Unit 4 - Packaging Investments Flashcards
These are portfolios that are made up of other investments, primarily stocks and bonds.
Packaged investments
This is a corporation or trust that pools investors’ money and then invests that money in securities on their behalf.
Investment company
Investment companies invest the money based on ___ and ____.
Growth and income
How do investment companies raise capital?
Selling shares to the public.
Investment companies must abide by the same registration and prospectus requirements imposed by the ___ ___ of ___.
Securities Act of 1933.
Investment companies are regulated by the ____ ___ ___ of ___/
Investment Company Act of 1940.
This classifies investment companies into three broad types.
Investment Company Act of 1940.
What are the three types under the Investment Company Act of 1940?
- Face-amount Certificate (FAC)
- Unit investment trusts (UIT)
- Management investment companies.
Subaccounts within variable annuities are defined as
UITs or open-end management investment companies
This is a contract between an investor and an issuer in which the issuer guarantees payment of a stated sum to the investor at some set date in the future.
Face-amount certificate (FAC)
Under FAC, the investor agrees to pay issuer a set amount of money, either as a ___ ___ or in ___ ___.
Lump sum or in periodic installments
If the investor pays for the certificate in a lump sum under FAC, the investment is known as
Fully paid FAC
This is an investment company organized under a trust indenture. They do not have BOD but instead, trustees.
UITs
These create portfolios of debt or equity securities designed to meet the company’s objectives. They sell redeemable interests. May be fixed or non fixed.
UITs
What does a debt fixed UIT purchase?
A portfolio of bonds and terminates when the bonds in the portfolio mature.
What does an equity UIT purchase?
A portfolio of stocks and terminates at a predetermined date.
Since fixed UIT portfolios are ____, there is no need for active management and little or no portfolio turnover.
Static
____ do not generally assess management fees.
UITs
____ and ____ are not managed.
FACs and UITs
____and ____ do not trade in the secondary market.
FACs and UITs
What is the main difference between close end and open end?
Close end limits its offering of shares while open end offers new shares to the public.
This type of company will raise capital for its portfolio by conducting a common stock offering.
Closed end
What is an IPO?
Selling shares to the public in an initial public offering
In closed end companies, within the ____ _____, the company registers a ___ number of shares with the SEC and offers them to the public with a prospectus for a ____ time through underwriters.
- Initial offering
- Fixed
- Limited
Once all shares have been sold in a close end company, the fund is ____ to new investors.
Closed
Why do funds usually elect to have a closed end company?
Limited amount of securities available
Closed end funds can issue ___ ___ , ___ ____ and ___ ____.
Common stock, preferred stock and debt securities.
Closed end companies are also called
Publicly traded funds
True of False: Closed end companies can buy or sell in the secondary market.
True
____ and ___ determine bid prices and ask prices for closed end companies.
Supply and demand
Closed end fund shares may trade ___ or ____ the shares NAV.
Above or below
What is a funds NAV?
Assets minus its libabilities
What is the NAV per share?
Funds NAV divided by the number of outstanding shares
This type of company only issues one class of security, which is common stock.
Open end companies
Open end companies do not specify the ___ ____ of shares it intends to issue but registers an ____ ____ with the SEC.
- Exact number
2. Open offering
Open end can raise an ____ amount of investment capital by continuously issuing new shares.
Unlimited
When investors want to sell their holdings in a mutual fund, the fund itself ____ those shares at the funds current ____.
- Redeems
2. NAV
Mutual funds shares do not trade in the ____ ____.
Secondary market
Mutual funds ____ shrinks when investors redeem shares but so does the number of ____ ____,
- Capital
2. Outstanding shares
True or False: With a mutual funds, the value of each share will fall as a result of redemption,
False. The value of each share will NOT fall as a result of redemption.
When a client acquires mutual fund shares, she pays the current ___ ___ ___.
Public offering price (POP)
When are mutual funds priced?
At the end of each business day
With mutual funds, sellers receive the next calculated ____ and buyers pay the next calculated ____.
- NAV
2. POP
For mutual funds, when do transitions requests need to be entered by?
4:00pm
Any requests to buy or sell mutual funds that are entered after 4:00pm will receive the ____ ____ ___’s NAV or POP.
Next business day’s
Even though mutual funds only issue common stock, the funds themselves can purchase ___, ____ and ____.
Common stock, preferred stock and bonds
Describe the characteristics below for an Open End fund:
- Capitalization
- Issues
- Shares
- Offerings and trading
- Pricing
- Shareholder rights
- Ex-date
- Capitalization: Unlimited, continuous offering of shares
- Issues: Common stock only
- Shares: Full or fractional
- Offerings and trading: Sold and redeemed by fund only, must redeem shares
- Pricing: NAV + sales charge
- Shareholder rights: Dividends, voting
- Ex-Date: Set by BOD
Describe the characteristics below for a Closed End fund:
- Capitalization
- Issues
- Shares
- Offerings and trading
- Pricing
- Shareholder rights
- Ex-date
- Capitalization: Fixed, single offering of shares
- Issues: Common and preferred stock
- Shares: Full only
- Offerings and trading: Initial primary offering, secondary market, does not redeem shares
- CMV + commission
- Dividends, voting, preemptive
- Set by the exchange or FINRA
This is an insurance contract designed to provide retirement income.
