Ch. 10 - Investment Companies

Front 1

types of investment companies

Back 1

- Face amount certificate companies - issuer guarantees payment of a stated sum in the future - zero couplon bonds
- Unit investment trusts - company organized under trust indenture - no board of directors, advisers, or active managemnt or portfolios - shares not traded in secondary market, must be redeemed by the trust
- management investment companies - active management - open or closed end - diversified

Front 2

How must management investment companies be diversified

Back 2

- they must pass the 75-5-10 test
- at least 75% of assets invested in such a manner that no more than 5% invested in any one issuer and no more than 10% owned by the fund with outstanding securities of one issuer

Front 3

open end vs. closed end

Back 3

- open end - continuous primary offering - prospectus - issue common shares only - must redeem shares - no secondary trading - price by formula - 8.5% max SC
- closed end - shares fixed - no prospectus - issues common, preferred, and bonds - shares not redeemable - secondary market (exchange or OTC) - priced by supply and demand - commissions instead of SC

Front 4

Investment company act of 1940

Back 4

- classifies investment companies
- manage them to make sure they have a defined investment objective

Front 5

SEC registration

Back 5

- company must register with the SEC if it has 40% or moare of its assets invested in securities
- company may not issue securities to public unless it has 100k of net assets, 100 investors, and clearly defined investment objectives

Front 6

changes that require majority vote

Back 6

- in borrowing money
- in issuing other securities
- in purchasing real estate
- in making loans
- in changing subclassification
- in changing sales load policy
- in changing nature of business
- in changing investment policy

Front 7

MF board of directors

Back 7

- 40% must be non interest - not paid other than for job
- if conflict of interest (changing 12b-1 fees), more than 50% must be nonaffiliated
- the BOD: defines the type of fund to offer, defines the fund objective, approves and hires the transfer agent, custodian, and investment advisor

Front 8

Investment adviror

Back 8

- largest expense of the fund - % of assets under management
- manages portfolio to implement investment strategy, identify tax status, and manage day to day trading

Front 9

custodian bank

Back 9

- enables safekeeping of the fund
- paid a percent of Assets under Management

Front 10

transfer agent

Back 10

- issue, redeem, and cancel fund shares
- record keeper - names, dividents, address, customer complaints, and distributions are properly made

Front 11

underwriter

Back 11

- sponsor - distributor
- Must be NASD member
- markets funds to BDs
- whenever there is an underwriter there is a sales charge

Front 12

SAI

Back 12

- statement of additional information
- contains funds consolidated financial statements - balance sheet, statement of operations, income statements, and portfolio list

Front 13

types of funds

Back 13

- stock - growth, income, growth and income, specialized (25% in one industry or area - sector funds - most risky)
- balanced funds - stocks and bonds
- bond funds
- option income funds - sell covered calls
- money market funds - high quality debt - stable value - 1 yr or less to maturity - no sales charge but there are management fees

Front 14

open end pricing-

Back 14

- required to forward price every business day - usually at 4:00 or as stipulated in prospectus
- NAV per share = (assets - liabilities) divided by # of shares
- NAV + sales charge = POP (ask)
- sales charge as a percentage of POP is sales charge $ amt divided by POP
- POP = NAV divided by (100% - %SC)

Front 15

breakpoints

Back 15

- available to spouses, parents of minor children, and corporations
- not available to investment clubs

Front 16

Letter of Intent

Back 16

if investing just below breakpoint but intend to deliver additional $ to reach breakpoint in next 13 months you will sign a letter of intent- may be backdated up to 90 days
- if intent not fulfilled, larger load applies

Front 17

rights of accumulation

Back 17

- another way to reach breakpoint
- lower sales change on $ that is pushed to breakpoint - but no time limit

Front 18

conversion on a MF

Back 18

- conversion b/w funds within the fund family
- no fees
- taxable event

Front 19

if a fund charges 8 1/2 % is must offer

Back 19

- breakpoints
- rights of accumulation
- reinvestments at NAV

Front 20

Net investment income

Back 20

- Diviends + interest - expenses = NII
- subchapter M (conduit theory) - if investment company is a regulated company (complies with subchapter M), taxation is eliminated at MF level if at least 90% of Net investment income is distributed - if less the company pays taxes on 100% of net investment income

Front 21

expense ratio

Back 21

- compares the management fees and operating expenses with the funds net assets
- an expense ratio of 1.72% means taht the fund charges $1.72 per year for every $100 invested

Front 22

turnover ratio

Back 22

- if a fund has a turnover rate of 100% if holds its securities for less than on year - gains are likely to be short term and subject to maximum tax rate
- if has a 25% it has an average holding period of 4 years and gains are likely taxed at the long term rate

Front 23

classes of shares

Back 23

- class A - front end load that can be reduced b y breakpoints
- back end load that declines over time - combined wiht 12b1 fees
- class c - 12b1 fees charged quarterly ( 12b1 fees must be approved annually)

Front 24

dollar cost averaging

Back 24

- fixed dollars invested regularly and consistantly over time

Front 25

SPDR

Back 25

- Standard and poors depositary receipts
- index funds designed to track the performance of an unerlying investment portfolio