Unit 4

Question 1

8 9 10 11 13 15 16 18 20 23 24 25 26 27 28 29 30 32

Question 2

What type of management does a debt-based unit investment trust (UIT) utilize?

Answer 2

UITs are not managed; once the portfolios are composed, they do not change. There is no manager, not even a passive one.

Question 3

Are mutual funds managed or unmanaged?

Answer 3

Mutual funds are managed

Question 4

Do mutual funds have a fixed or unfixed portfolio?

Answer 4

Mutual funds are managed and do not have a fixed portfolio, therefore a portfolio of funds is not fixed.

Question 4

Do mutual funds have a fixed or unfixed portfolio?

Answer 4

and do not have a fixed portfolio, therefore a portfolio of funds is not fixed.

Question 5

A debt-based unit investment trust (UIT) will feature what in its portfolio?

Answer 5

A fixed portfolio of bonds.

Question 6

A mutual fund can offer all of the following to investors except:

A) physical custody of the fund’s portfolio cash and securities.
B) acting as custodian for retirement accounts.
C) the ability to do transfers by telephone or online.
D) check-writing privileges for redemptions.

Answer 6

(A)
The services mutual funds offer may include retirement account custodianship, investment plans, check-writing privileges, transfers by telephone or online, withdrawal plans, and a number of other services and privileges. However the Act of 1940 requires that each investment company place portfolio cash and securities with a custodian for safekeeping.

Question 7

A customer sells shares of the ABC Growth Fund and invests the proceeds into the Windmill Income Fund. Both investments are in Class A shares. What are the tax consequences for these transactions? sales charge on Windmill?

Answer 7

The customer will realize any capital gains or losses and will pay a new sales charge.

This transaction will result in the customer realizing any capital gains or losses for tax purposes. The exchange (conversion) privilege would waive the new sales charge if this transaction was between funds within the same fund family (sponsor). In this question the funds are at different sponsors; any sales charges will apply to the new purchase.

Question 8

What is the Exchange Privilege? What is another name for this?

Answer 8

The exchange (conversion) privilege would waive the new sales charge if this transaction was between funds within the same fund family (sponsor).

(context: A customer sells shares of the ABC Growth Fund and invests the proceeds into the Windmill Income Fund. Both investments are in Class A shares. What are the tax consequences for these transactions? sales charge on Windmill?

This transaction will result in the customer realizing any capital gains or losses for tax purposes. The exchange (conversion) privilege would waive the new sales charge if this transaction was between funds within the same fund family (sponsor). In this question the funds are at different sponsors; any sales charges will apply to the new purchase.)

Question 9

What investment companies terminates business on a predetermined date?

Answer 9

A fixed UIT typically has bonds in its portfolio that mature on a specific date. Before that date, the trust buys and redeems units of beneficial ownership in the portfolio. When the bonds mature and pay off, the trust distributes the remaining interest and principal to the current unit holders and dissolves.

Question 10

What are the 3 types of investment companies?

Answer 10

(check book)

Question 11

The board of directors of the ABC Growth Fund has declared a $1-per-share dividend payable to holders of record on Wednesday, April 27. What is the most likely ex-dividend date for this dividend?

Answer 11

Thursday, April 28

This is a Mutual fund question not a stock question. So the settlement T+2 is not relevant to determine the DERP timing. Instead T+0 or something is the accurate way to think about mutual fund settlement time.

This is because: Purchasers of mutual fund shares become owners of record on the day the buy takes place. Sellers of mutual funds cease to be owners on the day the trade takes place. The result of the trade and settlement taking place on the same day is that you may buy the fund and receive the dividend as an owner of record on the same day. So when is the dividend no longer available to new owners? The day after the record date. The ex-dividend date for a mutual fund is the day after the record date.

Question 12

What is a breakpoint sales violation?

Answer 12

Breakpoint sales is a term used in the securities industry to mean sales just below the breakpoint at which the investor would pay a lower sales charge. Allowing a sale to occur in an amount just below a breakpoint can be viewed as an effort by representatives to make higher sales charges. This is inconsistent with just and equitable principles of trade. FINRA does not define near or just below a breakpoint or say how close a purchase can be to a breakpoint without triggering a violation. Therefore, members must make certain that customers are advised of a fund’s breakpoint schedule. It is not the investor’s order below the breakpoint that is a violation. It is the representative’s failure to disclose the breakpoint that triggers a breakpoint sale violation.

