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62 Cards in this Set

  • Front
  • Back

Investment Company Act of 1940

lays out rules relating to management of investment companies, divides investment companies into three main types: management investment companies (focus on these), face-amount certificate companies, and unit investment trusts

Management investment companies

most familiar type of investment company, actively managed by portfolio managers, either open-end (mutual) funds or closed-end funds

Open-end (mutual) funds

AKA: mutual funds, invest in many diff. securities to provide diversification for investors, key diff. constantly issuing and redeeming shares = liquidity for investors, prospectus must always be availible

Net asset value (NAV) for mutual funds

"net asset value per share" determined by dividing the value of the securities held by the fund by the # of outstanding, w/ mutual funds the NAV is the bid price, when investors redeem mutual funds they receive the NAV, can not ever trade below NAV, determined the same way for open and closed end funds

Public offering price (POP) for mutual funds

the POP (ask price) is the NAV plus a sales charge

Closed-end funds

invest in many diff. securities to provide diversification for investors, key diff. have a fixed # of shares, act more like stocks than open-end funds because they issue new shares to the public and they are bought and sold in the market, AKA: publicly traded funds

Net asset value (NAV) for closed-end funds

"net asset value per share" determined by dividing the value of the securities held by the fund by the # of outstanding, determined the same way for open and closed end funds, closed-end funds can trade below the NAV

Public offering price (POP) for closed-end funds

the POP (ask price) depends more on supply and demand than the NAV, investors of closed-end funds pay the POP (current market price) plus a broker's commission

Do closed-end funds offer a high degree of liquidity?

Yes, although they are not purchased from and redeemed from the issuer, after the initial offering, they can be purchased or sold quickly on the exchange or over-the-counter (OTC)

Closed-end funds

one time offering of securities (fixed # of shares), investors purchase at the current market value (POP) plus commission, issues common/preferred stock and debt securities, shares can be purchased in fully only, sale goes through underwrites and then investors purchase and sell shares OTC or on an exchange (no redemption)

Open-end funds

continuous offering of new shares (no fixed # of shares outstanding), investors purchase at the NAV plus a sales charge, issue common stock only, shares can be purchased in full or fractions (up to three decimal places), shares are sold and redeemed by the fund only

Major types of open and closed end funds:

Money market fund, income fund, balanced fund, growth fund, specialized (sector) fund, international or global fund, hedge fund

Money market fund

invests in money market instruments (short-term debt securities), usually provides a check-writing feature (checkbook) to redeem shares, "no load" (no sales charge), computes dividends daily and credits them monthly, no penalty for early redemption

1st safest

Income fund

goal is to provide current revenue (not growth) for investors, invests most of its assets in a diversified portfolio of debt securities that pay interest and in preferred/common stock of companies known to pay cash dividends, good for retirees and investors looking for steady cash flow w/o much risk

2nd safest

Balanced fund

combination of growth fund and income fund, invest in common stocks, preferred stock, long-term bonds, and short-term bonds, aims to provide income and capital appreciation while minimizing risk, these funds don't get damaged too badly when the market is bearish but usually underperform when the market is bullish

3rd safest

Growth fund

invest most of their assets in a diversified portfolio of the common stock of relatively new companies looking for big increases in stock prices, can be broken down into aggressive or conservative growth funds, higher growth potential for investors but higher risk, for the investor looking for long-term capital appreciation potential

4th safest

Specialized (sector) fund

invests primarily in the securities of a single industry or geographical area

Ex. financial services, healthcare, automotive stocks, Japanese securities

5th safest

International or global fund

international fund invests in companies based anywhere outside of the investor's home country, global funds in anywhere in the world including home country, holders of these funds face currency risk or that politics in a particular country will harm the value of the fund

6th safest

Hedge fund

this fund uses leverage (purchasing on margin), options, short sales, and other speculative investment strategies, usually perform better in bearish market than other funds do, most speculative


Composition funds

funds that invest in certain types of funds such as foreign stock funds, tax-exempt funds (municipal bonds), U.S. government funds

Ex. a customer looking for safety and income may invest in U.S. Government bond fund

Do open or closed end funds offer breakpoints?

