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32 Cards in this Set

  • Front
  • Back

Investment clubs:

1. can take advantage of breakpoints on mutual fund purchases.

2. cannot take advantage of breakpoints on mutual fund purchases.

3. are permitted to purchase new equity issues at the POP.

4. are not permitted to purchase new equity issues at the POP.

Answer: 2 & 3

Investment clubs are not considered restricted persons under the rules regarding sales of a new issue and therefore are eligible to purchase new equity issues. Note that if a registered representative (a restricted person) were a member of an investment club, the club would be prohibited from buying a new equity issue. Investment clubs are never permitted to take advantage of breakpoints available on MF purchases.

A broker/dealer selling open-end investment co. shares will be required to return its entire selling concession if the principal underwriter has to repurchase those shares from a customer within how many b. days of trade date?

A) 7

B) 15

C) 30

D) 60

Answer: A

Any concession earned by the member selling the shares must be returned to the principal underwriter of the fund if the shares are redeemed within 7 b. days of purchase.

According to the Investment Co. Act of 1940, an open end investment co. must compute its NAV:

A) no less frequently than once/day

B) weekly

C) monthly

D) annually

Answer: A

Mutual funds must calculate the value of fund shares at least once per business day. Funds may calculate the value more often and will disclose this fact in the prospectus.

An investment co. share purchased at its NAV that can always be redeemed later at its then-current NAV is a:

A) Class D share

B) Class C share

C) Class A share

D) Class B share

Answer: B

Class A shares are purchased at NAV plus sales charge. Class B shares pay the sales charge upon redemption. Class D shares have a level load plus a redemption fee. Class C shares have only a level load (a 12b-1 fee), which is taken from net assets during the year.

If the value of securities held in a fund's portfolio increases, and the amount of liabilities stays the same, the fund's net assets:

A) increase

B) decrease

C) stay the same

D) are more liquid

Answer: A

An appreciation in value of fund assets, without a corresponding increase in liabilities, leads to an increase in the fund's net asset value (NAV) (total assets - liabilities = net assets).

Under the Investment Co. Act of 1940, redemption payments for mutual fund shares must be made within how many days?

A) 15

B) 7

C) 5

D) 10

Answer: 7

If a customer tenders mutual fund shares for redemption, pmt must be made within 7 calendar days, unless the NYSE is closed on other than a weekend or holiday, or the SEC grants an exception.

Under the Conduct Rules, the maximum sales charge on any transaction involving an open-end investment co. share is:

A) 8.5% of the NAV

B) 9% of the NAV

C) 9% of the offering price

D) 8.5% of the offering price

Answer: D

Open-end investment companies (mutual funds) are limited to a max sales charge of 8.5% of the offering price.

A fund must inform its shareholders of their right to reinvest dividends at NAV:

A) quarterly

B) at the time of each distribution

C) only at the time of original purchase

D) annually

Answer: D

A fund must notify shareholders of their right to reinvest at LEAST annually (usually communicated through the annual report).

When discussing mutual funds with a customer, each of the following statements are prohibited EXCEPT:

A) Buy the shares on record date in order to receive the dividend.

B) Buy share of different funds in the same fund family and you may qualify for a breakpoint on the total purchase.

C) The income yield of the fund consists of both dividends and capital gains.

D) Get a few friends to join with you to form an investment club and you may qualify for a breakpoint.

Answer: B

Most funds provide a combination privilege, allowing investors to aggregate purchases made in different funds in the same family to qualify for a breakpoint. The income yield of a mutual fund includes dividends only. A group of friends is not eligible for a breakpoint. "Selling dividends" is a prohibited practice b/c of the immediate tax liability incurred with the dividend and share price adjustment that results after the dividend distribution.

All of the following events will affect the NAV per share of a mutual fund EXCEPT:

A) changes in the market value of the fund's portfolio of securities

B) the fund receives cash dividends on the securities in its portfolio

C) the fund pays dividends to its shareholders

D) wholesale redemption of fund shares

Answer: Dividends pd and rcvd by the fund directly affect NAV. Changes in the portfolio value affect NAV b/c the securities are marked to market daily. While share redemption will reduce total net asset value, the # of shares outstanding decreases in proportion, so the NAV per share stays the same.

All of the following are redeemable securities EXCEPT:


B) mutual funds

C) unit investment trusts

D) variable annuities

Answer: A

A redeemable security has no secondary market. To sell (redeem) a redeemable security, the investor must go back to the issuer or its agent. REITs trade in the secondary markets, either on exchanges or OTC.

The exchange privilege offered by open end investment companies allows investors to:

A) delay the payment of taxes on shares

B) exchange shares of one open end fund for another in the same fund family at a NAV basis

C) exchange personally owned securities for shares of the investment co.

