UNIT 4 QBANK Flashcards
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
A) a fixed UIT.
B) a closed-end company.
C) a nonfixed UIT.
D) a mutual fund.
B) 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.
A breakpoint sale is
A) the payment of compensation to a registered representative after she ceases to be employed by a member.
B) the sale of investment company shares in dollar amounts at the point at which the sales charge is reduced on quantity transactions to reduce the sales charge.
C) the sale of investment company shares in anticipation of a distribution soon to be paid.
D) the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions to incur the higher sales charge.
D) the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions to incur the higher sales charge.
Breakpoint sales are a violation of the Conduct Rules. A breakpoint sale is the sale of fund shares just below the point where a sales charge is reduced in order to maintain the higher commission.
A mutual fund has breakpoints at $25,000, $50,000, $100,000, and $250,000. Which of the following transactions might be considered a breakpoint sale?
I. The client purchases $48,000 worth of shares
II. The client redeems $24,000 worth of shares
III. The client purchases $252,000 worth of shares
IV. The client purchases $96,000 worth of shares
A) I and III
B) II and IV
C) I and IV
D) II and III
C) I and IV
I. The client purchases $48,000 worth of shares
IV. The client purchases $96,000 worth of shares
Breakpoints allow for lower sales charges at or above the designated points—in other words, quantity discounts. A breakpoint sale occurs whenever a purchase is made just below a designated breakpoint amount. Allowing a purchase to occur in an amount just below a breakpoint can be viewed as an effort by representatives to share in the higher sales charges.
Which of the following is true for mutual funds and those who invest in them?
A) All securities purchases entail risk, which is the only disclosure that need be made for mutual funds.
B) Mutual fund investors are required to attest that they have researched the securities in a portfolio before purchasing a fund’s shares.
C) Investors must be provided with specific information when purchasing mutual funds.
D) There are no disclosure requirements regarding information to investors for mutual funds.
C) Investors must be provided with specific information when purchasing mutual funds.
Mutual fund investors must be provided with specific information and disclosures before purchasing shares. Among the information required would be all that is disclosed either on a full or summary prospectus.
An investor has asked a mutual fund company for a copy of its Statement of Additional Information (SAI). How long does the fund have to comply with the request?
A) Five business days from the date of the request
B) SAI must go into the mail on the same day
C) Three business days from the date of the request
D) By end of week in which the request was received
C) Three business days from the date of the request
If an investor asks for a copy of a mutual fund’s SAI, the copy must go into the mail no later than the end of the third business day from the date of the request. It must also be supplied free of charge.
Which of the following regarding open-end (mutual fund) and a closed-end management investment company is true?
A) A closed-end company sets its own dividend ex-date, but an open-end company’s ex-date is set by its self-regulatory organization (SRO).
B) The price of open-end company shares is set by supply and demand, but not the price of closed-end shares.
C) Only the closed-end company may issue additional shares without changing its charter.
D) An open-end company may sell fractional shares, but a closed-end company may not.
D) An open-end company may sell fractional shares, but a closed-end company may not.
Open-end shares are redeemable and may be purchased in specific dollar amounts. This results in fractional shares being sold. Closed-end shares trade on the open market, and are therefore traded in round lots of full shares only. The other choices reverse the characteristics of open-end and closed-end companies.
Short-term purchases and sales of a mutual fund to take advantage of price fluctuation is known as
A) front running.
B) market timing.
C) price-spotting.
D) time spotting.
B) market timing.
The practice of market timing in mutual funds is not illegal but is rarely advantageous. Because many purchases and redemptions are involved over relatively short time periods, the sales charge lost each time the investor buys or redeems precludes making much in the way of profits. Most mutual funds in fact prohibit the practice.
Which of the following are the most likely to make monthly or quarterly payments for the life the investor?
