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Unit 4 Flashcards

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1
Q

What is a PACKAGED INVESTMENT?

A

PORTFOLIOS that are made up of OTHER INVESTMENTS, primarily STOCKS AND BONDS

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2
Q

How do investment companies RAISE CAPITAL?

A

SELLING SHARES to the PUBLIC

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3
Q

What is an INVESTMENT COMPANY?

A

a CORPORATION OR TRUST that POOLS INVESTORS’ MONEY and then INVESTS THAT MONEY in securities ON THEIR BEHALF

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4
Q

What are the 3 BROAD TYPES of INVESTMENT COMPANIES?

A

face-amount certificate (FAC) companies,
unit investment trusts (UITs), and
management investment companies

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5
Q

How is an INVESTMENT COMPANY able to invest in DIFFERENT SECURITIES?

A

INVESTORS are able to POOL THEIR MONEY and have the INVESTMENT COMPANY invest it based on a CLEARLY DEFINED OBJECTIVE, such as GROWTH OR INCOME.

By investing these POOLED FUNDS as a single large account, JOINTLY OWNED by every investor in the company

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6
Q

INVESTMENT COMPANIES must abide by the SAME REGISTRATION AND PROSPECTUS REQUIREMENTS imposed by the

A

Securities Act of 1933

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7
Q

What ACT are INVESTMENT COMPANIES regulated by?

A

They are regulated by the:

INVESTMENT COMPANY ACT OF 1940.

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8
Q

What is a FACE-AMOUNT CERTIFICATE (FAC)?

A

is a CONTRACT between an INVESTOR and an ISSUER in which the ISSUER GUARANTEES PAYMENT of a stated (face amount) sum to the investor at some SET DATE IN THE FUTURE.

If the INVESTOR PAYS for the certificate in a LUMP SUM, the investment is known as a FULLY PAID FAC.

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9
Q

What is GIVEN IN RETURN by an INVESTOR during FAC?

A

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.

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10
Q

What is a UNIT INVESTMENT TRUST (UIT)?

A

an INVESTMENT COMPANY organized under a TRUST INDENTURE.

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11
Q

True or False

UITs have BOARDS OF DIRECTORS

A

False

UITs DO NOT have boards of directors (they have trustees)

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12
Q

VARIABLE ANNUITIES have SUB-ACCOUNTS that are defined as either _____ or _____ management investment companies.

A

UITs or OPEN-END

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13
Q

What is an EQUITY-FIXED UIT?

A

PURCHASES a PORTFOLIO OF STOCKS and, because stocks DON’T have a maturity date, TERMINATES at a PREDETERMINED DATE.

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14
Q

Why does a FIXED UIT portfolio NOT NEED an ACTIVE MANAGEMENT?

A

Because a fixed UIT’s portfolio is STATIC, there is NO NEED for active management and LITTLE OR NO PORTFOLIO TURNOVER.

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15
Q

What are the TWO TYPES of UIT?

A

FIXED or

NONFIXED

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16
Q

What is NON-FIXED UIT?

A

PURCHASES SHARES of an UNDERLYING MUTUAL FUND.

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17
Q

What is a debt-fixed UIT?

A

typically purchases a portfolio of bonds and terminates when the bonds in the portfolio mature.

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18
Q 
In order to qualify as a conduit a mutual fund must pay out a minimum of 
A. 90% of gross investment income. 
B. 90% of net expenses. 
C. 90% of net investment income. 
D. 95% of net investment income.
A

c

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19
Q

Before an order to purchase a mutual fund can betaken, an investor must be provided with
I. a full prospectus.
II. a statement of additional information.
III. a Rule 482 prospectus.
IV. a summary prospectus.
A. I and IV B. II or Ill C. I or IV D. III and IV

A

c

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20
Q

In order to clear up confusing language and highlight a fund’s features, a registered representative may
A. highlight the financial results in the statutory prospectus.
B. highlight the breakpoint chart in the summary prospectus.
C. not change a prospectus in any way.
D. provide a magazine article that explains the fund prior to taking an order to purchase.