D) purchase new fund shares from dividends

Answer: B

Exchange privileges allow an investor to convert the value of shares held in one fund for those of an = value in the same family. Remember that conversion is a taxable event; if the shares converted have increased in value, capital gains taxes will be due.

5 years ago, the ABCD mutual fund bought 200K shares of Comet Industries at an avg price of $42.25. After a series of accounting scandals, the shares are now trading at $6. If the fund decides to sell its shares, what will be the impact of the sale of Comet shares on the NAV of the ABCD fund?

A) The NAV will not change

B) The NAV will fall

C) The NAV will rise

D) This depends upon whether the fund can claim a tax loss on the sale

Answer: A

Portfolio holdings in a mutual fund are marked to the market each day. Therefore, the NAV of the fund already reflects the current value of each security in its portfolio, including Comet Industries. When the fund sells the position, the value of the stock is replaced by an equivalent amt of cash, so net asset value does not change.

Which of the following statements regarding 12b-1 fees is TRUE?

A) These fees are charged against the assets of the fund to defray distribution expenses.

B) These fees are assessed on Class B shares only.

C) These fees are charged to customers who redeem their shares within 6 months of purchase.

D) These fees are assessed on Class A shares only.

Answer: A

These fees are used to offset distribution expenses of the fund and are charged against the assets of the fund, and may be assessed against Class A, B & C shares.

One of your clients purchased shares of the Ajax Mutual Fund several months ago. At that time, the NAV of the fund was $17.20. Today, the NAV is $17.56 and your client wants to know what accounts for the difference. You should advise him that the difference likely represents:

A) realized appreciation

B) capital gains

C) capital losses

D) unrealized appreciation

Answer: D

The NAV of MFs is marked to the market daily; the increase reflects higher market prices for the securities in the fund's portfolio.

A customer wishes to invest $800K in the Ajax Fund, an open end company with a LT growth objective. In order to take advantage of breakpoints, you recommend that the customer purchase:

A) Class B shares

B) Class C shares

C) Class A or Class C shares

D) Class A shares

Answer: D

Class A shares come with a front end load that can be reduced or eliminated by breakpoints. Class B shares come with a back end load combined with 12b-1 fees. Class C shares assess 12b-1 fees. Class B or C shares cannot take advantage of breakpoint reductions.

A father opens 4 custodial accounts for each of his children with the same mutual fund co. He invests $15K in each account. The fund co. has breakpoints at $50K, $100K and $200K. The sales charge is:

A) based on a $15K investment and is charged for each acct.

B) based on the total $60k investment and qualifies for the $100K breakpoint

C) ineligible for a breakpoint discount because these are custodial accounts

D) based on the total $60K investment and qualifies for the $50K breakpoint

Answer: D

An investment made by 1 person in 4 custodial accts for his children at the same fund co. would qualify for the breakpoint that is applicable to the total amount invested. In this case, $60K was invested, so the applicable breakpoint is at $50K.

An investor redeems 200 shares of ABC Fund, which has no redemption fee. If the quote is $12.05 bid, $13.01 asked, what amount will the investor receive?

A) 2410

B) 1098

C) 2275.5

D) 2602

Answer: A

If a mutual fund has no redemption fee, the investor will receive the bid price per share (NAV) multipled by the # of shares being redeemed. In this case, the investor would receive $2410 ($12.05 x 200 shs).

Mutual fund Class B shares assess:

A) a front end load

B) no load

C) a deferred sales load

D) a level load

Answer: C

Class B shares carry a deferred sales load. This is sometimes referred to as a back end load. Class A shares carry a front end load. Class C shares carry a level load.

A breakpoint sale is defined as the sale of mutual fund shares in an amount:

A) just below the public offering price of the fund

B) required as the min investment in a fund as specified by the SEC

C) just below the dollar amount at which the sales charge is reduced

D) at or above the dollar amount at which the sales charge is reduced.

Answer: C

The term "breakpoint sale" refers to the violation that occurs when a sale is made just below the point at which the investor would receive the reduced sales charge. The practice earns a higher commission for the salesperson but is not in the interest of the customer.

A customer seeks a significant LT investment in the Ajax fund, a growth oriented fund. To take advantage of breakpoints applicable to large investments, the customer should purchase:

A) Class C shares

B) Class D shares

C) Class A shares

D) Class B shares

Answer: C (Class A shares)

For initial purchases, breakpoints are only available if the customer purchases Class A shares, which are sold with a front-end load deducted from the initial investment. A substantial purchase can often reduce the sales charge to zero. Class B & Class C shares are sold with annual 12b-1 fees as well as a contingent deferred sales charge. Class D shares are sold with a level sales load plus a redemption fee.