Question 13

What is a breakpoint sales violation?

Answer 13

Breakpoint sales is a term used in the securities industry to mean sales just below the breakpoint at which the investor would pay a lower sales charge. Allowing a sale to occur in an amount just below a breakpoint can be viewed as an effort by representatives to make higher sales charges. This is inconsistent with just and equitable principles of trade. FINRA does not define near or just below a breakpoint or say how close a purchase can be to a breakpoint without triggering a violation. Therefore, members must make certain that customers are advised of a fund’s breakpoint schedule. It is not the investor’s order below the breakpoint that is a violation. It is the representative’s failure to disclose the breakpoint that triggers a breakpoint sale violation.

Question 14

A customer wants to invest $9,500 in the ABC Growth Fund. The fund has a breakpoint at $10,000. You disclose this to the customer and explain the advantage of investing an additional $500. The customer acknowledges the information and goes ahead with the purchase of $9,500. Which of the following is true of this situation?

Answer 14

The representative has met the disclosure obligation and may enter the order.

Question 15

BOB Income Fund has reported average net assets of $120 million and expenses of $600,000. What is the fund’s expense ratio?

How is expense ratio calculated?

Answer 15

Expense ratios are calculated by dividing the expenses for the reporting period by the average assets over that period. In this example, 600,000 / 120 million net = 0.005 (0.5%).

Question 16

BOB Income Fund has reported average net assets of $120 million and expenses of $600,000. What is the fund’s expense ratio?

How is expense ratio calculated?

Answer 16

Expense ratios are calculated by dividing the expenses for the reporting period by the average assets over that period. In this example, 600,000 / 120 million net = 0.005 (0.5%).

Question 17

ABC Growth Fund has reported average net assets of $120 million and expenses of $1.44 million. What is the fund’s expense ratio?

Answer 17

1.2%

Expense ratios are calculated by dividing the expenses for the reporting period by the average assets over that period. In this example, 1.44 million / 120 million = 1.2 (1.20%).

Question 18

A company has just conducted a stock offering, by prospectus, through an investment banker. The proceeds of the offering are used to purchase a portfolio of securities. The stock, now in the hands of the public, is freely traded in the secondary market, and the portfolio is managed to generate maximum profit according to a specific investment objective. The company must be

Answer 18

A closed-end company

A closed-end company, or closed-end management investment company, is much like any other company, just that its source of profit is investments, rather than selling a product or service. Shares of closed-end companies are traded in the secondary markets, while the other choices listed here offer only redeemable securities.

Question 19

If an investor purchases a mutual fund based solely on seeing the summary prospectus, the investor must be

Answer 19

Able to access a full prospectus no later than the confirmation of sale.

A mutual fund investor may base a decision to purchase solely upon studying the summary prospectus. If so, a full prospectus must be made available for delivery no later than receipt of confirmation of sale. In this case, online delivery of the full prospectus is permissible.

Question 20

Class C mutual fund shares are also known as

Answer 20

Level-load shares

Class C mutual fund shares have no sales charge at the time of purchase, but have a percentage of their value withdrawn from the customer’s account each quarter. The percentage, which can be as high as 0.75% of the value of the account, never ceases. The charge remains as long as the account does - it remains level - hence, the shares are known as level load shares.

Question 21

What is the maximum amount withdrawn from a Class-C mutual fund customer account each quarter? When does this go away?

Answer 21

The percentage, which can be as high as 0.75% of the value of the account, never ceases. The charge remains as long as the account does - it remains level - hence, the shares are known as level load shares.

Question 22

The ABC Growth Fund has a public offering price of $17.28 per share. Your customer invests $6,000 at this price. How many shares will they receive?

Answer 22

347.222

Mutual fund shares may be purchased in either full or fractional shares. In this example, 6,000 / 17.28 = 347.222 shares.

Question 23

What is considered unlawful regarding use of a mutual fund prospectus?

Answer 23

A prospectus for any security, not just one for a mutual fund, may not be marked, highlighted, or otherwise altered in any way, nor may steps be taken to call an investor’s attention to some passage or section that might be of special interest, even if the potential customer asked that it be done.

Question 24

A variable annuity (VA) is an investment product designed to provide which of the following?

A) A tax-free income source
B) Speculative gains
C) A supplement to retirement
D) A short-term savings vehicle

Answer 24

(C) VAs are designed to provide a supplement to retirement income.