Annuity
The term ___ refers to a stream of payments guaranteed for some period of time.
Annuity
How long does a stream of payment occur from an annuity?
Either the life of the annuitant, until the annuitant reaches a certain age or for a specific number of years.
Stream of payments are ____.
Guaranteed
Because an annuity can provide an income for the rest of someone’s life, the contract has a ____ ____.
Mortality guarantee
What is someone’s greatest fear when retiring?
Outliving his income
This provides an opportunity to keep pace with inflation
Variable annuity
Who assumes the investment risk rather than the insurance company for a variable annuity?
The investor
When an investor assumes the investment risk, the annuity is considered a _____.
Security
Variable annuity provide a ___ benefit.
Death
Beneficiaries under variable annuities will receive the ____ of the ____ amount or the ____ ____ if the owner dies during the accumulation period.
- Greater of the
- Contribution amount
- Current value
For variable annuities, premiums are invested in
Separate accounts
____ in separate accounts are not guaranteed and a loss of capital is possible.
Returns
If the investment manager of an insurance company is responsible for selecting the securities to be held in a separate account, the separate account is ____ ____ and must be registered under the ___ ___ ___ of ____.
- Directly managed
2. Investment Company Act of 1940.
If an investment manager of the insurance company passes the portfolio management responsibility to another party, the separate account is ___ ____ and must be registered as a ____ under the Investment Company Act of 1940.
- Indirectly managed
2. UIT
All ____ must be disclosed to a variable annuity buyer.
Fees
Fees for variable annuities include:
Administrative fees, investment advisory fees and custodial fee. Buyer must also be informed of surrender charges.
True or False: There is no limit to the annual contribution amounts on commercial (non qualified) contracts.
True
Qualified variable contracts are funded with ___ ____ contributions.
Pre Tax
An investor who reaches retirement may choose to ___ her contract.
Annuitize
What is the 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?
Annuitization
How is the amount of income from an annuitization determined?
Based on the annuitants age, gender, account value, payout option and assumed interest rate (GAAPI)
What is the difference between a variable annuity and a fixed annuity?
Fixed annuities promise a stated rate of return. The insurance company is at risk to provide the rate of return. Investor assumes no investment risk like variable annuities.
Mutual funds offer ____ ____.
Guaranteed marketability
Mutual funds are ____ securities and do not trade in the secondary market.
Redeemable
Each investor in the mutual fund’s portfolio owns an ____ ____ in the portfolio.
Undivided Interest
True or False: For mutual funds, each investor shares mutually with other investors in gains and distributions derived from the investment company.
True
For mutual funds, distributions are typically done at the ____.
NAV
Mutual funds operate under the ____ ____ of ____.
Conduit theory of taxation
For mutual funds, taxable events flow down to the _____ each year.
Shareholders
Mutual funds permit shareholders to ___ at NAV.
Reinvest
Each investors participation in the mutual funds performance is based on the ___ of ____ ____.
Number of shares owned
An investment company portfolio is ____.
Elastic
Mutual fund portfolios value and holding fluctuate as money is ____ or ____ and as the value of the securities in the portfolio ____ and ____.
- Invest or Redeems
2. Rises and falls
Mutual funds provide
Diversification
Mutual funds allow a minimum investment often ___ or less to open an account.
$500
An investor of mutual funds retains ___ rights.
Voting
Mutual funds must offer _____ of _____ and ____ ____ at NAV.
- Reinvestment of dividends
2. Capital gains
Each year, mutual funds will distribute a Form ____
1099
Reinstatement provisions within mutual funds allow investors who withdraw funds to reinvest up to the amount withdrawn within ___ ____ with no new sales charge.
30 days
Mutual funds are part of a ____ family of funds
Related (branded)
Switches between mutual funds in the same family are considered ____ events.
Taxable
For mutual funds, the maximum sales charge allowed is what?
81/2% of the POP
Classes of mutual funds portray how investors will pay ____ ____.
Sales charges
Why do companies offer no-load funds?
Because they do not offer shares to the public with an underwriter so a sales charge is not needed.
This class of shares have front end sales charges
Class A
This class has sales charges that are paid at the time an investor buys shares and the sales charge is taken from the total amount invested. Most common
Class A
This class of shares have back end sales load, also known as a contingent deferred sales charge (CDSC)/
Class B
This class has sales charges that are paid at the time an investor sells shares previously purchases. The sales load is reduced annually. Structured so the sales charge drops to zero, usually no longer than 5 years.
Class B
If Class B shares are converted to class B, that means there will be ___ sales charge at the time of redemption.
NO
With Class B, the __ investment amount is available to purchase shares.
Full
This class typically has a one-year, 1% CDSC, a 0.75% 12b-1 fee, and a 0.25% shareholder service fee.
Class C
Fees in this class never go away and this class is commonly referred to as having a level load.