A

c

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21
Q

How can triple taxation of investment income be avoided?

A

if the mutual fund qualifies under Subchapter M of the Internal Revenue Code (IRC).

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22
Q

Describe the process by which funds can avoid triple taxation of investment income?

A

If a mutual fund acts as a conduit, or pipeline, for the distribution of net investment income (NII), the fund may qualify as a regulated investment company, subject to tax only on the amount of investment income the fund retains. The investment income distributed to shareholders escapes taxation at the mutual fund level.

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23
Q

What is the most familiar type of investment company?

A

management investment company

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24
Q

Describe the types of management investment companies?

A

closed end or open end

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25
Q

What is a management investment company?

A

actively manages a securities portfolio to achieve a stated investment objective.

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26
Q

What is the difference between a closed end or open end management investment companies?

A

a closed-end company’s initial offering of shares is limited (it closes after a specific authorized number of shares have been sold) and an open-end company is perpetually offering new shares to the public (it is continually open to new investors)

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27
Q

Describe a closed end management investment companies

A

will raise capital for its portfolio by conducting a common stock offering, much like any other publicly traded company that raises capital to invest in its business.

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28
Q

Describe subchapter M requirements

A

Subchapter M requires a fund to distribute at least 90% of its net investment income to shareholders. The fund then pays taxes only on the undistributed 10%. If the fund distributes 89%, it pays taxes on 100% of net investment income.

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29
Q

What is the similarity between a closed end or open end management investment companies?

A

Both closed- and open-end companies sell shares to the public in an initial public offering (IPO)

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30
Q

The Windmill Balanced Fund holds a mix of stocks and bonds. In the current year, it received $500,000 in dividends from stocks and $600,000 in interest from bonds.
Over the year, it has had $100,000 in expenses.
Dividends $ 500,000
Interest $ 600,000
Total Income $1,100,000
Expenses $100.000
Net Investment Income $1,000,000

How much does the fund have to distribute to avoid taxes and what amount would be paid in taxes if less than the above amount is paid?

A

The fund must distribute $900,000 (90% of NII) to avoid taxes on the amount it distributes to shareholders. It will still pay taxes on the Nil it retains. If the fund distributes less than $900,000, the tax bill is based on the entire Nil ($1,000,000). The fund’s shareholders pay tax on the amount they receive.

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31
Q

Under the investment Company act of 1940 all of the following are examples of management companies except
A. S&P 500 Index Trust ETF.
B. growth fund option for a VA.
C. Windmill Income UT.
D. Windmill Income Fund, an exchange-listed closed-end fund.

A

C

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32
Q

One characteristic of an open-end investment company that distinguishes it from a closed-end one is that
A. it may avoid taxation by distributing all of its net investment income to shareholders.
B. it may be either diversified or non diversified.
C. there are a wide variety of objectives available for investors to select from.
D. there is a continuous public offering.

A

D

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33
Q

An investor can take advantage of intraday price changes due to normal market forces when investing in I. closed-end funds. II. exchange-traded funds. III. hedge funds. IV. open-end funds. A. I and II B. I and IV C. II and III D. III and IV

A

A

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34
Q

What is an open end investment company?

A

only issues one class of security, which is common stock (no preferred shares or bonds). It does not specify the exact number of shares it intends to issue but registers an open offering with the SEC.

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35
Q

___________investment companies are the only investment company security that trades in the secondary market _____________investment companies may issue common stock, preferred stock, and debt securities.

A

Closed-end

Closed-end

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36
Q

What are Closed-end investment companies are often called

A

publicly traded funds

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37
Q

What is the ask price?

A

price at which an investor can buy

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38
Q

What is the NAV’s fund?

A

the fund’s NAV is its assets minus its liabilities

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39
Q

How is the NAV per share calculated ?

A

is the fund’s NAV divided by the number of outstanding shares

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40
Q

a mutual fund’s capital shrinks when investors redeem shares but so does the number of outstanding shares. This means that

A

the value of each share does not fall as a result of the redemption.

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41
Q

What is the bid price?

