Unit 3 Flashcards
Ex-dividend date for a mutual fund
- set by the fund’s BOD or the fund’s principal underwriter
- commonly falls on first business day after the record date
Speculative investor
Tried to earn higher than average returns by investing in securities that carry higher than average risk
Money market
Marketplace for short-term debt obligations
What type of capital is raised in the capital market?
Long-term
Which investment company’s portfolios are supervised rather than managed?
UITs
Credit risk
- associated with debt securities
- risk that the issuer may suffer financial failure and default on its obligation to an investor
What could cause an increase in NAV?
- dividends and interest received by the fund
- appreciation of the portfolio
NAV of mutual fund class A share
- can never be higher than the POP
- can never be so much lower than the POP that the difference exceeds 8.5% of the POP
What is the federal taxation of municipal bond fund distributions?
- dividend distributions are tax-free
- capital gains distributions are taxable
What is the maximum sales charge allowed for mutual funds?
8.5%
What is the maximum sales charge allowed for contractual plans?
9%
What is the maximum sales charge allowed on variable annuities?
There is no maximum
How often must an investment company report to shareholders?
Semiannually
What is a key advantage of purchasing a variable annuity?
Tax deferral
Who must approve a 12b-1 plan?
- majority vote of the shares
- BOD
- noninterested members of the BOD
-fee must be reapproved annually by the board
Front-end sales load
The difference between the POP and the NAV per share of the fund
Unit refund annuity
- Insurer guarantees at minimum to distribute the amount of money they funded the annuity
- at the annuitant’s death if the guaranteed amount has not been fully distributed, the survivor receives the balance of the account typically in a lump sum payment
When can an investment adviser of a mutual fund liquidate shares held in the fund’s portfolio
- when liquidation is within the guidelines set forth by the fund’s objective
- mutual fund IA is given the authority to select and make investments in the fund portfolio
Equity income funds
-invest in common stock, preferred stock, and convertible securities for current income and capital growth
How are withdrawals from an annuity taxed?
LIFO-last in, first out
When can an open-end investment company borrow money from banks/financial institutions?
Provided an asset-to-debt ratio of 3:1 (300%) is maintained
Open-end investment companies/mutual funds
- only issue common stock
- cannot buy securities on margin
- cannot re-issue shares that have been redeemed
- can borrow money from financial institutions as long as an asset-to-debt ratio of 3:1 (300%) is maintained
Periodic payment deferred variable annuity
- investor makes more than one payment
- number of accumulation units increase
- value of each accumulation unit will vary according to the performance of the separate account
Index funds
Seek to duplicate the price and yield performance of a selected index
What type of investment company is a contractual plan?
UIT
Contractual plan
- UIT that purchases mutual fund shares for its customers on a contractual basis
- no longer sold but there are still many in force
What can an RR with a Series 6 license sell?
- only investment companies and variable products where a prospectus is required
- ex. A closed-end management investment company selling just above its NAV in the secondary market
Which mutual funds have the least correlation with the overall market?
-money market fund
•price doesn’t go up in good markets or down in poor markets-it just stays pegged to $1.00
What are the consequences of Grandpa giving $50,000 of stock to his granddaughter?
- donor (grandpa) is responsible for any gift taxes on the gift
- gift is not taxable to the recipient
- granddaughter maintains the original cost basis as the donor’s cost basis
What is the 12b-1 fee deducted from?
Assets of the fund
Money market securities
High-grade debt securities with 1 year or less to maturity
What could 12b-1 fees be allocated for payment for?
-to offset the costs of distributing a mutual fund
•printing the annual prospectus
•television advertisement about a mutual fund
What does the expense ratio include?
- the expenses of operating the fund compared to other assets
- expenses include management fees, administrative fees, brokerage fees, and taxes
- underwriter may never be an expense to the fund
How are redemptions done for mutual fund shares?
At the next computed NAV
What is the result of dollar cost averaging?
