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Series 6 > Unit 3 > Flashcards

Unit 3 Flashcards

1
Q

Ex-dividend date for a mutual fund

A
  • set by the fund’s BOD or the fund’s principal underwriter

- commonly falls on first business day after the record date

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2
Q

Speculative investor

A

Tried to earn higher than average returns by investing in securities that carry higher than average risk

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3
Q

Money market

A

Marketplace for short-term debt obligations

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4
Q

What type of capital is raised in the capital market?

A

Long-term

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5
Q

Which investment company’s portfolios are supervised rather than managed?

A

UITs

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6
Q

Credit risk

A
  • associated with debt securities

- risk that the issuer may suffer financial failure and default on its obligation to an investor

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7
Q

What could cause an increase in NAV?

A
  • dividends and interest received by the fund

- appreciation of the portfolio

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8
Q

NAV of mutual fund class A share

A
  • 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

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9
Q

What is the federal taxation of municipal bond fund distributions?

A
  • dividend distributions are tax-free

- capital gains distributions are taxable

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10
Q

What is the maximum sales charge allowed for mutual funds?

A

8.5%

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11
Q

What is the maximum sales charge allowed for contractual plans?

A

9%

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12
Q

What is the maximum sales charge allowed on variable annuities?

A

There is no maximum

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13
Q

How often must an investment company report to shareholders?

A

Semiannually

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14
Q

What is a key advantage of purchasing a variable annuity?

A

Tax deferral

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15
Q

Who must approve a 12b-1 plan?

A
  • majority vote of the shares
  • BOD
  • noninterested members of the BOD

-fee must be reapproved annually by the board

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16
Q

Front-end sales load

A

The difference between the POP and the NAV per share of the fund

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17
Q

Unit refund annuity

A
  • 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
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18
Q

When can an investment adviser of a mutual fund liquidate shares held in the fund’s portfolio

A
  • 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
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19
Q

Equity income funds

A

-invest in common stock, preferred stock, and convertible securities for current income and capital growth

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20
Q

How are withdrawals from an annuity taxed?

A

LIFO-last in, first out

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21
Q

When can an open-end investment company borrow money from banks/financial institutions?

A

Provided an asset-to-debt ratio of 3:1 (300%) is maintained

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22
Q

Open-end investment companies/mutual funds

A
  • 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
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23
Q

Periodic payment deferred variable annuity

A
  • 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
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24
Q

Index funds

A

Seek to duplicate the price and yield performance of a selected index

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25
Q

What type of investment company is a contractual plan?

A

UIT

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26
Q

Contractual plan

A
  • UIT that purchases mutual fund shares for its customers on a contractual basis
  • no longer sold but there are still many in force
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27
Q

What can an RR with a Series 6 license sell?

A
  • 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
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28
Q

Which mutual funds have the least correlation with the overall market?

A

-money market fund

•price doesn’t go up in good markets or down in poor markets-it just stays pegged to $1.00

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29
Q

What are the consequences of Grandpa giving $50,000 of stock to his granddaughter?

A
  • 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
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30
Q

What is the 12b-1 fee deducted from?

A

Assets of the fund

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31
Q

Money market securities

A

High-grade debt securities with 1 year or less to maturity

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32
Q

What could 12b-1 fees be allocated for payment for?

A

-to offset the costs of distributing a mutual fund
•printing the annual prospectus
•television advertisement about a mutual fund

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33
Q

What does the expense ratio include?

A
  • 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
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34
Q

How are redemptions done for mutual fund shares?

A

At the next computed NAV

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35
Q

What is the result of dollar cost averaging?

A
  • 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
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36
Q

Which mutual fund share classes are specially suited to investors that have long-term objectives?

A
  • class A shares for investors that have a large amount to invest
  • class B shares for investors that have a small amount to invest
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37
Q

Negotiable jumbo CDs (certificates of deposit)

A
  • 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
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38
Q

When must an open-end investment company redeem shares in any quantity?

A

Within 7 days of request

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39
Q

Capital risk

A

Potential for an investor to lose all their money (invested capital) under circumstances related or unrelated to an issuer’s financial strength

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40
Q

What securities for growth funds look for?

A
  • 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
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41
Q

What are some similarities between ETFs and closed-end investment companies?

