4: Packaged Investments Flashcards by Michael Sheen

______ is a corporation or trust that pools investors’ money and then invests that money in securities on their behalf.

Investment Company

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By selling share to the public, a corporation or investment company _________?

Raises capital

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provides a framework for the operation of investment companies, with the goal of protecting investors and ensuring that investment companies operate in a transparent and fair manner.

Investment Company Act of 1940

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Face-Amount Certificate (FAC)
Unit Investment Trusts (UITs)
& Management Investment Companies are considered the 3 types of ________ ?

Investment Companies

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_______ annuities have subaccounts that are defined as either UITs or Open-End management investment companies

Variable

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_______ is a contract between an investor and an issuer in which the issuer guarantees payment of a stated (Face amount) sum to the investor at some set date in the future.

Face-amount certificates (FACs)

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This classification of an investment company entails that the investor, in return for future payment, agrees to pay the issuer a set amount of money, either as a lump sum or in periodic installments.

Face-amount certificates (FACs)

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Define the term “Fully paid FAC”

When the investor pays for the certificate in a lump sum.

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________ an investment company organized under a trust indenture.

Do not have a BoD (They have Trustees)

Unit Investment Trusts (UITs)

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_______ create a portfolio of debt or equity securities designed to meet the company’s objectives.

They then sell redeemable interests, also known as units or shares of beneficial interest

UITs

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A ____ may be fixed or nonfixed.

UIT

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a _____ UIT typically purchases a portfolio of bonds and terminates when the bonds in the portfolio mature.

Debt-Fixed UIT

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a ____ UIT purchases a portfolio of stocks and, because stocks don’t have a maturity date, terminates at a predetermined date.

Equity-Fixed UIT

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_____ do not typically assess management fees because there is no need to hire an investment adviser to monitor and trade positions within the portfolio.

Fixed Unit Investment Trust (UITs)

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A ____ purchases shares of an underlying mutual fund.

A Nonfixed UIT

is a type of investment vehicle that pools money from multiple investors to purchase a portfolio of securities, typically stocks or bonds. Unlike a traditional fixed UIT, which invests in a predetermined portfolio of securities with a fixed investment objective, a nonfixed UIT has a more flexible investment approach and allows for changes to the portfolio holdings over time.

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____ and ____s are not managed, once the portfolios are composed, they do not change.

Also do not trade in the secondary market; they are redeemed only through the issuer

FACs and UITs

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Name the 2 types of managed investment companies

Closed and Open End

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Both ____ and _____ managed companies sell shares to the public in an initial public offering (IPO)

Closed and Open End

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A ______ company’s initial offering of shares is limited

Closed-End

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A _____ investment company is perpetually offering new shares to the public.

Open-End

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The investment company issues a fixed number of shares to investors through an initial public offering (IPO).

Once sold the fund is closed to new investors
After the IPO, the shares of the closed-end fund are traded on an exchange like stocks. The price of the shares is determined by supply and demand in the market.
The net asset value (NAV) of the closed-end fund is calculated by subtracting the fund’s liabilities from the value of its assets, and dividing by the number of outstanding shares.
may pay dividends to their shareholders out of the income generated by their portfolio

Closed-end investment companies

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are often called publicly traded funds and are the only investment company security that trades in the secondary market.

Closed-end investment companies

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How do we calculate NAV per share?

the funds NAV
_______________________ =
# outstanding shares

Shares in the hands of investors

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A mutual fund is what type of managed investment company?

Open-End

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an _______ company only issues one class of security, which is common stock (No preferred shares or bonds) - Does not specify the exact number of shares it intends to issue but does register with the SEC

Open-End Company

T or F One of the key differences between an open-ended fund and a closed-ended fund is that an open-ended fund, can raise an unlimited amount of capital by continuously issuing new shares.

True

What does the acronym POP mean?

Public Offering Price. This is the price paid for example when a client acquires mutual fund shares.

True of False Mutual Funds are priced at the end of each business day All buys/sells must be entered before 4pm or will be considered as a transaction for the next business day

True

True or False Buying into an open-end company buys you only full shares

False Open-End funds issue full or fractional shares Closed-End funds only issue full shares

A _____ funds price is determined by supply and demand - CMV + Commission make up the costs associated with this fund

Closed-End funds

True or False Most hedge funds are organized by private investment partnerships and are considered illiquid.

True * Some have minimum holding requirements known as "Lockup provisions" Their interests do not reliably trade intraday

securities that trade on the markets during regular business hours are said to trade _____

Intraday

______ a stream of payments guaranteed for some period of time

Annuities

True or False Because the investor takes on the risk, a **Variable Annuity** is considered a security

True

Beneficiaries will receive **the greater of** *the contribution amount* or *the current value if the owner dies during an accumulation period.* This often referred to as the ______ benefit

Death Benefit

Premium payments for variable annuities are invested in what is called a ______ account. - this account investments into various subaccounts that behave like diversified portfolios

The Separate Account

True of False If a Separate Account is directly managed it must be registered under the Investment Company Act of 1940.

True

If the portfolio management responsibility is passed to a third party, the separate account is indirectly managed and must be registered as a UIT True or False?

