price and redemption computations
C. That day’s closing price is the basis for fund purchase price and redemption computations
D. The next day’s closing price is the basis for fund purchase price and redemption computations
The best answer is C.
An order placed to buy or redeem mutual fund shares is “filled” at that day’s closing Net Asset Value adjusted by any sales charges or redemption fees. If the fund is no load, there’s no sales charge.
Mutual funds that have an automatic reinvestment provision will reinvest:
A. only dividends at Net Asset Value
B. only capital gains at Net Asset Value
C. dividends at Net Asset Value and capital gains at the Public Offering Price
D. dividends at Net Asset Value and capital gains at the Net Asset Value
The best answer is D.
If a fund offers an automatic reinvestment provision, both dividend distributions and capital gains distributions are reinvested at Net Asset Value.
