UNIT 02.01 003 Flashcards
An investor purchases $10,000 of the ABC Income fund. Over the course of the year, $500 in dividends are reinvested and $500 of capital gains are received in cash. The fund has a 5% front-end load. What is the investor’s cost basis at the end of the year?
A) $10,500
B) $11,000
C) $11,500
D) $10,000
$10,500
The investor invested $10,000 into the mutual fund, which included a $500 sales charge. Cost basis includes any sales charge that was paid. Reinvested dividends are taxable and, therefore, increase the investor’s cost basis. A capital gains distribution was received in cash and has no effect on the cost basis of the investment.
Which of the following mutual funds would be most likely to have the least correlation with the overall market?
A) Small-cap fund
B) International fund
C) S&P Index fund
D) Money market fund
Money market fund
Money market mutual funds have no correlation to the overall stock market. Their price doesn’t go up in good markets or down in poor markets—it just stays pegged to $1.00. If this question had asked for the most correlation, the answer would have been the index fund.
An investment company portfolio manager who switches among investment classes based on anticipated market changes is using a technique known as
A) value investing.
B) asset allocation.
C) indexing.
D) dollar cost averaging.
asset allocation.
Changing asset classes in response to market conditions is the technique of allocating one’s assets to take advantage of possible opportunities.
According to the Investment Company Act of 1940, which of the following are required of investment companies?
Investment company registration statement filed with the SEC
Minimum net worth of $1 million before the offer of shares to the public
Statement of investment policies and diversification status
Asset-to-debt ratio of 2:1
Investment company registration statement filed with the SEC
Statement of investment policies and diversification status
The Investment Company Act of 1940 requires registration of the company with the SEC, a minimum initial net worth of $100,000, a specifically defined investment objective and whether the company intends to qualify as a diversified or nondiversified investment company. The asset-to-debt ratio must be at least 3:1.
If the value of securities held in a fund’s portfolio increases and the amount of liabilities stays the same, the fund’s net assets
A) decrease.
B) stay the same.
C) increase.
D) are more liquid.
increase.
An appreciation in value of fund assets, without a corresponding increase in liabilities, leads to an increase in the fund’s net asset value (total assets minus liabilities equals net assets).
Investors should consider all of the following when investing in a mutual fund except
A) the underwriter.
B) the time horizon.
C) the investment adviser.
D) the expense ratio.
the underwriter.
Time horizon, investment policy, track record of the investment adviser, portfolio, expense ratio, and sales load should all be researched when assessing a fund. The identity of the underwriter for the fund does not bear on its performance or suitability.
Which of the following statements regarding 12b-1 charges is correct?
A) The SEC sets a maximum limit of 0.75%.
B) They may be charged by open-end management companies.
C) They may be charged by closed-end management companies.
D) FINRA permits members to charge 0.75% as a shareholder servicing fee, which is not included in the 12b-1 limits.
They may be charged by open-end management companies.
Because 12b-1 charges are to cover distribution costs, it would be inappropriate (and illegal) for a closed-end fund to assess the charge. The 0.75% maximum is set by FINRA, not the SEC, and FINRA does permit the additional 0.25% (not 0.75%) for shareholder servicing.
Under the Investment Company Act of 1940, which of the following describes an investment company?
A) A company whose primary business is investing its owners’ money in securities issued by other companies
B) A company that offers investment advice to new companies
C) A company formed to underwrite the issuance of new securities
D) A group of individuals formed for mutual interest and benefits
A company whose primary business is investing its owners’ money in securities issued by other companies
An investment company is a corporation or trust whose only business is investing its owners’ money in the securities of other companies instead of manufacturing goods or providing services. The company must have a clearly defined investment objective.
A customer has been investing $150 into an equity growth mutual fund for three years. The customer’s daughter is in college and needs $100 a month for expenses. What would you recommend she do to provide her daughter with expense money?
A) Set up a systematic withdrawal plan and continue to invest $150 per month.
B) Liquidate the mutual fund.
C) Give the daughter $100 per month and invest $50 per month instead of $150 per month into the mutual fund.
D) Continue to invest and make periodic liquidations from the mutual fund.
Give the daughter $100 per month and invest $50 per month instead of $150 per month into the mutual fund.