Open-end funds


to entice investors to spend more is to reduce the sales charge when they spend a certain minimum amount of money, purchase amounts are divided into diff. tiers, vary from fund to fund

breakpoint sales

selling a fund to an investor just lower than the breakpoint value which is a violation of FINRA rules

Rights of accumulation

investors receive a breakpoint when the amount of funds held plus the amount purchased exceeds a certain value

Letter or intent (LOI)

signed by an investor, allows them to receive a breakpoint right away w/ an initial purchase on the promise that they will deposit enough money within a 13-month period to reach the breakpoint, may be backdated 90 days (applied to a previous purchase, but 13-month period still starts on the purchase date, shares are held in escrow/custody/collateral until the investor deposits the promised funds, if they do not the fund sells the shares and pockets the cash

Are investors able to redeem their shares even while under letter of intent?


Dollar cost averaging

an investor is investing the same dollar amount into the same investment periodically, primarily used for mutual funds but used for others as well, benefits investor when the price of security is fluctuating, ends up buying more when price is low and less when it is high by depositing same amount in each purchase, results in average cost per share lower than the average price per share

average cost per share = (total amount per share)/(# of shares purchased)

Know how to get average cost and price per share, and amount saved per share

Fixed share averaging

no formula, just buying the same # of shares at fixed intervals

Ex. 50 shares every month

Sales charge percent calculation for open end funds

sales charge max is 8.5%, part of the POP, not tacked on afterward, POP = 100%, if sales charge is 8% then the NAV is 92%

sales charge % = (ask - bid) / (ask)

- or - = (POP - NAV) / (POP)

Public offering price (POP) for open end (mutual) fund

when given only the NAV and sales charge percent:

POP = (net asset value) / (100% - sales charge %)

Face-amount certificate companies

a packaged security that's similar to zero-coupon bonds, investors make a lump sum payment or periodic payments in return for a larger future payment, issuer of guarantees payment of face amount (fixed sum) to investor on preset date, very few of these securities are around today

Unit investment trusts (UIT's)

registered investment company that purchases a fixed (unmanaged) portfolio of income-producing securities (typically bonds) and holds them in a trust, this means the UIT acts as a holding company for investors, company issues redeemable shares (units) that represent investors interest in the trust, unlike mutual funds, UIT's are set for specific period of time and have set termination date, any capital gains, interest, and/or dividends are passed to shareholders at regular intervals

Unit investment trust (UIT's) - (extended)

have a finite # of shares outstanding + distrib. in primary market at the IPO price, because finite # of shares = must be redeemed w/ issuer or sponsor and liquidity is limited, can be purchased as a growth, income, international type etc.,

Two main types of UIT's

Fixed investment trust ands Participating trusts

Fixed investment trusts

companies invest in a portfolio of debt securities and the trust terminates when all the bonds in the portfolio mature, do not employ an investment adviser because it is fixed therefore there are no investment adviser fees during the life of the trust

Participating trusts

companies invest in shares of mutual funds, the mutual funds that the trusts hold do not change but the securities held by the underlying mutual funds do

Exchange traded funds (ETF's)

closed-end index funds traded on the exchange, provide investors w/ diversification along w/ ability to sell short and purchase shares on margin

Inverse ETF's

AKA: Short ETF's or Bear ETF's: exchange-traded funds that are designed using many derivative products, such as options to attempt to profit from a decline in the value of underlying securities (for example, S&P 500), can be used to profit from the decline in a broad market index or a specific sector such as energy or financial sectors

Real-estate investment trust (REIT)

a trust that invests in real-estate-related projects such as properties, mortgage loans, construction loans, pool the capital of many investors to manage property and/or purchase mortgage loans, issue shares to investors repping their interest in the trust, provide diversification and liquidity, distributed in primary market @ IPO price, traded (bought and sold) in secondary market to other investors, have a finite # of shares

