UNIT 02.01-002 Flashcards
Which of the following statements describe an open-end investment company?
The company may SELL new shares ________
The company must REDEEM shares in any quantity at any time, except that it may ________ the redemption of shares with SEC approval.
The company may SELL new shares in any quantity at any time.
The company must REDEEM shares in any quantity at any time, except that it may suspend the redemption of shares with SEC approval.
Under the Investment Company Act of 1940, an investment company selling mutual funds need not continuously offer new shares for sale. In fact, a fund often suspends sales to new investors when it grows too large to adequately meet its investment objective. The Act of 1940 does require a fund to continuously offer to redeem shares, and this redemption privilege may only be suspended during non-business days or with the SEC’s approval.
Your customer originally invested $20,000 into the ACE Growth Fund and has reinvested dividends and gains of $8,000. His shares in ACE are now worth $40,000. He exchanges his investment to the ACE Income Fund. Which of the following statements is true?
He must declare $12,000 as a taxable gain upon exchange into the ACE Income Fund.
The exchange privilege offers exchange without an additional sales charge, but the exchange is still taxable. The customer is taxed on the gain of $12,000 ($40,000 − $28,000). The taxes on $8,000 (dividends and capital gains) were taxed in the years that distribution took place.
Mutual fund shares represent an undivided interest in the fund, which means that
each investor owns a __________ part of every security in the portfolio.
each investor owns a proportional part of every security in the portfolio.
Each mutual fund shareholder owns an undivided interest in the investment company’s portfolio. Because each share represents one class of voting stock, the investor’s interest in the fund is reflected by the number of shares owned.
Closed-end investment companies
generally make a one-time ______ offering of shares.
may issue _____ securities.
generally make a one-time public offering of shares.
may issue debt securities.
Publicly traded, or closed-end, funds generally make a one-time offering of shares, which then trade on the secondary market. Unlike mutual funds, they may issue both bonds and preferred stock.
Which of the following statements regarding UNREALIZED GAIN in a mutual fund portfolio are true?
It affects the mutual fund’s shares’ _____.
It is realized by shareholders when they ______ their shares.
Capital gains are never treated as net investment income.
It affects the mutual fund’s shares’ VALUE.
It is realized by shareholders when they REDEEM their shares.
Unrealized gains in portfolio securities result from the assets’ appreciation in value and is reflected in an appreciation of the mutual fund shares themselves.
A shareholder may cash in on this appreciation only by selling the shares and realizing the gain.
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Alright, let’s break this down using a metaphor to make it easier to understand.
Imagine you have a collection of rare, vintage comic books. Over time, the value of your collection increases because these comics become more desirable to collectors. This increase in value is like the “unrealized gains” in your collection - it’s an increase on paper, but you haven’t actually sold any comics to turn this increase into cash.
Now, let’s relate this to a mutual fund:
- Mutual Fund’s Shares’ Value: Think of a mutual fund like your comic book collection. Instead of comic books, the mutual fund has a collection of investments (like stocks and bonds). When the value of these investments goes up, the value of the mutual fund (and thus, each share in the mutual fund) increases. This is similar to how the value of your comic book collection increases as the individual comics become more valuable.
- Realized by Shareholders When They Redeem Their Shares: You only make actual money from your comic books when you sell them. Similarly, a mutual fund shareholder “realizes” the gain (turns the increase in value into actual cash) only when they sell (or redeem) their shares in the mutual fund. Until they sell, the gain is just on paper and is considered “unrealized.”
- Unrealized Gains in Portfolio Securities: When the investments within the mutual fund increase in value but haven’t been sold by the fund manager, these are “unrealized gains.” It’s like when your comic books increase in value over time, but you haven’t sold any yet. The value of the mutual fund shares appreciates along with these investments, reflecting the increase in the total value of the fund’s portfolio.
- Shareholder May Cash In on This Appreciation Only by Selling the Shares: Just like you only get money for your comic books when you sell them, a shareholder in a mutual fund only receives the monetary benefit of the appreciated value of their mutual fund shares when they sell those shares.
- Capital Gains Are Never Treated as Net Investment Income: Capital gains (the profit from selling your comics at a higher price than you paid) are considered separately from net investment income, which usually consists of interest and dividends earned on investments. In mutual fund terms, the money made from selling investments at a higher price (capital gains) is distinct from the income generated from the investments themselves, like dividends from stocks or interest from bonds.
This metaphor helps illustrate how mutual funds work in terms of share value appreciation and realizing gains, and distinguishes between unrealized gains and the actual act of cashing in on those gains by selling shares.
Which of the following mutual funds seeks HIGH CURRENT YIELD accompanied by REASONABLE RISK and invests most of its assets in a portfolio of CORPORATE BONDS having one of the TOP-FOUR RATINGS according to both Moody’s and Standard & Poor’s?
ABC _________-Grade ______ Fund
ABC Investment-Grade Bond Fund
Investment-grade bond funds invest in corporate bonds having one of the top-four ratings according to both Moody’s and Standard & Poor’s.
Which of the following are features of Class C mutual fund shares?
Typically charge no _____-end load
Typically impose lower ______ than Class B shares for a shorter period
Typically charge no front-end load
Typically impose lower CDSCs than Class B shares for a shorter period
Class C shares generally have the following features: no front-end sales charge, lower CDSCs than Class B shares for a shorter period of time, and no conversion to Class A shares regardless of how long they are held.
Because of these features, Class C shares may be LESS expensive for investors with SHORTER investment horizons.
They may be MORE expensive for investors who plan to hold their shares for a LONG time, because the level load never discontinues.
An investment company must report to shareholders
semiannually.
Shareholders receive two reports a year, one of which must be an audited annual report.
Mutual fund 12b-1 fees are deducted from
the fund’s ______ on a _______ basis
the fund’s ASSETS.
Quarterly
Mutual fund 12b-1 fees are deducted quarterly from the assets of the fund.
You have supplied a summary prospectus for a mutual fund to a customer rather than the full prospectus. The customer would like to purchase the fund immediately. Under what circumstances could you enter the order?
You may enter the order only if the customer is able to access a statutory prospectus _______.
You may enter the order only if the customer is able to access a statutory prospectus online.
A customer who has received only a summary prospectus may purchase fund shares but must be able to access the statutory prospectus online.