A

price at which an investor can sell

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42
Q

Describe capitalization in terms of open-ended and closed ended investment company

A

Open End
Unlimited; continuous offering of shares

Close end
Fixed; single offering of shares

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43
Q

while _____only issue common shares to their shareholders, the funds themselves can purchase common stock, preferred stock, and bonds for their investment portfolios.

A

mutual funds

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44
Q

Describe shares in terms of open-ended and closed ended investment company

A

Open end
Full or fractional

Close end
Full only

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45
Q

Supply and demand determine the _______and _________-

A

bid price and the ask price

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46
Q

Describe pricing in terms of open-ended and closed ended investment company

A

Open end
NAV+ sales charge; selling price determined by formula in the prospectus

Close end
CMV+ commission; price determined by supply and demand

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47
Q

Describe offering and trading in terms of open-ended and closed ended investment company

A

Open end
Sold and redeemed by fund only; continuous primary offering must redeem shares

Close end
Initial primary offering secondary trading OTC or on an exchange; does not redeem shares

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48
Q

What is annuitization?

A

This is a one-time and irreversible election to give up ownership of the assets of the annuity in return for a lifetime income guaranteed by the insurance company.

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49
Q

How is the amount of income determined during the annuitization process?

A

The amount of the income is determined by the insurance company based on the annuitant’s gender, age, account value, payout option, and an assumed interest rate (GAAP)

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50
Q

What is the similarity between fixed annuity differs from a variable annuity?

A

Though both are insurance company products and both guarantee a stream of income for life, a food annuity simply promises a stated rate of return.

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51
Q

When a customer chooses to annuitize a variable annuity, all of the following are factors the insurance company will use in calculating the initial payout amount except A. age of the annuitant.
B. gender of the annuitant.
C. balance of the separate account.
D. historic inflation rate.

A

D

52
Q

The investment return of a variable annuity comes from
A. the performance of the selected subaccounts within the separate account.
B. the assumed rate stated in the policy documents.
C. computing the excess of the premiums received over the mortality experience.
D. the insurance company’s general account.

A

A

53
Q

The decision to annuitize a variable or fixed annuity may be reversed within how many days of election? A. 30 days B. 7 days C. 0 days D. 90 days

A

C

54
Q

What is annuity?

A

is an insurance contract designed to provide retirement income.

55
Q

What is the difference between fixed annuity differs from a variable annuity?

A

Therefore, it is the insurance company who is at risk to provide the rate of return it promised. The investor assumes no investment risk with a fixed annuity. With no investment risk for the investor to shoulder, the product is not considered a security.

56
Q

Why does an annuity have a morality guarantee?

A

Because an annuity can provide an income for the rest of someone’s life

57
Q

Describe variable annuity

A

as an opportunity to keep pace with inflation. For this potential advantage, the investor assumes the investment risk rather than the insurance company. Because the investor takes on this risk, the product is considered a security.

58
Q

What is the separate account?

A

Beneficiaries will receive the greater of the contribution amount or the current value if the owner dies during the accumulation period. The premium payments for variable annuities are invested. The separate account comprises various subaccounts that behave like the diversified portfolios of mutual funds

59
Q

What is a mutual fund?

A

a pool of investors’ money invested in various securities as determined by the fund’s stated investment objective

60
Q

What does the term annuity refer to?

A

a stream of payments guaranteed for some period of time.

61
Q

What are the various objectives of separate accounts?

A

These accounts will have various objectives to choose from, such as growth, income, and growth and income.

62
Q

When and How does a company become a open-end management investment company

A

If the investment manager of an insurance company is responsible for selecting the securities to be held in the separate account, the separate account is directly managed and must be registered under the Investment Company Act of 1940 as an open-end management investment company

63
Q

True or False

All fees directly related to the product must be disclosed to a variable annuity buyer

A

True

64
Q

Describe mutual funds in terms of guaranteed marketability

A

if an investor wants to sell shares previously purchased in a mutual fund, it is the mutual fund that stands ready to buy them back

65
Q

What will classify a company as a UIT?

