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103 Cards in this Set
- Front
- Back
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What are some examples of a management company
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Closed and open in funds are subclassification of management company or actively managed portfolio companies
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What are the three classifications made by the Investment Company Act of 1940 for investment companies
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Face amount certificate companies,FACs, unit investment trust, and management investment companies
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What is a face amount certificate companies
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A face amount certificate is a contract between an investor and an issuer in which the issuer guarantees payment of a stated or fixed sums to the investor at some set date in the future. Very few FACs today because of tax law changes
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What are the characteristics of a unit investment trust company
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No boards of directors, employee investment advisors, or actively manage their own portfolio. NOT traded in the secondary market. UITs function as a holding company for its investors. They purchase other investment company shares or government bonds. They issue redeemable shares known as units for shares of beneficial interest. It may be fixed (bonds)or non fixed.
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What is the major difference between a closed end mutual fund and a UIT
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UIT portfolios usually are not traded they are fixed trust. It has a board of trustees and not a board of directors. Closed end mutual funds are actively traded, the do not redeem their own shares.
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What is the advantage that UIT has over mutual funds
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They own a diversified interest but do not have to pay a management fee because it is not a managed portfolio , which is the biggest expense of mutual fund ownership
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What is another name for closed end funds
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Publicly traded funds or exchange traded funds, ETF
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What are some advantages of ETF
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Price and ease of trading because they can be bought and sold any time during the trading day, margin-- they can be bought and sold short, operating costs are lower than mutual funds, tax efficiency-they do not distribute capital gains, there are no tax consequences until investors sell their shares
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How are closed end companies like corporate securities
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They traded in the secondary market, they can issue common preferred and bonds, Only full shares can be purchased. A prospectus is used only in the IPO , the ex day is set by the exchange or FINRA
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What are some of the characteristics that opened end investment companies have that closed end investment companies do not have
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The ex date is set by the Board of Directors, pricing is net asset value plus sales, fractional shares may be sold , sold and redeemed by fund only
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How does a investment company qualify as diversified
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If it meets the 75 5 10 test. 75 percent of total assets must be invested in securities issued by companies other than the investment company or its affiliates, no more than 5% of the funds total assets are invested in the securities of one issuer and the fund does not own more than 10% of the outstanding voting securities of any one issuer
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A nondiversified investment company is also called
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Specialized or sector funds
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An open end investment company must file a registration statement consisting of two parts part 1 is the prospectus part 2 is what
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The statement of additional information. Additional information is not needed to make informed investment decisions
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Open end investment companies are offered continuously which means that all sales must be accompanied by
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A prospectus
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What activities must a mutual funds disclose
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Purchasing securities on margin, selling securities short, participating in a joint investment
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Mutual fund shareholders had the right to vote on
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Bylaws, objectives, changes in borrowing, issuing other securities, purchasing real estate, making loans, changing subclassification, changing sale load policy or other investment policy
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The transfer agent of an investment company is paid a fee by the fund to
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Issue and redeem shares
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What are the unique characteristics of a mutual fund
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Mutual funds must redeem shares at net asset value,
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What is a special situation fund
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Special situation funds by securities of companies that may benefit from a change within the company or in the economy. Take over candidates companies with patents pending
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What are dual purpose funds
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Dual-purpose funds are closed end funds that meet two objective. Investors seeking income purchase income shares and receive income the portfolio earns, and investors interested in capital gains purchase the gain shares and receive all gain
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What is a life cycle fund
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Life-cycle funds are used a predetermined acid mix that is tailored to meet investment objective based on various time horizons or target date. These funds usually structured as fund of funds so that the entire composition of the fund portfolio consist of funds offered in the same fund family. The asset allocation of the fund will be adjusted regularly to keep risk and reward balanced optimally, given the time remaining until the target date is reached
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What is the average holding period for a portfolio with a 25 percent turnover rate
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4 years
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How is net asset value for a plan calculated
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Assets minus liabilities divided by number of shares outstanding equal net asset value per share
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What is the maximum sales charge for mutual fund purchases
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8.5 percent of the public offering price
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Closed-end funds do not have sales charges. Instead
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the investor pays for a brokerage commissions in an agency transaction or pays a mark up for mark down in a principal transaction
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Mutual funds cannot act as a distributor for their own fund shares except under Section 12b1 of the Investment Company Act of 1940. This section permit a mutual fund to collect a fee for promoting, selling or undertaking activity in connection with the distribution of its own shares. How is the fee determined and what is the maximum amount
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The fee is determined annually as a flat amount or as a percentage of the fund's average net asset value during the year and is charged accordingly. The maximum allowed is 1% of funds net asset
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How do you calculate the sales charge in a mutual fund
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POP - NAV equals sales charge