I. Fixed annuity
II. Unit investment trust (UIT)
III. Mutual fund
IV. Variable annuity
A) I and II
B) II and III
C) I and IV
D) III and IV
C) I and IV
I. Fixed annuity
IV. Variable annuity
Both a fixed and variable annuity is an insurance contract designed to provide retirement income. The term annuity refers to a stream of payments guaranteed for a certain period including the life of the annuitant. In the case of a variable annuity, the actual amount to be paid out may or may not be guaranteed, but the stream of payments itself is. Because an annuity can provide an income for life, the contract has a mortality guarantee. Mutual funds and UITs have no such guarantee.
Mutual funds that market directly to the public, using no underwriter and charging no sales charge, are called
A) no-load funds.
B) free-sale funds.
C) loaded funds.
D) charge-free funds.
A) no-load funds.
Some funds distribute their own shares without using an underwriter and, hence, have no need to levy a sales charge. Because sales charges are also called sales loads, such funds are known as no-load funds.
For which of the following investors would Class C shares be most suitable?
A) A relatively inexperienced investor
B) An investor who intends to leave the money in the fund for many years
C) An investor who intends to redeem the shares within a short time
D) An investor interested in high-risk, high-potential return speculation
C) An investor who intends to redeem the shares within a short time
Because Class C shares have no sales charge levied at the time of purchase but rather levy a withdrawal from the customer’s account every quarter, they would be most suitable for an investor intending to redeem the shares relatively soon. Mutual funds are not intended for the speculative investor, those who might trade in and out frequently, and no particular share class is especially suited to the inexperienced investor.
A mutual fund has breakpoints at $25,000, $50,000, $100,000, and $250,000. Which of the following transactions might be considered a breakpoint sale?
I. The client purchases $48,000 worth of shares
II. The client redeems $24,000 worth of shares
III. The client purchases $252,000 worth of shares
IV. The client purchases $96,000 worth of shares
A) I and III
B) II and III
C) II and IV
D) I and IV
D) I and IV
I. The client purchases $48,000 worth of shares
IV. The client purchases $96,000 worth of shares
Breakpoints allow for lower sales charges at or above the designated points—in other words, quantity discounts. A breakpoint sale occurs whenever a purchase is made just below a designated breakpoint amount. Allowing a purchase to occur in an amount just below a breakpoint can be viewed as an effort by representatives to share in the higher sales charges.
A mutual fund’s share class determines
A) the net asset value per share.
B) how the shares are delivered to the investor.
C) how sales charges and related expenses are paid.
D) how many shares the investor may purchase.
C) how sales charges and related expenses are paid.
Individual mutual funds are often available to investors as Class A, Class B, or Class C, and there are other classes varying from fund to fund. The share class determines when and how the sales charge is paid. Class A shares have it paid when the shares are purchased, Class B shares have it paid when the shares are redeemed, and Class C shares have a small charge removed from the investor’s account every quarter.
Mutual fund shares are required to be priced at least
A) once per business day.
B) continuously throughout the day.
C) each day at the opening of the market.
D) hourly.
A) once per business day.
Most funds are priced (calculate a new net asset value) at the close of the day, but the rule just requires that they be priced at least once per business day. They may perform this calculation more than once a day, but that is rare.
Which of the following would have no effect on the NAV per share of a mutual fund share?
A) The portfolio’s market value undergoes a large increase.
B) The fund pays its monthly operating expenses like utility bills.
C) The fund receives a dividend from one of the portfolio stocks.
D) Portfolio securities had to be sold for a big capital loss.
D) Portfolio securities had to be sold for a big capital loss.
Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share.
Which of the following would have no effect on the NAV per share of a mutual fund share?
A) The portfolio’s market value undergoes a large increase.
B) The fund pays its monthly operating expenses like utility bills.
C) The fund receives a dividend from one of the portfolio stocks.
D) Portfolio securities had to be sold for a big capital loss.
D) Portfolio securities had to be sold for a big capital loss.
Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share.