A

if the investment manager of the insurance company passes the portfolio management responsibility to another party, the separate account is indirectly managed and must be registered as a UIT under the Investment Company Act of 1940

66
Q

What are some of the fees that would be disclosed to a variable annuity buyer?

A

administrative fees, investment advisory fees, and custodial fees. Buyers must also be made aware of any surrender charges associated with the product.

67
Q

Describe mutual funds in terms of being redeemable securities?

A

this means they do not trade in any secondary market

68
Q

How is the performance of the annuity’s investment performance determined?

A

The performance of the separate account may be invested in one or more subaccounts that are managed separately. It is the performance of these subaccounts that determines the annuity’s investment performance.

69
Q

Describe an open end mutual fund

A

All investors in an open-end fund are mutual participants; no single investor has a preferred status over any other investor because mutual funds issue only one class of common stock.

Each investor shares mutually with other investors in gains and distributions derived from the investment company portfolio.

70
Q

What is mean’t by “Mutual funds operate under the conduit theory of taxation”

A

all taxable events flow down to the shareholders each year

71
Q

An investment company portfolio is (elastic/inelastic)

A

elastic

72
Q

The investor’s account value fluctuates proportionately with the ______________________.

A

mutual fund portfolio’s value

73
Q

At what value are distributions done at for mutual funds?

A

Any distributions are typically done at net asset value (NAV) (the investor does not pay a sales charge) and provide a compounding effect to an investor’s return

74
Q

What are some characteristics of mutual funds?

A

■ A professional investment adviser manages the portfolio for investors.

■ Mutual funds provide diversification by investing in different companies or securities.

■ Mutual funds must offer reinvestment of dividends and capital gains at NAV (without a sales charge), but these reinvestments are taxable.

■ An investor may liquidate a portion of his holdings without disturbing the portfolio’s balance or diversification.

■ Tax liabilities for an investor are simplified because each year the fund distributes a Form 1099 explaining taxability of distributions.

■ A fund may offer various withdrawal plans that allow different payment methods at redemption.

75
Q

Suppose a mutual fund’s shares are priced at $12.34 per share and an investor wishes to invest $4,000. Given the share price and the amount the investor wants to invest, the purchase will be for

A

324.15 shares ($4,000 / $12.34 = 324.15). In other words, the investor doesn’t need to specify purchasing any specific number of shares (e.g., 323, 324, or 325). Instead, the investor can simply decide on how much (S) she wants to invest, and however many shares that dollar amount will purchase will be the number of shares the investor will now own

76
Q

What is the difference amongst the various types of mutual fund shares?

A

are how much and in what way investors will pay sales charges (loads) and related expenses. In essence, these sales charges are the way the distribution services that a fund’s underwriter provides are paid for

77
Q

What is a class C share?

A

Class C shares typically have a one-year, 1% CDSC, a 0.75% 12134 fee (fees used to promote the fund discussed later), and a 0.25% shareholder services fee.

78
Q

What is a no load fund?

A

Some fund companies market their shares directly to the public without the assistance of underwriters. In these instances, the companies offer —a fund with no sales charges

79
Q

What is the most common way of paying for mutual fund?

A

Front-end loads

80
Q

Suppose a fund company offers a fund with a 5% sales charge and an investor wants to invest $10,000.

What amount will be available to purchase shares?

A

Because 5% of the $10,000 investment must be allocated to the sales charge, only $9,500 is actually going to purchase fund shares ($10,000 x 0.05 = $500 sales charge; S10,000 invested - S500 sales charge = $9,500 available to purchase shares).

81
Q

What is a class B share?

A

Class B shares have a back-end sales load, also called a contingent deferred sales charge (CDSC). A back-end sales charge is paid at the time an investor sells shares previously purchased (has them redeemed).

82
Q

What are no loads shares?

A

some companies market their shares directly to the public, eliminating the need for underwriters and thus the sales charges used to compensate them. As the name no load implies, the fund does not charge any type of sales charge and the shares are purchased at NAV.

83
Q

Which of the following is not true of no-load shares?
A. They have fees associated with sales and redemptions.
B. They are redeemed with no charges or fees of any kind.
C. They are sold by the fund with no sales charges or fees of any kind.
D. They offer more return per dollar invested versus load funds if investing results are the same.

