Unit 2 - Session 7 - Pooled Investments

Question 1

Investment Company

Answer 1

A corporation or a trust through which investors may acquire an interest in large, diversified portfolios of securities by pooling their funds with other investors’ funds. People invest in professional money managers b/c they believe they should outperform the average investor in the market. By investing through an investment company, individuals gain some of the advantages large investors enjoy, such as diversification of investments, lower transaction costs, prof manager and more.

Question 2

What are the 3 types of investment companies

Answer 2

1. ) Face-amount Certificates
2. ) Unit Investment Trust
3. ) Management Investment Companies

Question 3

Face-Amount Certificate (FAC)

Answer 3

A contract between an investor and an issuer in the which the issuer guarantees payment of a stated (of fixed) sum to the investor at some set date in the future. In return for this future payment, the investor agrees to pay the issuer a set amount of money, either as a lump sum or in periodic installments.

Question 4

Unit Investment Trusts (UITs)

Answer 4

Defined by the Inv. Company Act of 1940.
Unmanaged investment company organized under a trust indenture
1.) do not have a board of directors
2.) do no employ an investment adviser
3.) do not actively manage their own portfolios
Trustees usually buy other company shares, stock or bonds to make the desire portfolio. They can sell units or shares in the portfolio, called beneficial interest. when securities are liquidated, proceeds must be distributed

Question 5

Fixed UITs

Answer 5

Typically a portfolio of bonds and terminates when the bonds in the portfolio matures. Can be equities, but equities do not have a maturity date so usually have a set maturity date at offering

Question 6

Nonfixed UITs

Answer 6

Purchase shares of an underlying mutual funds

Question 7

Management Investment Companies

Answer 7

Actively manages securities portfolios to achieve a stated investment objective

Question 8

Net Asset Value Per Share

Answer 8

Value is the result of fund valuing all of its assets, subtracting its liabilities, and then dividing that by the number of shares outstanding

Question 9

Closed-end Investment Companies

Answer 9

Conducts a common stock offering, usually IPO, and registers a fixed number of shares with the SEC and offers to the public for a limited time through an underwriting group. Capitalization is fixed unless additional public offering is made. Know as publicly traded funds. After the stock is distributed, anyone can buy or sell on the secondary market. Supply and demand determine the bid and ask price. Closed-end fund shares usually trade at a premium or discount to the shares’ net asset value

Question 10

Country funds

Answer 10

Funds that concentrate their investments in the securities of companies domiciled in foreign countries. Well known examples are Korea Fund, New Germany Fund, and Mexico Fund

Question 11

Open End Investment Companies

Answer 11

Does not specify the exact number of share it intends to issues, aka as a mutual fund. Can raise an unlimited amount of investment capital by continuously issuing new shares. Only issue common stock. Each investor owns an undivided interest in the entire underlying portfolio (each investor shares mutually with other investors in gains and distributions)

Question 12

POP

Answer 12

Open End Investment Company or Mutual Fund public offering price

Question 13

Redeemable Securities

Answer 13

When an investor sells shares in a mutual fund, the fund redeems them at the NAV.

Question 14

Forward Pricing Principal

Answer 14

Whenever an order, where to purchase or redeem, is received, the price is based upon the next computer NAV per share

Question 15

What are the fee types for a mutual fund?

Answer 15

1. ) Front End Loads: difference between public offering price (POP) and net asset value (NAV)
2. ) Back End Loads: contingent deferred sales loads
3. ) 12b-1 fees: asset-based fees, technically not a sales charge

Question 16

Front-End Loads

Answer 16

Reflected in the public offering price. Charges are added to NAV at the time an investor buys shares. they are frequently referred to as Class A shares and have lower operating expense ratios than other classes.

Question 17

Back-End Loads

Answer 17

Charged at the time an investor redeems mutual fund shares. The sales load, a declining % that is reduced annually is applied to the proceeds of any share sold in the that year. Usually structured so that the sales load drops to zero after 6-8 yrs, at which time they are usually converted to Class A shares with their lower op ex. ratios. These are usually referred to as Class B shares.