- to obtain a lower average cost per share than average price per share
- accomplished by making regular investments of a fixed amount when prices are fluctuating
Which mutual fund share classes are specially suited to investors that have long-term objectives?
- class A shares for investors that have a large amount to invest
- class B shares for investors that have a small amount to invest
Negotiable jumbo CDs (certificates of deposit)
- usually have maturities of less than 1 year
- usually issued in denominations of $100,000 to $1 million
- readily marketable
- FDIC insures only up to $250,000; any issue greater than that is an unsecured promissory note of the bank
When must an open-end investment company redeem shares in any quantity?
Within 7 days of request
Capital risk
Potential for an investor to lose all their money (invested capital) under circumstances related or unrelated to an issuer’s financial strength
What securities for growth funds look for?
- high price-to-earnings ratio stocks
- because the investor confidence expressed in the high stock price often indicates that the company and its stock will increase in value with time
What are some similarities between ETFs and closed-end investment companies?
- traded on registered stock exchanges
- investors pay commissions to purchase and liquidate their positions
- may be sold short
- may be purchased on margin
- neither are redeemable with the issuer since they’re traded in the secondary market
Money market mutual funds
- shares purchased at NAV->none with a sales load
- portfolio consists of high-quality short-term debt instruments, but they do not issue debt instruments themselves
- shareholders have check writing privileges which add to the liquidity of the shares
- dividends earned on a daily basis
- shares offered on a no-load basis
- NAV falls within as narrow a range as possible
- managed to have very low volatility, therefore, they have a very low beta coefficient
What is the participation rate for index annuities?
- the degree to which they participate
- can range from 70% - 100%
Index annuities
- designed to give their owners participation in the performance of a specific index
- degree to which they participate is the participation rate and ranges from 70% - 100%
- in most cases there is also a rate cap which is a ceiling on the amount that will be credited
- surrender period is longer than most other annuities
Nonqualified tax-deferred annuity
- investment made with after-tax dollars
- money grows tax-deferred
- only the earnings are taxed at distribution
- computation made at retirement called the exclusion ratio to determine how much of each retirement payment will be treated as a return of cost basis & how much as taxable ordinary income
When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed?
As ordinary income based on an exclusion ratio
Exclusion ratio
How ordinary income taxes are paid when an annuity is annuitized
What is the equation for the exclusion ratio?
Cost basis/expected return=how much of the distribution is a return of cost basis and NOT subject to income taxes
Bond registered as to principal
- only has a certificate registered in the owner’s name and has beater coupons attached to the bond certificate
- only the person to whom the bond is registered may sell the securities
- interest is not sent directly to the owner but is paid only if the interest coupons are presented to the bond’s paying agent
How do mutual fund redemption values fluctuate?
According to the value of the securities in the portfolio
What does a mutual fund investor’s cost base include?
Total of all investments including reinvested distributions
How long will a straight life annuity give monthly payments?
As long as the annuitant lives
When will an investor not pay a sales charge?
- fund to investor
- this represents the sale of a no-load fund
ETFs
- trade on an exchange so they’re priced by supply and demand
- designed to track an index
Asset-based distributor fees (12b-1 fees)
- based on the fund’s annual average daily net assets
- must be reviewed at least quarterly by the fund’s BOD
The value of a mutual fund share is its _______.
NAV
If a fund has a POP < NAV, it must be a _________.
Closed-end investment company
Who sets breakpoint schedules for a fund?
The board
Who makes the decisions regarding changes to a fund’s portfolio (within the scope of the fund’s investment policy)?
The portfolio manager
What do separate accounts and mutual funds have in common?
- both may have diversified portfolios of common stock
- both give investors voting rights
Investors with a short time horizon most likely will invest in which class of mutual fund shares?
Class C shares
How are payments made into a nonqualified deferred annuity?
With after-tax money
What do blend/core funds consist of?
Both growth and value stocks
When is the best time to purchase a long-term bond fund?
When long-term interest rates are falling after a period of high interest rates