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The sales charge is always based on the
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POP
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If you know the NAV and the sales charge how do you determine the POP
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Net asset value / 100% - sales charge
equals POP |
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The maximum permitted sales charge is reduced from 8 1\2% to 6 1\4% if an investment company does not offer which features
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Break points, rights of accumulation, an automatic reinvestment of distributions at net asset value
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A person who plans to invest more money with the same mutual fund company can decrease the overall sales charge by signing
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A letter of intent. The letter of intent is a one-sided contract binding on the fund only. In the letter of intent the investor informs the investment company of an intention to invest the additional funds necessary to reach the breakpoint within 13 months. The letter of intent can be backdated up to 90 days after the purchase
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What is a combination privilege
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Investors seeking a reduced sales charge may be allowed to combine separate investments in two or more funds of the same family to reach a breakpoint
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What are there four classes of shares that can be offered by a mutual fund and what is their fee structure
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Class A= front load priced at NAV plus sales charge, Class B =back load, class C (12b-1 fee)=level load, Class D=level load plus redemption fee
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What is the class of mutual fund shares that can take advantage of breakpoint reductions
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Only class A, front loaded shares. Class A shares must offer dividends reinvestment at in NAV, right of accumulation, and quantity discount break points.
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Who can buy mutual funds at a price lower than POP
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Only member firms. Not a public or non members
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Mutual funds are redeemed at what price
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Net asset value
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What is subchapter M
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Subchapter M requires a mutual funds to distribute at least 90 percent of its net investment income to shareholders in order to avoid triple taxation . The fund then pay taxes only on undistributed 10 percent. If the fund distribute 89%, it pays taxes on 100 percent of net investment income
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What happens when an investor purchases fund shares just before the ex-dividend date
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The fund shares market value decreases by the distribution amount. The investor is also taxed on the distribution amount .
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Funds that comply with the subchapter m, conduit theory, are also known as
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Regulated investment company
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What is a fixed time withdrawal plan
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Customers liquidate their holdings over a fixed period. Most mutual funds require a customer's account to be worth a minimum amount of money
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What are SPDRs, standard and poors depository receipts, spiders
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Index tracking fund. They are not investment company products but they have characteristics similar to both open and closed end funds
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How are spiders different from mutual funds
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Intraday trading, margin eligibility short selling
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What is the two times leverage fund
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These funds attempt to deliver a multiple of the return of the benchmark index they are designated to track
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What is an inverse fund
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They are opposite of the benchmark index they are tracking
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How is a hedge fund different from a mutual fund
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The fund has more flexibility in investment strategies. They are highly leveraged use short positions and relative, currency speculation, commodity speculation and investing into with a clean unstable international market
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What is a hedge fund lock up provision
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During a certain initial period, an investor may not withdraw from the phone. This is a way the manager can have capital retained in the phone and it is also a unique risk of hedge fund
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What are SPACs, special purpose acquisition company
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Blank check companies with out business operations that raise money through IPOs in order to have their shares publicly traded . They also are blank check companies that issuers raise capital by selling securities to the public without telling investors what the specific use of the proceeds will be.
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What are holding company depository receipts, HOLDRS
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They are broker-dealer issue products that trade on the exchange. They are different from ETFs because they represent investors ownership in the stock or ADRs of specified companies in a particular industry
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How are holders different from ETF and mutual
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Holders do not rebalance themselves. Additionally when a company is acquired or spun off, investors are treated as if they owned the underlying stock directly. Trades in 100 share lots only
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How do reinvested dividends and changes in net asset value affect the amount required to fulfill a letter of intent
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They do not
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What decreases the net asset value
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If you dividends are distributed
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What increases net asset value
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Appreciation of the portfolio and dividends received but not distributed
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How can 12b-1 fees be used
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Only to cover promotional and other distribution expenses for funds that are distributors of their own shares
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Must 12b-1 fees be disclosed in the prospectus
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Yes. That the amount must be disclosed. The fund may not use the term no load in any of its communication with the public if the 12b-1 fee other service fees exceed .25 % of average net assets
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What are some characteristics ETNs
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Unsecured long term debt securities issued by financial institutions and therefore the credit worthiness of the issuer should be a concerning factor. They have a final payment at maturity based on the return of a single stock, a basket of stocks or an equity index.exchange traded and marginable
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What is the difference in the pricing mechanism of an ETF and an opened end mutual fund share
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ETF prices fluctuate based on the value of the security within the fund portfolio throughout the trading day and therefore are not forward priced like open end mutual fund shares are
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What are the differences in objectives btwn preferred stock fund versus aggressive growth fund
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Preferred stock generates current income in the form of dividends. Aggressive growth fund strives for capital appreciation rather than current income.