A

A

84
Q

Class B mutual fund shares are also called A. deferred-load shares.
B. back-end load shares.
C. CDSC shares.
D. reverse load shares.

A

B

85
Q

Class A shares are best for investors with
A. larger investment amounts and short time frames.
B. smaller investment amounts and longtime frames.
C. larger investment amounts and long time frames.
D. smaller investment amounts and short time frames.

A

C

86
Q

What is breakpoint?

A

are quantity discounts on open-end management company shares (mutual funds)—the greater the dollar amount of a purchase, the lower the sales charge.

87
Q

Class C shares are appropriate for investors who have _____________because the annual charges make them expensive to own if investing for more than four to five years.

A

short time horizons

88
Q

What is an letter of intent?

A

A person who plans to invest more money with the same mutual fund company may immediately decrease the overall sales charges by signing a letter of latent

89
Q

What is rights of accumulation?

A

allow an investor to qualify for reduced sales charges.

90
Q

The major differences are that rights of accumulation

A

■ are available for subsequent investments and do not apply to initial transactions;
■ allow the investor to use prior share appreciation to qualify for breakpoints; and
■ do not impose time limits.

91
Q

What will occur if a customer has not completed the investment within 13 months?

A

he will be given the choice of sending a check for the difference in sales charges or cashing in escrowed shares to pay the difference.

92
Q

Referring back to the sample breakpoint schedule, a customer investing $9,000 is just short of the $10,000 breakpoint. In this situation, the customer might

A

sign an LOI promising an amount that will qualify for the breakpoint within 13 months from the date of the letter. An additional $1,000 within 13 months qualifies the customer for the reduced sales charge.

93
Q

What is combination privilege?

A

A mutual fund sponsor frequently offers more than one fund and refers to these multiple offerings as its firmly of funds.

94
Q

Which of the following statements regarding a letter of intent and breakpoints are true?
I. The letter of intent can be backdated a maximum of 30 days.
II. The letter of intent is valid for 13 months. III. The investor is legally bound to meet the terms of the agreement.
IV. The fund holds the additional shares in escrow.
A. I and II B. II and III C. II and IV D. III and IV

A

C

95
Q 
All of the following investors can take advantage of breakpoints except 
A. an individual. 
B. an investment club. 
C. a trust. 
D. a corporation.
A

B

96
Q

Rights of accumulation allow an investor to combine previous investments in the fund with today’s investment to determine

A

today’s sales charge.

97
Q 
An investor is purchasing $48,000 of the Windmill Alternative Energy Fund. The fund has a breakpoint at 350,000. The least appropriate action would be to 
A. place the order. 
B. explain breakpoints. 
C. explain letters of intent. 
D. discuss combination privilege.
A

A

98
Q

What is exchange privilege?

A

Many sponsors offer exchange or conversion privileges within their families of funds. Exchange privileges allow an investor to convert an investment in one fund for an equal investment in another fund in the same family, often without incurring an additional sales charge.

99
Q

Under combination privileges , what is another a family reach breakpoint?

A

An investor seeking a reduced sales charge may be allowed to combine separate investments in two or more funds within the same family to reach a breakpoint.

100
Q

What exchange is considered taxable event, and there may be tax consequences?

A

exchange privilege

101
Q

What is breakpoint sales?

A

a term used in the securities industry that means sales just below the breakpoint. Allowing a sale to occur in an amount just below a breakpoint can be viewed as an effort by representatives to share in the higher sales charges.

102
Q

How does FINRA define near or just below breakpoint?

A

FINRA does not define near or just below a breakpoint or how close a purchase can be to a breakpoint triggering a violation. Therefore, members must make certain that customers are advised of a fund’s breakpoint schedule.

103
Q

Why FINRA does not define near or just below a breakpoint ?

A

The rule is in place because members, and indirectly, RRs, could earn more concession dollars on a smaller customer investment (with a higher sales charge) than on a larger customer investment (with a smaller sales charge).

104
Q

What is the NAV of a fund share ?