A
  • 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
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42
Q

Money market mutual funds

A
  • 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
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43
Q

What is the participation rate for index annuities?

A
  • the degree to which they participate

- can range from 70% - 100%

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44
Q

Index annuities

A
  • 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
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45
Q

Nonqualified tax-deferred annuity

A
  • 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
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46
Q

When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed?

A

As ordinary income based on an exclusion ratio

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47
Q

Exclusion ratio

A

How ordinary income taxes are paid when an annuity is annuitized

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48
Q

What is the equation for the exclusion ratio?

A

Cost basis/expected return=how much of the distribution is a return of cost basis and NOT subject to income taxes

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49
Q

Bond registered as to principal

A
  • 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
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50
Q

How do mutual fund redemption values fluctuate?

A

According to the value of the securities in the portfolio

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51
Q

What does a mutual fund investor’s cost base include?

A

Total of all investments including reinvested distributions

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52
Q

How long will a straight life annuity give monthly payments?

A

As long as the annuitant lives

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53
Q

When will an investor not pay a sales charge?

A
  • fund to investor

- this represents the sale of a no-load fund

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54
Q

ETFs

A
  • trade on an exchange so they’re priced by supply and demand
  • designed to track an index
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55
Q

Asset-based distributor fees (12b-1 fees)

A
  • based on the fund’s annual average daily net assets

- must be reviewed at least quarterly by the fund’s BOD

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56
Q

The value of a mutual fund share is its _______.

A

NAV

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57
Q

If a fund has a POP < NAV, it must be a _________.

A

Closed-end investment company

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58
Q

Who sets breakpoint schedules for a fund?

A

The board

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59
Q

Who makes the decisions regarding changes to a fund’s portfolio (within the scope of the fund’s investment policy)?

A

The portfolio manager

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60
Q

What do separate accounts and mutual funds have in common?

A
  • both may have diversified portfolios of common stock

- both give investors voting rights

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61
Q

Investors with a short time horizon most likely will invest in which class of mutual fund shares?

A

Class C shares

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62
Q

How are payments made into a nonqualified deferred annuity?

A

With after-tax money

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63
Q

What do blend/core funds consist of?

A

Both growth and value stocks

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64
Q

When is the best time to purchase a long-term bond fund?

A

When long-term interest rates are falling after a period of high interest rates

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65
Q

What is the technique of asset allocation?

A

Changing investment/asset classes based on anticipated market changes

66
Q

According to the investment company act of 1940, where are mutual funds required to pay dividends from?

A

Their net investment income (NII)

67
Q

Net investment income (NII)

A

(Interest received + dividends received) - expenses

68
Q

What must happen in order for an investor to realize a capital gain or loss?

A

A sale must take place

69
Q

The duration of an interest-bearing bond is __________ its time to maturity.

A

Shorter than

70
Q

When may a variable annuity account be surrendered?

A

During the accumulation period

71
Q

UITs

A

Investment companies that have no management fee, have a relatively low percentage sales charge, and invest in a fixed portfolio of debt or equity securities

72
Q

To receive a dividend, the buyer must be on the issuer market books as the owner by the __________.

A

Record date

73
Q

Warrant

A

Certificate granting its owner the right to buy securities from the issuer at a specified price, normally higher than the market price when issued

74
Q

Individuals licensed as series 6 representatives can deal in ____________ in the _____________ only.

A

Closed-end funds, primary market

75
Q

The holding period for stock inherited is always ___________, no matter when the stock was purchased

A

Long-term

76
Q

12b-1 fees are deducted from _____________ , _____________.

A

Fund assets, quarterly

77
Q

Who sets the maximum limit of 0.75% for 12b-1 fees?

A

FINRA

78
Q

When a fund offers conversion privileges, what does the conversion occur at?

A

NAV

79
Q

Accumulation plans with mutual funds are binding on the ________ and not binding on the _________.

A

Mutual fund, investor

80
Q

Regarding variable annuities, the number of accumulation units _________ and the number of annuity units _________ at annuitization.

A

Varies, is fixed

81
Q

Where would an investor find a complete list of holdings for a particular mutual fund?

A

Semi-annual or annual report

82
Q

POP - NAV = _________

A

Mutual fund sales charge

83
Q

How do you calculate the mutual fund sales charge?