The best choice is to reduce the mutual fund investment to $50 per month and give the daughter $100 per month. By doing so, the mutual fund remains intact. Liquidating a growth fund after just three years is not advised because this is a long-term investment. Most mutual funds require a customer account to be worth a minimum amount of money before a withdrawal plan may begin. Additionally, most funds discourage continued investment once withdrawals start.
If a mutual fund offers a fixed-time withdrawal plan, all of the following statements are true except
A) a fixed number of shares is liquidated each month.
B) the end date of the plan is fixed.
C) this plan is self-exhausting.
D) the amount the client receives each month may vary.
a fixed number of shares is liquidated each month.
In a fixed-time withdrawal plan, the end date of the plan is fixed, but the individual payment amount is uncertain. An unspecified number of shares is liquidated each month based on the number of months left to distribute and the NAV of the investment. ($10,000 ÷ 120 months = $83.33.)
You have a client who purchased shares of the BERT Fund for $11.22 per share earlier in the year. The investor calls you and comments that even though the net asset value per share is higher today than when he originally made his purchase, the current asking price is only $10.50. The BERT Fund must be
A) either open-end or closed-end.
B) closed-end.
C) suffering from poor portfolio management.
D) open-end.
closed-end.
It is clear that the asking price has decreased while the NAV has increased. This is only possible with shares of a closed-end fund because their price is based on supply and demand, not NAV plus sales charge.
A fund seeks to maximize safety of invested principal while providing current income. By investing in a broad range of debt securities issued by the U.S. Treasury and government agencies (e.g., Government National Mortgage Association), the fund provides reduced risk. This statement describes which of the following mutual funds?
A) NavCo Corporate Bond Fund
B) XYZ Government Income Fund
C) ACE Equity Income Fund
D) NavCo Tax-Free Municipal Bond Fund
XYZ Government Income Fund
Government income funds invest in U.S. Treasury and agency securities for income and safety of principal.
How do closed-end investment companies differ from open-end investment companies?
I. Closed-end companies register their shares with the SEC; open-end companies do not.
II. Closed-end companies’ shares are sold with prospectus only in IPOs; open-end shares’ solicitations must always be accompanied by a prospectus.
III. Closed-end companies issue a fixed number of shares; there is no limit on the number of shares issued by an open-end company.
IV. Closed-end companies may only sell shares to institutional investors; open-end companies can sell to any investor.
Closed-end companies’ shares are sold with prospectus only in IPOs; open-end shares’ solicitations must always be accompanied by a prospectus.
Closed-end companies issue a fixed number of shares; there is no limit on the number of shares issued by an open-end company.
Closed-end companies issue a fixed number of shares, whereas open-end companies do not specify the number of shares to be issued. Both types of company register issues with the SEC, and any investor may invest in either type of company. Open-end shares must always be sold with a prospectus because each is a newly issued share.
Two investors each have an open account in the ATF Mutual Fund, which charges a maximum sales charge of 8.5%. The first investor has decided to receive all distributions in cash, whereas the second investor is automatically reinvesting all distributions. How do their decisions affect their investments?
Cash distributions may reduce the first investor’s proportionate interest in the fund.
The first investor may delay payment of up-front sales charges on the shares he buys with his distributions.
The second investor’s reinvestments purchase additional shares at NAV rather than at the offering price.
The second investor’s reinvested distributions will not be taxed.
Cash distributions may reduce the first investor’s proportionate interest in the fund.
The second investor’s reinvestments purchase additional shares at NAV rather than at the offering price.
By electing to receive distributions in cash while others are purchasing shares through reinvestment, the first investor is lowering her proportionate interest in the fund. Cash purchases later would be at the POP, not the NAV, with no delay in payment of sales charges, and reinvested distributions are taxed just as cash distributions are.
From which of the following might you be able to purchase shares of a closed-end investment company after its initial offering?
From the investment company directly
From other stockholders in the OTC market
From other stockholders on the NYSE
From the investment company in exchange for other securities
From other stockholders in the OTC market
From other stockholders on the NYSE
Closed-end investment company shares are traded in the secondary marketplace (OTC or exchange). Shares are thus purchased from other shareholders through broker-dealers.