True Remember, UIT stands for Unit Invesment Trust. Keep the term Trust in mind here. As the third party is managing the fund of an investment company for a trustee aka the investor

True or False There is no limit to the annual contribution amounts on commercial (nonqualified aka taxed) contracts. But there is on qualified contracts (Pre-taxed) which are subject to contributions similar to those of 401(k) plans.

True

_______ is defined as a one-time and irreversible election o give up ownership of the assets of the annuity in return for a lifetime guarantee by the insurance company - the income is determined by the insurance company based on gender, age, account value, payout option, an the assumed interest rate (GAAPI)

Annuitization

True or False A Fixed-Annuity promises a stated rate of return. - Therefore the insurance company is at risk and the investor is not as the return is guaranteed, the product is **not considered a security.**

True

Under a ____ fund - All taxable events flow down to the shareholders each year - Whether funds are reinvested or taken, they are taxable - Reinvestment will add to the investors cost basis in the fund - Shares can be fractional and therefore can be thought of in dollars rather than in number of shares owned.

Mutual Fund

True or False Each year a mutual fund distributes a Form 1099 explaining the taxability of distributions

True

no-load funds mean a fund with no _______.

Sales Charges

Class A funds are _____ loaded. - Most common way of paying for mutual fund shares

Front Loaded Meaning the sales charge is charges at the time of purchase

Class B funds are _____ loaded.

Back-end Loaded - Sales charge is paid at the time of sale (redemption period) This % usually drops to zero however once the shares are held for no longer than 5 years. - At which point become Class A

Class C are ____ load shares

Level-Load These fees are typically lower but they never go away. Meant for shorter investment horizons. * Imagine how expensive this can get the longer an investor reinvests into the fund

_____ are quantity discounts on open-end management company shares (Mutual Funds) - the greater the dollar amount or a purchase, the lower the sales charge.

Breakpoints

A person who plans to invest more money with the same mutual fund company may immediately decrease the overall sale charges by signing a ____________.

Letter of Intent (LOI)

This letter from the investor informs the investment company of the intention to invest additional funds necessary to reach the breakpoint within 13 months

Letter of Intent - One side contract binding on the fund only - Appreciation and reinvestment do not count towards the LOI

True or False Letters of Intent - Allow the investor to use prior share appreciation to qualify for breakpoints and - do not impose time limits

False This applies to **Rights of Accumulation**

True or False An investor with investments in a family of funds may combine his shares to reach breakpoints?

True This is called **Combination Privilege**

True or False **Exchange privileges** allow an investor to convert an investment in one fund for an equal investment in another fund in the same family, often without incurring additional sales charges.

True - This exchange is considered a taxable event and there may be tax consequences.

The ____ of a fund share is the amount the investor receives upon redemption.

NAV Net Asset Value

We always have to wait until the next available calculation to determine the value of shares redeemed or, for that matter, the number of shares purchased. This is often referred to as _____ pricing.

Forward Pricing

Assets - Liabilities ___________________ outstanding shares =

NAV per share

compares the management fees and operating expenses, including any 12b-1 fees, and the funds net assets calculated as: = Total Fund Costs ___________________ Total Fund Assets

Expense Ratio

the ____ is the full and fair disclosure document that provides a prospective investor with the material information needed to make a fully informed decision. - disclosed a 1-, 5-, and 10-year performance histories or performance over the life of the fund, whichever is shorter.

Full Prospectus.

TEST TOPIC ALERT****

A prospectus may not ever be altered in any way. This means no highlighting, writing in, or taking any measure to bring attention to any specific passage or section is permitted.

Omitting Prospectus is another term for a _______

fund advertisement.

at the investors request this document must be delivered within 3 business days. - Additional information about the fund not necessary for the prospectus.

(SAI) Statement of Additional Information

True or False Subchapter requires a fund to distribute at least 90% of its net investment income to shareholders.

True Anything less and it pays taxes on 100% of net investment income.

Is an investment company that offers a fixed portfolio, generally of stocks and bonds, as redeemable units to investors for a specific period of time. - designed to provide capital appreciation and/or dividend income.

A unit investment trust

____ are similar to both open-ended and close ended funds in that they all consist of collective investments in which many investors combine their funds to be managed by a portfolio manager.

Unit investment trusts

In essence, it is a type of savings instrument that **guarantees a specific amount of money, or the face value, to the holder at a future date.** The face value is typically higher than the amount of money initially invested, and it may also include interest earned over the life of the certificate - backed by a security interest.

Face-Amount certificate company

Implies keeping the price steady, which SEC allows in a new issue if done in accordance with strict guidelines of SEC ---- anti- manipulation guidelines

Stabilizing

A term generally used in Wall Street to refer to the practice of: Maintaining a market price at or near the POP of a new issue for the sole purpose of protecting the stock from declined during a new offering.

Stabilizing

Which of the following investment instruments trades on an exchange at a market price not directly related to its net asset value? A. Open end investment company B. Private hedge fund C. Put and call options contracts D. Closed-end investment company

Only the closed end investment company trades at supply and demand pricing on an exchange, and has no specific relationship to the funds underlying asset value

4: Packaged Investments Flashcards

(68 cards)