A

POP - NAV

84
Q

What is a CDSC?

A

A back-end sales charge that decreases the longer the investor holds the shares

85
Q

What does the death benefit clause of a variable annuity state?

A

If a client dies during the accumulation phase, his heir or estate will receive the amount of money invested or the current value of the account, whichever is greater

86
Q

Customers could pay a commission rather than a sales charge for shares of a(n) __________.

A

Closed-end investment company

87
Q

A manager of an index fund would use a ____________ style.

A

Buy-and-hold

88
Q

How are money market mutual funds liquid?

A

They usually come with a check-writing privilege which allows the investor the opportunity to immediately convert his assets to cash

89
Q

How do you determine the selling price/POP of the shares when given the NAV?

A

Divide NAV by 100% minus the sales load

90
Q

What is the FIFO method for determining capital gains?

A

The first shares purchased are the first shares redeemed

91
Q

Dividend distributions are reported on IRS Form _______.

A

1099-DIV

92
Q

What are dividends paid from?

A

The company’s NII

93
Q

When are capital gains generated?

A

When an investor redeems appreciated shares of the investment company and when portfolio securities are sold.

94
Q

Which companies generally sell shares directly to the public?

A

No-load mutual funds

95
Q

Investors redeem their mutual fund shares at the _____________ or ______.

A

Next calculated NAV, bid price

96
Q

How often must investment companies report to shareholders?

A

At least every 6 months

97
Q

When securities are inherited, what will be the recipient’s cost basis?

A

The market value of the securities at the time of death

98
Q

The price of closed-end investment company shares trading in the secondary market is determined by _________.

A

Supply and demand

99
Q

Blend/core funds contain _________.

A

Both growth and value stocks

100
Q

Beta (of a stock or portfolio)

A

A measure of its volatility in relation to the overall market (systematic risk)

101
Q

Security with beta = 1.0

A

Moved in line with the market

102
Q

Security with beta > 1.0

A

More volatile than the market

103
Q

Security with beta < 1.0

A

Less volatile than the market

104
Q

Municipal bonds pay interest __________.

A

Semiannually

105
Q

How much is 1 point for 1 bond?

A

$10

106
Q

How much is 1/2 point for 1 bond?

A

$5

107
Q

1035 exchange

A

-tax-free exchange of one like contract for another like contract

108
Q

Examples of 1035 exchanges

A
  • annuity to annuity
  • life to life
  • life to annuity
  • *NOT annuity to life
109
Q

What is the default method of the IRS for determining which shares to sell?

A

FIFO

110
Q

What is the most common way for mutual funds to determine which shares to sell?

A

Average cost

111
Q

Selling FIFO

A

The first ones we sell are the first ones we bought

112
Q

A single premium deferred annuity’s premium buys __________ units.

A

Accumulation

113
Q

A single premium immediate annuity’s premium buys ________ units.

A

Annuity

114
Q

A periodic payment deferred annuity’s premiums buy __________ units.

A

Accumulation

115
Q

How are dividends from NII taxed?

A

As ordinary income

116
Q

NII equation

A

D + I - E (dividends + interest - expenses)

117
Q

How are mutual fund dividends typically paid?

A

From the NII, usually quarterly

118
Q

How are qualified dividends taxed?

A

At the long-term capital gains rate

119
Q

How are nonqualified dividends taxed?

A

Distributed as short-term capital gains and taxed as ordinary income

120
Q

What are some advantages of buying listed call options compared with buying the underlying stock?

A
  • buying a call allows greater leverage than buying he underlying stock
  • buying a call would require a smaller capital commitment
121
Q

How do you calculate the alpha?

A

Subtract the required return from the expected return for each share

122
Q

What would a positive alpha indicate?

A

A buy recommendation

123
Q

What is the purpose of life insurance?

A

It creates an estate

124
Q

12b-1 fees are charged by ________.

A

Open-end investment companies

125
Q

How long to CDSCs of variable annuities often continue for?

A

5-7 years

126
Q

How does the income level of the contributor to a 529 plan affect their annual contribution amount?

A

It has NO affect

127
Q

How are conversion prices of a convertible bond set?