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What is a specialized Fund
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A fund with that, as part of its investment policy, makes a commitment to invest 25% or more of its assets into a particular economic or geographical sector
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What is net investment income for a investment company
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Gross investment income - operating expenses. Gross investment income is interest and dividends received from security in the investment company portfolio
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What is an income bond and for what fund would it not be suitable
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An income bond, aka adjustment bond, pays interest only if the issuer has enough money to do so. They are often issued by companies coming out of bankruptcy and trade like zeros. They are not suitable for a fund designed to generate current income
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What is the maximum sales charge or load that an investment company who does not offer dividends reinvestment at in NAV, right of accumulation, and quantity discount break points.
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6.25%
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The IRS deems an exchange between funds as
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A sale and repurchase of shares. On a sale of securities, capital gains or losses are realized, as such such exchanges are a taxable event
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How do you compute a mutual fund expense ratio
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Expenses / average annual net assets
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What is the price of a no load mutual fund
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Book value, bid , nav . No load open end investment company shares are sold to investors and redeemed through the issue worth at their book value, which is the same as their NAV or bid price
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The principal underwriter of an open-end investment company or mutual fund is known as a
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Sponsor or distributor of the fund
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What is the minimum net worth that a registered investment company must have in order to make a public offering
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$100,000. Investment companies are not required to register in offering with the SEC unless they have a net worth of $100,000
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Does a public or exchange traded fund, closed end fund, trading in the secondary market require the delivery of a prospectus
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No
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How are open end funds and unit investment trusts traded
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They are not traded in the secondary market. Instead shares are redeemed by the issuer
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How are publicly traded or closed end funds offered
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Generally they make a one-time offering of shares which then trade on the secondary market
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What is the capital structure of an open end investment company
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They may only issue redeemable common stock. Preferred stock, bonds, and other forms of senior security are not allowed. Bank borrowing is allowed subject to certain limitations
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5 years ago, the ABC mutual fund bought 200K shares of Comet industries at an average price of $42.25. After a series of scandals, the shares are now $6. If the fund sells Comet, what will be the impact on the nav of the ABC fund
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No change. Portfolio holdings in a mutual fund are marked to market each day. Therefore, the nav of the fund already reflects the current value of each security and its portfolio.
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What fund would have the objective of providing a moderate risk client with long term capital gains and professional stock selection
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Large capital growth fund. A large capital growth fund is the most appropriate choice because large capitalization stocks are generally less volatile than small capitalization and provide long-term capital growth. This is more appropriate than the index fund because there is no stocks selection.
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How are mutual funds like corporate stockholders
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Mutual fund shareholders have a number of rights, including the right to elect the Board of Directors, which sets policies for the fund. However the shares can only be purchased in the primary market and then meeting with the fund
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Under the Investment Company Act of 1940 redemption payments for mutual fund shares must be made within how many days
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7. Unless the NYSC is closed on other than a weekend or holiday, or the SEC grants an exception
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Financial information cannot be used in a mutual fund prospectus if the information is older than
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16 months
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What is true about fixed municipal unit trusts
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Fixed unit trusts are not managed. The portfolio of securities does not change. As bonds mature or are called, the proceeds are distributed to the unit holders. These units are redeemable by the issuer or its agent
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What happens to the concession if a customer redeems mutual fund shares within 7 business days of purchase
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Any concession earned by the member firm that sold it to him must be returned to the underwriter. The same rule applies to variable annuities
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When is the sales charge deducted from purchase of mutual fund shares made under a letter of intent
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When the customer makes the first investment under a letter of intent, the reduced sales charge applies immediately and to each subsequent investment. With each additional investment the same reduce charge is deducted. If the customer does not invest the amount stated in the letter, the full sales load isbapplied retroactively to the total investment
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What is an example of a mutual fund that would have capital appreciation as its investment objective
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Specialized. An objective of high capital appreciation is most likely realized by a specialized stock fund. A specialized fund is one that invest in stock of one particular industry or region, and its main objective is capital or price appreciation
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A mutual fund has a net asset value of $7.80 per share, & a fund pays an underwriter a concession of 12 cents per share. If the fund has a sales load of 50 cents per share, an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A shares of this fun
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$8.30. The investor pays the POP when purchasing mutual funds. For a class A share, upon purchase the POP is NAV plus sales charge
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What should be researched when assessing a fund
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Investment policy, track record, portfolio, and sales load. The identity of the custodian bank for the fund or number of shares outstanding does not bear on its performance or suitability
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What are two functions of an investment companies custodian bank
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Safekeeping of portfolio securities (not investors) and cash and maintaining asset records of the funds. The custodian bank performs bookkeeping and clerical functions.
