Packaged Investments

Question 1

3 Main types of Investment companies

Answer 1

Face Amount Certificate Company
Management Investment Company
Unit Investment Trust

Question 2

Face Amount Certificate Company

Answer 2

Contract between investor and an issuer in which the issuer guarantees payment of a stated (face amount) sum to the investor at some set day in the future. Very few FACs operator today.
Non managed. Redeemable only through issuer.

Question 3

Unit Investment Trusts

Answer 3

Investment company organized under a trust indenture. UITs create a portfolio of debt or equity securities designed to meet the company’s objectives. They then sell redeemable interests, known as units or shares of beneficial interest. May be fixed or non fixed.
Non managed. Redeemable only through issuer.

Question 4

Managed investment companies

Answer 4

Actively manages a securities portfolio to achieve a stated investment objective. Closed end or open end.

Question 5

Closed end investment companies

Answer 5

Will raise capital for its portfolio by conducting a common stock offering. May issue bonds and preferred stock. Often called publicly traded funds. After stock is sold in the initial offering, anyone can buy or sell shares in the secondary market. May trade above (at a premium to) or below (at a discount to) the shares NAV. Only investment company security that trades in the secondary market.

Question 6

Open end investment companies

Answer 6

Mutual funds. One class of security, which is common stock. Registers an open offering with the SEC. A continuous primary offering of common stock. Fund redeems shares at its current NAV. Priced at the end of the day, with sellers receiving the next calculated net asset value (NAV) and buyers paying the next calculated public offering price (POP)

Question 7

Investment Company Act of 1940

Answer 7

Classifies investment companies into Face amount certificate companies, unit investment trusts, and management investment companies.

Question 8

Annuity

Answer 8

A stream of payments guaranteed for some period of time.

Question 9

Mutual fund characteristics

Answer 9

Professional investment advisor manages the portfolio
Provide diversification
Most allow a minimum investment to open and account and low additional investment
May allow a reduced sales charged based on amount of investment
Investor retains voting rights
Must offer reinvestment of dividends and capital gains at NAV without a sales charge but reinvestments are taxable
May liquidate a portion without disturbing the portfolio’s balance or diversification
Tax liabilities are simplified because of form 1099
May offer various withdrawal plans that allow different payment at redemption
May offer reinstatement provisions for 30 days
May be part of a related/branded family of funds
Maximum sales charge is 8.5%

Question 10

Class A shares

Answer 10

Front end load
Sales charges paid at the time an investor buys shares, and sales charge is taken from the total amount invested. Most common way of paying for mutual funds
Best for investors with large investments (to get breakpoints) and longer time frames

Question 11

Class B shares

Answer 11

Back end load shares
Contingent deferred sales charge (CDSC)
Paid at the time an investor sells shares. Sales load is a declining percentage charge reduced annual and is applied to the proceeds of any shares sold in that year. Usually drops to zero after an extended holding period, when shares are converted to Class A shares, no sales charge applied at the time of redemption.
Best for investors with smaller investments and long time frames

Question 12

Class C shares

Answer 12

Level load shares
Typically have a one-year 1% CDSC, a 0.75% 12b-1 fee (fees used to promote the fund) and a 0.25% shareholder services fee.
Fees never go away. Appropriate for short time horizons. Annual charges make them expensive to own. Best for investors with short time frames (at least a year but not more than 5)

Question 13

No load shares

Answer 13

No sales charges, but there are other fees

Question 14

Letter of intent

Answer 14

Allows an investor to qualify for reduced sales charges. The investor informs the investment company of the intention to invest additional funds necessary to reach breakpoint within 13 months. Appreciation and dividends do not count toward LOI

Question 15

Rights of accumulation

Answer 15

Allow an investor to qualify for reduced sales charges. Are available for subsequent investments and do not apply to initial transactions.
Allow the investor to use prior share appreciation to qualify for breakpoints
Do not impose time limits.

Question 16

Combination of time limits

Answer 16

An investor seeking a reduced sales charge may be allowed to combine separate investments in two or more family of funds to reach a breakpoint

Question 17

Exchange privilege

Answer 17

Or conversion privileges. Allow an investor to convert an investment in one fund for an equal investment in another fund in the same family without an additional sales charge. It is a taxable event.

Question 18

Breakpoint sales

Answer 18

Sales just below the breakpoint to take advantage of a higher sales charge. Inconsistent with just and equitable principles of trade.

Question 19

Forward pricing

Answer 19

NAV calculated

Question 20

Breakpoints

Answer 20

Quantity discounts on sales charges for open-end management company shares (mutual funds)

Question 21

NAV

Answer 21

Net asset value

total assets - total liabilities=NAV of the fund

Question 22

NAV per share

Answer 22

NAV of the fund / shares outstanding

Question 23

Expense ratio

Answer 23

compares management fees, operation expenses, including 12b-1 fees, with the fund’s net assets

Question 24

Fees included in expense ratio

Answer 24

Manager's fee
Administrative fees
Board of director's costs
12b-1 fees
(sales charges or loads are NOT included)

Question 25

Types of mutual fund prospectus

Answer 25

Full or statutory
Summary prospectus
Statement of additional information (SAI)
Omitting prospectus (Rule 482)

Question 26

Summary prospectus

Answer 26

Rule 498, short form that may be used to make the sale; before or with the solicitation

Question 27

Prospectus (statutory)

Answer 27

Sale document; full and fair disclosure of all material facts for investment decision; before or with solicitation; or if with a summary prospectus, no later than confirmation of sale date

Question 28

Statement of additional information

Answer 28

SAI; more data for the investor; additional details about the fund not necessary for the prospectus; within three business days of customer request

Question 29

Omitting prospectus

Answer 29

Rule 482; Raise awareness; contains very little; published advertisement

Question 30

Subchapter M

Answer 30

of the Internal Revenue Code; requires a fund to distribute at least 90% of its net investment income to shareholders. The fund then pays taxes only on the undistributed 10%. If fund distributes 89% it pays taxes on 100% of net investment income. Pipeline theory