A

is the amount the investor receives upon redemption. It must be calculated at least once per business day.

105
Q

What is forward pricing?

A

A typical fund calculates its NAV at the end of each business day. The price the customer receives is the next NAV calculated after receipt of his redemption request. we always have to wait until the next available calculation to determine the value of shares redeemed or, for that matter, the number of shares purchased.

106
Q

How is public offering price (POP) calculated?

A

For the class of fund shares known as front-end loaded shares, it is simply the NAV plus the sales charge: NAV + SC = POP.

107
Q

How are sales charges levied?

A

sales charges can be levied at the time of purchase (front-end load), at the time of redemption (back-end load), or over the course of ownership (level load); or there can simply be no sales charge (no load), meaning that shares are both purchased and redeemed at NAV.

108
Q

It is not the order below the breakpoint that is a violation. It is the failure to disclose the breakpoint that triggers a ___________

A

breakpoint sale violation.

109
Q

The purchase price of a fund share is called the

A

public offering price (POP)

110
Q

How do you calculate the NAV of a fund share?

A

the fund starts with its total assets and subtracts out its total liabilities: total assets — total liabilities = total NAV of the fund.

111
Q

The ABC fund has total assets of $100 million and $5 million in liabilities. If it has 10 million shares outstanding, what is its NAV per share?

A

Net assets: $100 million (total assets) - $5 million (total liabilities) = $95 million total NAV. NAV per share: $95 million =10 million shares outstanding = $9.50 per share.

112
Q

What is expense ratio?

A

compares the management fees and operating expenses, including any 126-1 fees, with the fund’s net assets.

113
Q 
A mutual fund's public offering price is $10.50. An investor who wishes to invest $1,000 in the fund will purchase how many shares? 
A. 95 shares with $2.50 left 
B. 96 and owe $8.00 
C. Partial shares not allowed 
D. 95.238
A

D

114
Q

How does one find NAV per share?

A

The fund then divides the total net assets by the number of shares outstanding. This gives the NAV per share: NAV of the fund / shares outstanding = NAV per share.

115
Q

Which of the following would cause a change in the net asset value of a mutual fund share?
A. The market value of the portfolio declines.
B. Many shares are redeemed.
C. Securities in the portfolio are sold for a capital gain.
D. The fund takes a new position

A

A

116
Q

Which of the following would not be included in a mutual fund’s list of expenses?
I. Shareholder records and service
II. Investment adviser’s fee
III. Broker-dealer sales charges
IV. Underwriter’s sales loads
A. I and II B. III and IV C. I and III D. II and IV

A

B

117
Q

A fund’s expense ratio includes

A 
■ Manager's fee 
■ Administrative fees (trading, transfer agents, accountants, attorneys, etc.) 
■ Board of directors costs 
■ 126-1 fees 
This list is not exhaustive.
118
Q

The expense ratio does not include

A

sales charges or loads.

119
Q

How is the expense ratio calculated?

A

dividing a fund’s expenses by its average net assets. Stock funds generally have expense ratios between 1% and 1.5% of a fund’s average net assets.

120
Q

What is an omitting prospectus?

A

another term for a fund advertisement. An advertisement does not contain enough information to qualify as “full and fair disclosure.” Delivery of an omitting prospectus is not sufficient to solicit a trade.

121
Q

What is the purpose of a summary prospectus?

A

Rule 498: short form that may be used to make the sale

122
Q

What is the purpose of a prospectus(statutory) and how is it presented?

A

Sale document

Before or with the solicitation

123
Q

What is the purpose of Statement of additional information (SAI) and what does it contain ?

A

SAI: more data for the investor

Additional details about the fund not necessary for the prospectus

124
Q

What does the summary prospectus contain?

A

Summary of key information in the prospectus

125
Q

What does the prospectus(statutory) contain and how is it presented

A

Contain
Full and fair disclosure of all material facts for investment decision
Presented
Before or with solicitation or if a summary prospectus is used, no later than confirmation of the sale

126
Q

How is Statement of additional information (SAI) presented?

A

Within three business days of customer request

Investments (securities) (15 decks)

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