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Mutual funds must show performance statistics for which years
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Years 1, 5, and 10, or the life of the fund, whichever is shorter
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What would happen if a client issued a letter of intent and later decided to redeem the shares
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A letter of intent is not binding on client in any way. The fund will keep some of the initially issued shares in an escrow account to ensure payment of the full sales load and would reduce the redemption by the amount of shares held in escrow.
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On what type of fund would the customer pay the asking price plus a commission
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A closed end fund
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Who sets the ex date for a closed end fund
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The ex dates for closed end funds, typically 2 business days before the record date, are determined by the exchanges on which they trade.
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Who sets the ex date for an open and fund
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The ex date for open end funds, typically the business day following the record date, is determined by the Board of Directors of the fund
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The fee received by the management company from an investment company depends on
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The average annual net assets of the fund
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Can a closed end fund issue more than one class of security
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Yes. Including debt issued and preferred stock. Note open-end cannot issue debt
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Unit investment trust issues shares that represent units of a
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Particular portfolio. Management has no authority to change the portfolio. The portfolio is fixed and is not traded
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All sales agreement for investment companies between a principal underwriter and a member must
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Be in writing, provide for a 7 day refund of the concession, and include a stipulation that the member will maintain the public offering price, not the nav
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A low portfolio turnover or a high portfolio turnover will have the lowest annual expenses
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Lower portfolio turnover
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A FINRA member broker-dealer trading in shares of an open end investment company may not buy shares for
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Its own inventory. A broker-dealer may buy shares only to fulfill existing orders or for its own investment accounts
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From whom are redeemable securities purchased and redeemed
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A redeemable security is purchased from and redeemed by the securities issuer. Open end shares are redeemable securities
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What is a risk unique to closed end funds versus a open end fund
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Closed end funds can, and often do, trade below their net asset value, thus subjecting the customers principal to risk . A open and fun can never have a POP less than its NAV.
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Are the a semi annual report required to be supplied to investment company shareholders regulated under FINRA's communication with the public rules for broker dealers
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The reports are required to be supplied under the Investment Company Act of 1940. They are prepared and distributed by the investment companies. Unless forwarded by broker dealers to their customers, the semi annual reports are not regulated under center of communication with the public for broker dealers
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How often must a fund notify shareholders of their right to reinvest
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At least annually. Usually communicated through the annual report
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Why are the tax consequences different for a exchange traded funds compared to a mutual funds
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Portfolio turnover rate is minimized on ETFs because they do not have to buy and sell within their portfolio to accommodate shareholder purchases and redemption. This can affect the potential tax consequences of annual capital gains and losses. Since ETFs are traded like other exchange products, they are priced by supply and demand. Customers pay commissions not sales charges on ETFs.
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What is it called when a registered representative encourages investors to purchase funds before the ex-dividend date,
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selling dividends--a violation of the FINRA rules
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In mutual fund invested in bonds with medium length maturities. As the bonds matured, the fund reinvested the proceeds and purchased long term bonds with maturities up to 20 years. What might have happened to the fund if the reinvestment had occurred during a period when interest rates for rising
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An increase in yield and an increase in income. If a fund replaces medium term bonds with long-term bonds the bonds would pay higher interest rates thus generate more income. Additionally as interest rates rise so do yields
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Mutual fund has no redemption fee, the investor redeemed her shares at what price
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The bid price, net asset value
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Open end investment companies are limited to a maximum sales charge of 8.5% of the
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Offering price
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What are HOLDRs
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HOLDRs are exchange traded investment that traded in round lots of 100 shares. They are not redeemable by the issuer. The securities can be unbundled and traded individually thus taking losses or gains when advantageous
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