Encouraging a customer to purchase mutual fund shares in an amount just under the next dollar volume bracket (which entitles the customer to a reduction in sales charges) or remaining silent on the matter is called:

A) front running

B) a breakpoint sale

C) interpositioning

D) selling away

Answer: B

In a breakpoint sale, a customer unknowingly buys investment company shares in an amount just under a dollar bracket that would qualify for reduced sales charges. As a result, the registered representative receives a somewhat higher commission but the customer pays higher sales charges, reducing the number of shares purchased and resulting in a higher cost per share.

If a RR is seeking to sell shares of an investment co to a client, which of the following statements would be accurate and permissible regarding her recommendation?

1. When the client redeems his shares, he will not immediately know their dollar value.

2. If the client invests just before the dividend distribution, he can benefit by receiving the added value of that dividend.

3. If the client purchases the shares of 2 or more funds in the same family of funds, he may be entitled to a reduced sales charge.

4. The purchase of Class B shares always provides the greatest return on investment.

Answer: 1 & 3

The purchase of 2 funds in the same family of funds may qualify an investor for combination privileges. At redemption, he will receive the next price calculated (forward pricing), which is not yet known. Class B shares, or deferred sales charge shares, may or may not provide the best return. Share class suitability can depend upon the amount invested and the client's individual needs. Lastly, while the dividend is received if the fund shares are purchased before the ex-dividend date, there is no added value. The fund share price is reduced by the amount of the dividend on the ex-dividend date, just as it would be for a cash dividend pd on equity securities.

The maximum sales load may be charged on the purchase of shares from an open-end investment co. that offers all of the following EXCEPT:

A) exchange privileges

B) dividend reinvestment at NAV

C) rights of accumulation

D) quantity discounts

Answer: A

Investment companies may charge the maximum sales load of 8.5% if they offer dividend reinvestment at NAV, rights of accumulation and quantity discounts (breakpoints). If a fund offers none of these features, it cannot assess a sales charge of more than 6.25%.

A purchase or redemption order for investment co. shares must be executed at a price based upon the:

A) NAV next computed after the fund receives the order

B) NAV last computed before the fund receives the order

C) NAV computed at the close of trading on the NYSE the day before the fund receives the order

D) best NAV computed the same day the fund receives the order

Answer: A

Purchase or redemption of MF shares occurs at the NAV next calculated after the fund receives the order; this is known as forward pricing.

All of the following may receive breakpoint discounts EXCEPT:

A) an investment club

B) a pension plan trustee

C) an investor or an individual retirement account

D) a husband and wife in a joint account

Answer: A

Breakpoints are not available to investment clubs.

Letters of intent may be backdated up to how many days?

A) 120

B) 90

C) 30

D) 60

Answer: B

The time limit for a letter of intent is 13 months, but the letter may be backdated up to 90 days from the date it was filled. In that case, the investor has 10 months to complete the letter.

Reduced sales charges are allowed under all of the following circumstances EXCEPT:

A) a lump sum purchase that qualifies for a breakpoint

B) additional purchases that qualify for breakpoints under rights of accumulation

C) combining separate purchases made by a client and his business partner in their respective IRA accounts

D) the customer signing a letter of intent

Answer: C

Two unrelated adults may not combine transactions to receive a breakpoint.

A front end sales load is defined as the:

A) concessions allowed on the purchase or sale of securities.

B) difference between the public offering price and the NAV of a MF share

C) commissions paid on the purchase or sale of securities

D) fee paid to the investment advisor

Answer: B

A sales load is the difference between the public offering price and the NAV per share of the fund.

An investor redeems 300 shares in ACE fund. When the investor bought the shares at $12, the NAV was $11.08. If the current POP is a $12.50 and the NAV is $11.80, the investor receives:

A) 3600

B) 3750

C) 3540

D) 3324

Answer: C

Shares are redeemed at NAV. If the investor redeems 300 shares at an NAV of $11.80, he receives $3540 (300x$11.80).

Letters of intent may be backdated up to how many days?

A) 60

B) 120

C) 90

D) 30

Answer: C

The time limit for a letter of intent is 13 mos, but the letter may be backdated up to 90 days from the date it was filled. In that case, the investor has 10 mos to complete the letter.

The management fees paid by an investment company are part of:

A) The custodial fees

B) The sales load

C) the operating expenses of the fund

D) the underwriting agreement

Answer: C

The management fees paid by an investment co. are part of the operating expenses of the fund. Custodial fees are also part of the operating expenses. A sales load is a selling cost contained within the underwriting agreement.