Packaged Products Flashcards
Investment Company
is a financial institution investing in securities
The most appealing aspects of investment companies
-diversification
-liquidity
-professional management
Investment companies are designed
for long-term investing
3 classifications of investment companies are
- Face amount certificates companies
- Unit Investment Trusts (UITs)
- Management companies
Face amount certificates companies
debt certificates at a discount that pay purchasers a face value amount at maturity
Unit Investment Trusts features
-issue only redeemable units
-do not have an investment or portfolio manager
-are supervised but not managed
-pay investors “interest” not dividends
Open-end
issue and redeem shares every day
Management companies features
-open-end
-closed-end
-diversified
-non diversified
closed-end
issue shares once, which are then publicly traded
diversified
has at least 75% of assets regulated
Open End investment company
-mutual fund
-shareholders share part of the fund’s gains, losses, and income
-issue only redeemable shares
Net asset value (NAV)
equals the total assets of the fund less the total liabilities divided by the total number of shares
Assets - liabilities divided by # shares = NAV
ASK
NAV + max sales load = offering price
Forward pricing
investors get the next calculated bid or ask price after the order is entered
Max sales load
under act 1940 9%
under FINRA 8.5%
Closed end investment company characteristics
-does not issue redeemable shares
-prices are determined by supply and demand
-NAV per share is greater than the ASK, the fund is a closed end fund
-charge a commission fee
-
Business Development Company (BDC) characteristics
-a type of closed-end fund
-provides debt capital to small and medium sized companies
-target investors are retail clients with high risk tolerance
-BDC are required to distribute at least 90% of their income as dividends
-have high yields
Both open-end & closed-end companies are subject to
market risk
The major difference between closed-end and open-end funds
Capitalization
investment companies vote to
-elect the board of directors
-change investment objectives
-change the investment advisory firm used
diversified common stock fund
invests in common stocks, in different industries and fluctuate with the changing value
Specialized/sector fund
invests in one industry or one specific area
(riskiest type of fund)
Growth Fund
appreciation of capital
-do not pay dividends and have lower yields
-invests in small-cap common stocks
Balanced funds
invests in a diversified mix of bonds, preferred stocks and common stocks
(least amount of volatility and appreciation)
International fund
invests in stocks and bonds issued by foreign companies and governments
Global fund
invests in stocks and bonds issued by US and foreign companies
Municipal bond fund
invests in a portfolio that consists of municipal bonds only
-dividend are exempt from federal income tax
-capital gains are subject to federal income tax
Index funds
mirror the portfolio of a particular index, do not have active managers.
Money market funds
invests in low risk debt securities with short-term maturities (12 months or less)
Largest operating expense in money market
management and advisory fees
money market are considered
most liquid mutual fund
money market pay
monthly
dividends on a mutual market fund
is fully taxable
(federal, state, and local)
money market funds must have
-average weighted maturity of 90 days or less
-offer minimal credit risk
-have 95% of the fund invested in securities
money market invest in securities as
T-bills, CD’s, commercial paper, bankers acceptances and Eurodollars
Money market minimum withdrawal
$500
Exchange traded funds (EFTs)
are funds that are similar to normal index mutual funds or industry sector basket of securities
What’s the difference between ETF and index fund
ETFs have shares that trade like common stock
Exchange traded notes (ETN)
are debts instruments issued by banks that are linked to a specific index
ETNs are issued on four basic sectors
a. commodities
b. currencies
c. emerging markets
d. strategy/index (like s & p 500)
Class A shares
charge investors an upfront sales charge which cannot exceed 8.5%
Class B shares
are back-end loaded funds, expense charges are higher than class A shares.
Mutual fund 12b-1 fee
an annual charge against the fund’s assets
letter of intent (LOI)
allows an investor a 13-month period
-can be backdated 90 days