Class C
Which type of investors would choose Class C?
Investors with short time horizons because annual charges make them expensive to own if investing for more than four to five years.
What type of shares do not charge any type of sales charge and the shares are purchased at NAV?
No-load shares
No load shares are permitted to charge which fees?
Purchase fees, account fees, exchange fees and redemption fees
Redemption fees are not considered a ____ ____.
Sales load
A shares are best for investors with
Large investments and longer time frames
B shares are best for investors with
Smaller investments and long time frames
C shares are best for investors with
Short time frames, not more than 5 years.
This is quantity discounts an open-end management company shares.
Breakpoints
The ___ the dollar amount of a purchase, the ___ the sales charge.
- Greater
2. Lower
Most mutual funds allow investors to combine orders amoung related accounts in order to achieve a better
Breakpoint
____ ____ may not get breakpoints
Investment clubs
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 intent (LOI)
Within this document, the investor informs the investment company of the intention to invest the additional funds necessary to reach the breakpoint within ___ months.
- LOI
2. 13 months
The LOI is a ___ ___ contract binding on the fund only.
One-sided
When performing an LOI, the extra shares are held in
Escrow
A customer who deposits the money to complete the LOI received the ___ ____.
Escrowed shares
____ and ____ ____ do not count toward the LOI.
Appreciation and reinvested dividends
If a customer has not completed the investment within 13 months, he will be given the choice of
- Sending a check for the difference in sales charges
2. Cashing in escrowed shares to pay the difference
This allows investors to qualify for reduced sales charges.
Rights of accumulation
What are the three characteristics of rights of accumulation?
- Are available for subsequent investments
- Allow the investor to use prior share appreciation for breakpoints
- Do not impose time limits
A customer may qualify for reduced charges when the ___ ____ of shares previously purchased and shares currently being purchased ____ a certain dollar amount.
- Total value
2. Exceed
This allows an investor to combine previous investments in the fund with today’s investment to determine today’s sales charge.
Rights of accumulation
Once an investor accumulates $50,000 in the funds, it qualifies for the ____ sales charge.
Lowest
What is combination privilege?
When a mutual fund sponsor offers more than one fund and refers to these multiple offerings as its family of funds.
This allows an investor to convert an investment in one fund for an equal investment in another fund in the same family. It is a taxable event.
Exchange or conversion privileges
This is a term used in the securities industry that means sales just below the breakpoint.
Breakpoint sales
____ does not define near or just below a breakpoint or how close a purchase can be to a breakpoint triggering a violation
FINRA
What is considered to be a breakpoint violation?
Failure to disclose the breakpoint that triggers a breakpoint sales violation.
This is the amount the investor received upon redemption
NAV
NAV must be calculated
At least once per business day
NAV are usually calculated
At the end of each business day
Forward pricing is when
The price the customer received is the next NAV calculated after receipt of his redemption request.
This is the purchase price of a fund share
Public offering price (POP)
What is the math equation to calculate the POP?
NAV + SC = POP (NAV plus the sales charge)
Sales charge can be levied at the time
Of purchase, redemption or over the course of ownership, or not at all
The NAV changes
Daily
Since mutual funds dont trade in the secondary market, the value of shares is not determined by supply and demand but by
Formula
What is the math equation to calculate the NAV of a fund share?
Total assets - total liabilities = total NAV of the fund
What is the math equation to calculate the NAV per share?
NAV of the funds / shares outstanding = NAV per share
This compares the management fees and operating expenses including any 12b-1 fees with the funds next assets
Expense ratio
True or False: All mutual funds, both load and no load, have an expense ratio.
True
What is the expense ratio calulated?
Funds expenses / average net assets
Stock funds generally have expense ratios between
1% and 1.5%
Bond funds have an expense ratio between
0.5% and 1%
What does a funds expense ratio include?
- Manager’s fee
- Administrative fee
- BOD costs
- 12b-1 fees
A fund with ____ expenses will provide ___ returns
- Higher
2. Lower
The expense ratio does not include
Sales charge or loads.
This is the full and fair disclosure document that provides a prospective investor with the material information needed to make a fully informed investment decision.
Full or statutory prospectus
If using a prospectus to ____ a trade, it must be distributed to an investor ____ or ____ the solicitation.
- Solicit
2. Before or during
What does a full or statutory prospectus include?
- Funds objective
- Investment policies
- Sales charges
- Management expenses
- Services offered
Full or statutory prospectus disclose
1-, 5- and 10- year performance histories or the performance over the life of the fund, whichever is shorter
This is a standardized summay of key information in the funds full or final prospectus.
Summary prospectus
People who receive this have the option of either purchasing fund shares using the application found therein or requesting a full prospectus.
Summary prospectus
An investor who purchases fund shares on the basis of the ____ ____ must be able to access a full prospectus no later than the _____ of the sale.
- Summary prospectus
2. Confirmation
____ delivery is possible for summary prospectus.
Online
What needs to be included in summary prospectus?
- The funds name and the class of shares
- The exchange ticker symbol
- A legend
