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SIE Exam > Unit 4: Investment Company and Insurance-Based Products > Flashcards

Unit 4: Investment Company and Insurance-Based Products Flashcards

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SIE Exam flashcards
1
Q

An ____ is a corporation or trust that pools investors’ money and then invests that money in securities on their behalf.

A

investment company

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2
Q

Investment companies are subject to regulations regarding how their shares are sold to the public, and they are regulated by the ____.

A

Investment Company Act of 1940

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3
Q

Investment companies must abide by the same registration and prospectus requirements imposed on other issuers by the _____.

A

Securities Act of 1933

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3
Q

The Investment Company Act of 1940 classifies investment companies into three broad types:

A

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

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4
Q

A ______ is a contract between an investor anda n issuer in which the issuer guarantees payment o f a stated (face amount) 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.

A

FAC Face-Amount Certificates (FACs)

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4
Q

A ______ is an investment company organized under a trust indenture. This type of investment company does not have boards of directors; they have trustees.

A

UIT: Unit Investment Trusts

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5
Q

UIT: Unit Investment Trusts Characteristics:

A

Generally, invest in a fixed portfolio
no management fees
redeemable only through the issuer

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6
Q

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

A

Management Companies

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7
Q

A managed investment company is either _____ or _____.

A

closed end or open end

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8
Q

Both closed- and open-end companies sell shares to the public in an _____

A

initial public offering (IPO)

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9
Q

The primary difference between open end and closed end:

A

is that 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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10
Q

Open End Characteristics:

A

Mutual Fund
Continuous offers
common stock only
sold and redeemed by the fund IPO only!!!
Pricing is made up of Current market value (CMV)+ commission; price determined by supply and demand
Ex date is set BOD because mutual funds are not offered in the secondary market

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11
Q

Closed End Characteristics

A

Single Offering
Common, preferred and bonds
IPO and then offered on secondary markets
Pricing is made up of NAV + sales charge; selling price determined by formula in the prospectus
Ex- date is set by Exchange because closed end can be bought on secondary market

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12
Q

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

A

common shares

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13
Q

Mutual funds are priced at the ____, with sellers receiving the next calculated ___ and buyers paying the next calculated ____.

A

end of each business day
NAV
POP

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14
Q

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

A

mutual fund

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15
Q

Mutual funds are ___ securities.

A

redeemable

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16
Q

_____ means they do not trade in any secondary market.

A

Redeemable

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17
Q

______ shares may be purchased in either full or fractional shares.

A

mutual fund shares can be fractional, the investor can think in terms of dollars rather than number of shares owned, unlike corportate stock

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18
Q

Price of Purchase (POP)=

A

net asset value (NAV) + sales charge

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18
Q

Under the Investment Company Act of 1940, the maximum sales charge allowed is __% of the POP for mututal funds.

A

8.5%

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19
Q

Generally, investors can purchase Class A shares, Class B shares, and Class C shares. The differences among these shares are how much and in what way investors will pay ______

A

sales charges (loads) and related expenses.

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20
Q

Class A shares have _____ sales charges. With Class A shares, the sales charges are paid at the time an investor buys shares, and the sales charge is taken from the total amount invested.

A

front-end load

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21
Q

Class B shares have a ____ which is also called a contingent deferred sales charge (CDSC) which is paid at the time an investor sells shares previously purchased (has them redeemed).

A

back-end sales load

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22
Q

Class C shares have a level load which means….

A

have a one-year, 1% CDSC, a 0.75% 12b-1 fee (fees used to promote the fund discussed later), and a 0.25% shareholder services fee.

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23
Q

_____ shares are appropriate for investors who have short time horizons because the annual charges make them expensive to own if investing for more than four to five years.

A

Class C shares

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24
Q

______ the fund does not charge any type of sales charge, and the shares are purchased at NAV

A

No-Load Shares

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25
Q

_____ shares are best for investors with large investments (to get breakpoints) and longer time frames (spreading the one-time cost over several years);

A

Class A

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26
Q

_____ shares are best for investors with smaller investments and long time frames [to get past the back-end loads (CDSC)

A

Class B

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27
Q

_______ are quantity discounts on open-end management company shares (mutual
f u n d s ) - t h e greater the dollar amount of a purchase, the lower the sales charge.