Equity REIT's

take equity positions in real-estate properties, derived from rent collected or profit made when properties are sold

Mortgage REIT's

purchase construction loans and mortgages, receives interest paid on the loans and in turn passes it on to the owners/investors of the trust

Hybrid REIT's

combo of equity and mortgage REIT's, generate income derived from rent and capital gains (like equity) and interest (like mortgage)

REIT's can avoid being taxed if:

- at least 75% of income comes from real-estate-related activities

- at least 75% of the REIT's assets are in real estate, gov. securities, and/or cash

- at least 90% of the net income received is distributed to shareholders (who pay taxes on this income)

REIT vs. real-estate limited partnerships

- REIT's only pass income to investors

- Limited partnerships pass on (industry term 'pass through') income and tax write-offs to investors for them to use on their personal tax return


like mutual funds, except designed to provide supplemental retirement income for investors, life insure companies issue annuities and they provide guaranteed payments for life, two types: fixed and variable, typically for investors under 75 but over 50 and not for entire portfolio

Fixed annuities

fixed rate of return that the issuer guarantees, investors pay money into account and it is deposited into the insurance company's general account, after investor starts receiving money back (usually monthly) from the fixed annuity, payments remain the same for the rest of the investor's life, not considered securities because they are fixed and therefore exempt from SEC registration

Purchasing power risk

the risk that the investment won't keep up the inflation (usually associated w/ fixed annuities)

Ex. $1,000 in 1970's is better than $1,000 now

Variable annuities

issued to keep pace w/ inflation, variable annuities are considered securities and must be registered w/ SEC, money deposited is held in a separate account and invested in stocks, bonds, mutual funds to keep pace w/ inflation, the

Assumed interest rate (AIR)

related to variable annuities, the projection of the performance of securities in the separate account over the life of the variable annuity contract, what the investor expects to receive

Can investors in fixed and variable annuities write off their payments on their taxes?

No, payments are made w/ after tax dollars

How do payments in a fixed and variable annuity grow?

On a tax-deferred basis (are not taxed until the money is withdrawn)

Ex. Deposit $80, grows to $120, taxed on $40

death benefit

if an annuitant dies during the pay in phase, the 'greater of all the money in the account' or some guaranteed minimum amount is paid to the annuitant's beneficiary

accumulation units

investor of variable annuity purchases these during pay-in phase similar to shares of a mutual fund

Single payment deferred annuity

investor purchases the annuity w/ a lump sum payment, payouts are delayed until some predetermined date

Periodic payment deferred annuity

investor makes periodic payments (usually monthly) into the annuity, payouts are delayed until some predetermined date, most common type of annuity

Immediate annuity

investor purchases the annuity w/ a large sum, payouts begin within a couple months

life annuity

provides income for the life of the annuitant, however, if the annuitant dies the payments stop, this is risky because if the annuitant dies earlier than expected the insurance company keeps the leftover money, has the highest payout

life annuity with period certain

payout option guarantees payment to the annuitant for a minimum # of years (10, 20, 30 yrs)

Ex. annuitant purchases an annuity for 20 yrs, dies after 5, named beneficiary receives payments for 15 years

Joint life w/ last survivor annuity

guarantees payments over the lives of two people, typically for husband and wife, if husband dies first, wife receives payments until death and vice versa, because it lasts two lifetimes has the lowest payout

mortality guarentee

annuities are guaranteed payments as long as they live, even if beyond life expextancy

Early withdrawal penalty

annuity investors are hit w/ 10% early withdrawal penalty if they withdraw the money prior to age 59 1/2, 10% penalty added to investor's tax bracket

some exceptions such as purchase of new home, age 55, lose job, death, disability

For Further Review (Part 3 / Ch. 10)

pgs. 143-144