Question 18

12b-1 Fees

Answer 18

Permits a mutual fund to collect a fee for promotion or sales-related activities in the connection with the distribution of its shares. Fee is determined as a flat dollar amount of a % of the fund’s average total NAV during the year. The annual fee cannot exceed .075% of net assets. If the fee exceeds 0.25% it cannot use the term no-load.

Question 19

Class A shares

Answer 19

front-end load: investors pay the charge at the time of purchase

Question 20

Class B shares

Answer 20

back-end load: declines over time so investors pay the charge at redemption

Question 21

Class C shares

Answer 21

level load: no sales charge to purchase, generally a 1% contingent deferred sales charge for 1 year with a continuous 12b-1 charge.

Question 22

Breakpoints

Answer 22

A schedule of discounts a mutual fund offers. Breakpoint qualification includes married couples, parents and their minor child, and corporations.

Question 23

Breakpoint sale

Answer 23

When mutual funds would makes sales just below the breakpoint. This is illegal

Question 24

Letter of Intent for Breakpoints

Answer 24

If an investor plans to invest additional monies in the next 13 months they may qualify for the next level of breakpoint

Question 25

Family of Funds

Answer 25

mutual fund companies often offering more than one fund and an investor can usually qualify for a breakpoint if they they invest in 2 or more funds

Question 26

Exchange of Funds

Answer 26

allows an investor to convert an investment in one fund for an equal investment in another fund in the same family at the net asset value w/o incurring additional sales charge. An exchange of funds is considered a sale for tax purposes

Question 27

Market Capitalization

Answer 27

Number of outstanding common shares multiplied by the current market price per share

Question 28

Growth Funds

Answer 28

Invest in stocks of rapidly growing companies - tend to reinvest all or most of their profits in R&D rather than paying dividends

Question 29

Income Funds

Answer 29

Stress current income over growth - usually invest in stocks of companies with long histories of paying dividends such as utility company stocks

Question 30

Combination Funds

Answer 30

Combine objectives of growth and income funds - companies that show long-term growth potential and pay high dividends

Question 31

Specialized Funds

Answer 31

Specialize in specific economic sectors or industries and are more likely to stick to a relatively fixed allocation

Question 32

Special Situation Funds

Answer 32

Buy securities of companies that may benefit from a change within a corporations or in the economy. Takeover and turnaround situations are common investments

Question 33

Index Funds

Answer 33

Invest in securities to mirror a market index, such as the S&P 500. Passive style of investment management

Question 34

Foreign Stock Funds

Answer 34

Invest mostly in securities of companies that have principal businesses outside the US. Long-term capital appreciation is their primary objective aka as International Funds and Global Funds

Question 35

Bond Funds

Answer 35

Income as their primary investment objective, sometimes solely investment-grade corporate bonds, sometimes government, sometimes capital appreciation

Question 36

Tax-Free Bond Funds

Answer 36

Invest in municipal bonds or notes that produce income exempt from federal income tax. However, any capital gains distribution from the fund are taxable just as with any other fund

Question 37

US Government and Agency Securities Funds

Answer 37

Purchase securities by the US Treasury or an agency such as Ginnie Mae which seek income and maximum safety

Question 38

Foreign Bond Funds

Answer 38

Funds invest in foreign sovereign debt issues. Tend to be less risky than foreign debt b/c these tend to be professionally managed and appropriately diversified

Question 39

Balance Funds

Answer 39

Invest in stocks for appreciation and bonds for income and different types of securities are purchase according to that formula

Question 40

Asset Allocation Funds

Answer 40

Split investments between stocks for growth, bonds, for income, money market instruments for stability.

Question 41

Money Market Funds

Answer 41

No-load, open-end investment companies (mutual funds) that serve as temporary holding accounts for investors; money. Most suitable for investors that have financial goals of liquidity

Question 42

NAV for Money Markets

Answer 42

Floating NAV for prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of the fund assets

Question 43

Are money market funds FDIC insured?

Answer 43

No

Question 44

Target Date Funds

Answer 44

aka lifecycle funds are designed to offer a convenient way to invest for a person expecting to retire around a particular date. Pursues a long-term investment strategy. use a mix of asset classes that become more conservative over time

Question 45

What do investors look at when comparing mutual funds

Answer 45

1. ) Costs
2. ) Taxation
3. ) Services offered