A

Breakpoints

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28
Q

Most mutual funds allow investors to combine orders among related accounts order to achieve a better ____.

A

breakpoint

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29
Q

A person who plans to invest more money with the same mutual fund company may immediately decrease the overall sales charges by signing a_____ which allows the investor to inform the investment company of the intention to invest the additional funds necessary to reach the breakpoint within 13 months.

A

letter of intent (LOI)

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30
Q

_____, like breakpoints, allow an investor to qualify for reduced sales charges.

A

Rights of accumulation

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31
Q

The major differences from a breakpoint are that rights of accumulation:

A

are available for subsequent investments (the reduced sales charges will not apply to initial transactions);
allow the investor to use prior share appreciation to qualify for breakpoints;
do not impose time limits.

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32
Q

____ allow an investor to convert an investment in one fund for an equal investment in another fund in the same family, usually without incurring an additional sales charge.

A

Exchange privileges

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33
Q

To calculate the NAV of a fund share:

A

Step 1: total assets - total liabilities = net assets of the fund
Step 2: Net Assets of the fund / shares outstanding = NAV per share.

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34
Q

A fund’s _____ compares the management fees and operating expenses, including any 12b-1 fees, with the fund’s net assets.

A

expense ratio

35
Q

All mutual funds, both load and no load, have _____

A

expense ratios

36
Q

A fund’s expense ratio includes the following:
* * *
Manager’s fe
Administrative fees (trading, transfer agents, accountants, attorneys, etc.)
BOD’s costs 126-1 fee

A

Manager’s feees
Administrative fees (trading, transfer agents, accountants, attorneys, etc.)
BOD’s costs
12b-1 fees

37
Q

The expense ratio is calculated:

A

the fund’s expenses / average net assets.

38
Q

The expense ratio does not include ___ or ____

A

sales charges or loads.

39
Q

A fund with an expense ratio of 1.25% deducts $1.25 for every $100 of the fund’s assets _____

A

annually

40
Q

____ is determined by the next NAV calculation after the order is received.

A

Forward Pricing

41
Q

POP (public offering price)= ____ + Sales Charge

A

NAV

42
Q

To calculate the sales charge percent=

A

(POP-NAV) / POP

43
Q

To calculate the POP=

A

NAV / (100%-Sales Charge Percent)

44
Q

_____ 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.

A

Breakpoint sales

45
Q

tI is not the investor’s order below the breakpoint that is a violation. tI is the representative’s failure to ____ the breakpoint that triggers a breakpoint sale violation.

A

disclose

46
Q

the order of the steps for the distribution of dividends is:

A

declaration date - (record and payable date) - ex-dividend date.

47
Q

There are four disclosure documents (prospectuses) associated with a mutual fund

A

Full or Statutory Prospectus
Summary Prospectus
Statement of Additional Information (SAI)
Omitting Prospectus (Rule 482)

48
Q

Full or Statutory Prospectus:

A

Must be updated on an annual basis
The prospectus also discloses 1-, 5-, and 10-year performance histories, or performance over the life of the fund, whichever is shorter.

49
Q

Summary Prospectus:

A

is a standardized summary of key information taken from the fund’s full or final prospectus

50
Q

An investor who purchases fund shares on the basis of the summary prospectus must be able to access a full prospectus no later than the ______

A

confirmation of the sale.

51
Q

The following must be included on the cover page or at the beginning of the summary prospectus:

A

The fund’s name and the class or classes ofshares
The exchange ticker symbol for the fund’s shares
A legend, which must appear on the cover page, that refers to the summary nature of the prospectus and the availability of the fund’s full (statutory) prospectus, with a legend providing a toll-free number to request paper delivery of a prospectus or a website where one may be downloaded

52
Q

Mutual funds (open end) and closed-end funds are required to have a statement of additional information (SAI) available for delivery within ____ business days of an investor’s request without charge.

A

three

52
Q

Statement of Additional Information (SAI)

A

While a prospectus is always sufficient for the purpose of selling shares, some investors may seek additional information not found in the prospectus. This additional information is not considered mandatory to make an informed investment decision, but it may be useful to the investor.