Most VAs have surrender charges that make them unsuitable for short term investments. These investments are tax deferred, not tax free. Subaccounts are investment company products and are not speculative in nature.

Question 25

DEF Growth Fund has total assets of $330 million and liabilities of $15 million. The fund has 10 million outstanding shares. What is the fund’s current net asset value (NAV) per share?

Answer 25

31.50

To find the net assets, you subtract the fund’s liabilities from the fund’s total assets. In this question 330 million – 15 million = 315 million. NAV is calculated by dividing the net assets of the fund by the number of outstanding shares. In this question 315 million / 10 million = $31.5 per share.

Question 26

After the owner of a variable annuity elects to annuitize, they begin to receive lifetime income payments. The calculation that determines the amount of those payments includes several factors. What are they?

Answer 26

An acronym to assist in remembering the criteria is SAAPI: sex, age, amount, payout choice, and interest rate.

Question 27

Are 12b-1 fees part of a mutual fund’s expense ratio?

Answer 27

Yes

Question 28

Are Manager fees part of a mutual fund’s expense ratio?

Answer 28

Yes

Question 29

Is sales load part of a mutual fund’s expense ratio?

Answer 29

No

Question 30

Is Transfer agent’s cost part of a mutual fund’s expense ratio?

Answer 30

Yes

Question 31

ABC Fund has assets of $50 million and liabilities of $2 million. The fund has 20 million outstanding shares. What is ABC Fund’s net asset value?

Answer 31

$2.40

The formula is (assets – liabilities) / outstanding shares. In this example, (50 – 2) / 20 = 2.4.

Question 32

Is CDSC part of the mutual fund’s expense ratio? What does the acronym stand for?

Answer 32

No it is a sales load and therefore not a part of the expense ratio. Contingent Deferred Sales Charge

Question 33

What class of shares does CDSC refer to?

Answer 33

(check book)

Question 34

What information must be on the cover page or beginning of the summary prospectus of a mutual fund?

Answer 34

The summary prospectus, as the name implies, contains the important information about a mutual fund in summary form. The cover page must contain a standardized listing of certain information, including the fund’s name, share classes offered, ticker symbols, information on how to get a full prospectus, a warning that the information is in summary form, and other facts. **There is no requirement that the name of the investment adviser be on the cover page of the summary prospectus.

Question 35

When the owner of an annuity elects to annuitize, they begin to receive income payments that are guaranteed for the life of the annuitant. Who provides this guarantee?

Answer 35

The insurer

The income is guaranteed by the insurance company that issued the policy and is backed by that insurer’s financial strength.

Question 36

What is the maximum 12b-1 fee that a no load fund may charge annually?

Answer 36

No load funds have no sales charge and are limited to a 12b-1 fee of 0.25% annually.

Question 37

What is a Class A mutual fund share?

Answer 37

(book)

Question 38

What is a Class B mutual fund share?

Answer 38

(book)

Question 39

What is a Class C mutual fund share?

Answer 39

(book)

Question 40

An investor in a variable annuity is considering transferring to a different annuity through a 1035 exchange. Which of the following is true of a 1035 exchange?

Answer 40

A 1035 exchange allows funds to be moved from one annuity to another annuity without taxes. It does not prevent surrender fees.

Question 41

How many reports per year must a mutual fund make to shareholders? What are they?

Answer 41

A mutual fund must provide two reports per year to shareholders: an annual audited report and a semiannual unaudited report.

The reports must include among other things, the balance sheet and profit and loss statement, a list of portfolio securities as of the date of the balance sheet, compensation paid to the board of directors (BOD) and advisory board, and total dollar amount of securities bought and sold during the period.

Question 42

The sales charge for Class A shares may not exceed what?

Answer 42

Though they are almost always much smaller, sales charges for Class A shares may not exceed 8.5% of the money invested. For example, if an investor spends $1,000 for Class A shares, no more than $85 may be charged as a sales load.

Question 43

A registered representative needs which of the following licenses to solicit a variable annuity sale?

Answer 43

A variable annuity requires both a securities license (Series 6 or Series 7) and a life insurance license (issued by the states). There is no “annuity license.”

Question 44

The DEF Income Fund has a public offering price of $25 per share. Your customer invests $10,730 at this price. How many shares will they receive?

Answer 44

429.2

Mutual fund shares may be purchased in either full or fractional shares. In this example, 10,730 / 25 = 429.2 shares.