Packaged Securities

Question 1

Companies engaged in investing, reinvesting, owning, holding or trading in securities are regulated by…

Answer 1

The 1940 Investment Company Act

Question 2

What triggers a requirement for an investment company to register with the SEC?

Answer 2

Having more than 100 shareholders, unless every shareholder is a qualified investor

Question 3

Any offer for mutual fund shares must have…

Answer 3

A current prospectus, stating the fundamental investment objectives

(Objectives may only be changed with approval of shareholder majority)

Question 4

Key features of a Closed-End Investment Company…

Answer 4

• Fixed number of shares representing a specific interest in the underlying investment portfolio
• Share not redeemable by issuer
• Trade like equities, on an exchange or OTC

Question 5

Where must Closed End Investment Companies register?

Answer 5

1940 Investment Company Act AND

Securities Act 1933

Question 6

Open-end investment company also known as…

Answer 6

Mutual funds

Question 7

Key features of mutual funds…

Answer 7

• Continuously issue new shares
• Redeem shares on demand at net asset value
• May only be purchased from and sold to the investment company
• Trade at public offering price / asked price (net asset value plus sales charge)

Question 8

What’s the relationship of spread to sales charge?

Answer 8

The spread is the difference between bid (net asset value) and ask (public offering price)

As a % of offering price, cannot exceed 8.5%

Question 9

When is NAV calculated?

Answer 9

Once per day at close of NYSE

Orders to buy and sell during day are for the price to be calculated at end of the day

Question 10

When must a mutual fund pay the proceeds of redemptions?

Answer 10

Within seven days.

Note SEC can order/allow suspension of redemptions during market turmoil that would make disposal impractical

Question 11

Key features of money market funds?

List five

Answer 11

1. A type of mutual fund
2. Must register under 1933 Securities Act and 1940 Act
3. Require a prospectus
4. Relatively safe, liquid investment with competitive short term interest rates
5. NAV stable at $1/share and rates vary

Question 12

Key features of an ETF?

List five

Answer 12

1. Basket of securities such as an index or sector
2. Price determined by supply and demand with continuous pricing
3. Low expenses, commission paid on purchase / sale
4. Can be bought in margin and sold short
5. Availability of options in these securities

Question 13

Secondary market transactions in debt securities of one year or less (ie short term) make up the…

Answer 13

Money market

Question 14

List five types of money market instrument…

Answer 14

1. Repurchase agreement (repo)
2. Commercial paper
3. Bankers Acceptances
4. CDs (Certificates of Deposit)
5. Federal Funds

Question 15

What happens in a repo?

Answer 15

Dealer 1 borrows money by selling dealer 2 securities (usually T bills) with an agreement to repurchase.

Dealer 2 makes the difference between the initial purchase price and the price they sell back

Question 16

List three features of commercial paper…

Answer 16

1. Short term corporate debt (max maturity of 270 days)
2. Unsecured – so only issued with corporations with highest ratings
3. Usually issued at a discount and redeemed at par at maturity (but sometimes has a coupon)

Question 17

Who can issue CDs?

Answer 17

Banks – they are short term (minimum 7 days), interest bearing and secured by general credit of the issuing bank

Minimum of $100k but usually trade in denominations of $1m or more

Question 18

Is there a a management fee on a UIT?

Answer 18

No – a unit investment trust is a portfolio of securities that is generally fixed so it is supervised but not managed

Question 19

List three key features of a REIT

Answer 19

1. 75% of gross income must be from real property
2. If 90% of income is distributed to investors, the REIT itself doesn’t pay taxes
3. Traded OTC and on exchanges - can trade below NAV

Question 20

What types of stock can can be issued by Open / Closed End Investment Companies?

Answer 20

Open (mutual) - only common stock

Closed - common, preferred, bonds

Question 21

What is the management fee paid to an investment advisor by a mutual fund based on?

Answer 21

Amount of assets under management

Question 22

The top X ratings are investment grade… X=?

Answer 22

4
Moody’s: Aaa Aa A Baa
S&P: AAA AA A BBB

Question 23

What two factors increase interest rate risk?

Answer 23

Risk comes from rising rates pushing prices lower, so
TERM - long term means price falls more
COUPON - lower coupons have greater price volatility

Question 24

Mnemonics for Open and Closed?

Answer 24

OCR - open / constant (issue) / redeemed

CFT - closed / fixed (# shares) / trade

Question 25

Dividend policy on a money-market fund?

Answer 25

Declared daily and credited monthly

Question 26

What’s a certificate of beneficial interest?

Answer 26

Securities issued by trusts such as UITs and REITs

Question 27

How do each of these trade in respect to interest?
T-bills
Zero coupon bonds
CDs
Bankers acceptances

Answer 27

• T-bills - trade at discount without accrued interest
• Zero coupon bonds - don’t pay interest
• CDs - trade with accrued interest
• Bankers acceptances - trade at discount without accrued interest