52
Q

_____ is another term for a fund advertisement. An advertisement is also sometimes called a tombstone ad

A

Omitting Prospectus (Rule 482)

52
Q

Pipeline (or Conduit) Tax Theory

A

triple taxation (taxes applied at the corporate, fund, and investor level) of investment income may be avoided if the mutual fund qualifies under Subchapter M of the Internal Revenue Code (IRC).

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.

53
Q

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

A

90%

53
Q

Net Investment Income= Dividends+Interest- Expenses

A

Dividends+Interest- Expenses

54
Q

An _____is an insurance contract designed to provide retirement income. The term refers to a stream of payments guaranteed for some period of time.

A

annuity

55
Q

Because an annuity can provide an income for the rest of someone’s life, the contract has a mortality guarantee –

A

a promise to pay the annuitant no matter how long that person lives.

56
Q

Two Types of Annuties

A

Fixed and Variable

56
Q

Fixed Annuities:

A

Invested in the company’s general account
A guaranteed payout
The insurer bears the risk of the investment
The owner bears the purchasing power (inflation risk)

57
Q

Variable Annuities:

A

Considered insurance and securities
Opportunity to keep pace with inflation
Investor assumes investment risk
Considered securities
Suitability (risk tolerance) is the firstconsideration

58
Q

Purchasing types of annuties

A

Lump-Sum payment, monthly, quarterly, annually
Deferred annuity
immediate annuity
bonus annuity

59
Q

bonus annuities:

A

reward customers with an upfront bonus to match the amount they put into the annuity. The bonus grows but there is a vesting period.

60
Q

single premium immediate annuities:

A

are funded with an upfront lump sum and the customer can receive income immediately. usually fixed

61
Q

single premium deferred annuities:

A

gets funded upfront with a lump sum but can get he lump sum later. can be fixed or variable

62
Q

Flexible premium annutites:

A

gets funded over time where the customer gets the income at a later date. can be fixed or variable. can be deferred or immediate

63
Q

Annuity Sale Charges:

A

No stated maximum sales
Fait and Reasonable
sold with little or no sales charge
surrender charge

64
Q

Annuities are sold in ___ for variable annuities

A

units

65
Q

AIR

A

Assumed Investment Return

66
Q

If the investor chooses annutization, the monthly amount of the check is dependednt on sever factors

A

Age, Gender, Payout option, Amount of money in the contract, Investment return vs. AIR

67
Q

Performance exceeds AIR=

A

monthly payment increases

68
Q

Performance equal to AIR=

A

No change in monthly payments

69
Q

Performance Below Air

A

Monthly payment reduces

70
Q

To be suitable for a variable annuity:

A

be able to fund with available cash
not needed for an immediate lump sum
must have tolerance for market risk
must have maximized all available qualified plans

71
Q

If an owner annuitizes the variable annuity (converts the lump sum into a life income), a portion of the regular payment is considered income and part is considered return of principal. The principal portion is called the _____.

A

exclusion ratio

Note that a return of principal si not taxable.

72
Q

if the annuitant is under the age of 591⁄2, the taxable portion of awithdrawal is subject to a ___ penalty.

A

10%

73
Q

The funds in an annuity may be transferred to another annuity with no tax implications. This tax-free transfer is called a ____.

A

1035 exchange

74
Q

The decision to annuitize a variable or fixed annuity may be reversed within how many ___ davs of election?

A

0

75
Q

When is growth within a variable annuity taxed?

A

At withdrawal

76
Q

A fund’s expenses are expressed as a percentage of _____

A

net assets

77
Q

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?

A

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

78
Q

How often may a mutual fund calculate a new net asset value (NAV)?

A

There is no limit to the number of times this may occur.

because mutual funds can calculate more often

79
Q

Paying a dividend and suffering market decline both reduce the _____

A

net assets of the fund without reducing the number of share

80
Q

A letter of intent may be backdated to include a prior purchase up to

A

90 days

81
Q

If the portfolio of a variable annuity separate account is directly and actively managed by the insurance company, the separate account must be registered as

A

an open-end management investment company.

82
Q

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 ……

A

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.

83
Q

Which type of shares allow the investor to buy and sell the shares at NAV and have a 12b-1 fee of 0.25% or less?

A

No Load

84
Q

_____ shares have expenses that are not considered sales charges. Some broker-dealers may charge fees for transactions, but these fees are not from the fund, so they are not considered sales charges.

A

No-load

SIE Exam (13 decks)

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