A

They are set higher than the current market price of a company’s stock

128
Q

What happens to the annuity units during the annuitization period of a variable annuity contract?

A

The number of annuity units remains the same, but the value of each unit varies

129
Q

Why are money market funds liquid?

A

They generally come with a check-writing privilege, which offers the investor the opportunity to immediately convert their asset to cash

130
Q

When a customer receives payment during the annuity period of a variable annuity, what is subject to tax?

A

Only the amount that represents investment income

131
Q

The portfolio of a UIT is _________.

A

•fixed, once it has been constructed

-therefore, it does not change in reaction to market conditions

132
Q

What are the management fees paid by an investment company part of?

A

The operating expense of the fund

133
Q

What are custodial fees part of?

A

The operating expenses of the fund

134
Q

What is a sales load part of?

A

The underwriting agreement

135
Q

What is the most important factor in determining suitability when evaluating the purchase of an immediate variable annuity for a retiree?

A

The uncertainty of the amount of the monthly check

136
Q

Where is long-term capital raised?

A

Capital market

137
Q

How much is one bond point?

A

$10

138
Q

Flexible premium variable contract

A
  • timing and amount of premiums generally are discretionary
  • performance of the separate account directly affects the policy’s cash value
  • allows the insured to determine the amount and timing of premium payments, provided minimums are met
  • depending on the policy, the face amount (death benefit) is recalculated each year
  • it is intended that the death benefit receive some inflation protection, but this CANNOT be guaranteed
  • if separate account performance causes the cash value to drop below an amount necessary to maintain the policy in force, the policy lapses until the requisite amount is received within 31 days
139
Q

Within the first 24 months of issue, the owner of a variable life insurance policy has the right to ___________.

A

Convert the policy into a whole life policy using the original policy issue date

140
Q

The surrender period for index annuities is _________ most other annuities.

A

Longer than

141
Q

What does the participation rate for index annuities usually range?

A

70% - 100%

142
Q

What should you mention when discussing an index annuity?

A
  • rate cap

* participation rate

143
Q

How is the interest on Treasury STRIPS taxed?

A

As income over the life of the bond

144
Q

Immediate annuities do not purchase _________; they purchase _________ directly.

A

Accumulation units, annuity units

145
Q

When are investors vested in their IRAs?

A

Immediately

146
Q

What can affect the NAV of a mutual fund?

A
  • changes in portfolio values, both positive and negative (appreciation and depreciation)
  • dividends and interest received by the fund can increase NAV
  • dividends or gains distributed by the fund can decrease NAV
147
Q

What are portfolio transactions covered by?

A

The management fee

148
Q

TIPS

A
  • helps protect investors against purchasing power risk
  • issued with a fixed interest rate, but the principal amount is adjusted semiannually by an amount equal to the change in the consumer price index (CPI), the standard measure of inflation
  • sold at lower interest rates than conventional fixed-rare treasury securities because of their adjustable nature
149
Q

After a variable life insurance policy has been in effect for 2 years, what is the surrender value?

A

The cash value

150
Q

Which mutual fund share classes have no back-end load, lower operating expenses, and low or no 12b-1 fees?

A

Class A shares

151
Q

Class A shares

A
  • have no back-end load
  • have lower operating expenses
  • have low or no 12b-1 fees
152
Q

Expense ratio

A

Includes the [expenses of operating the fund] compared to [fund assets].

153
Q

What expenses are included in the expense ratio?

A
  • management fees
  • administrative fees
  • brokerage fees
  • taxes

**NOT the underwriter

154
Q

What is one of the most important functions of a BA?

A

Facilitating trades in foreign foods

155
Q

Investors with a short time horizon will most likely invest in what class of mutual fund shares?

A

Class C shares

156
Q

Bond registered as to principal

A
  • can be purchased in the secondary market
  • coupons are attached
  • registered owner may sell the bonds before maturity
  • only has a certificate registered in the owner’s name and has bearer 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
157
Q

A balanced fund invests in _________.

A

Both debt and equity instruments

158
Q

Blend/core funds invest in _________.

A
  • both value & growth stocks

* want to achieve appreciation rather than income

159
Q

What does the investor pay when purchasing mutual fund shares?

A

POP

160
Q

What is the POP for a class A share upon purchase?

A

NAV + sales charge = POP

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