Ch 7 - Investment companies Flashcards

Question

Diversification

Answer 1

Investing in many different securities Reduces non-systematic risks

Answer 2

75%+ invested with no more than: **10% of an issuer’s voting power **5% of its assets in one issuer

Answer 3

Represents total fund expenses Includes: **Management fees (largest) **Custodian fees **Legal fees **Administrative fees Efficient funds have low expense ratios

Answer 4

Cost of investment adviser’s services Typically the largest part of the expense ratio

Answer 5

Paid to financial firm holding fund assets

Answer 6

Cannot be purchased on margin Cannot be sold short

Answer 7

Right to vote for Board of Directors Right to approve investment adviser contract Right to vote on fund-specific matters, including: **Fund’s objective **Changes to fund structure **Changes to fee schedule **Changes to diversified status Right to receive pro-rata share of dividends Right to fund disclosures **Prospectus **Statement of additional information **Annual SEC filing **Semi-annual shareholder report

Answer 8

Represents shareholder interests Oversees overall operation of the fund 40%+ must be independent (non-interested) **No more than 60% “interested” Approve dividend and capital gain distributions

Answer 9

Primary fund disclosure document Must be delivered when: **Financial professionals solicit investors **An investor purchases shares unsolicited Information disclosed includes: **The investment objective **Shareholder fees **Past performance (at least 1, 5, and 10-year returns) **Details on investment adviser and fund manager **Related risks **Fund policies **Financial highlights

Answer 10

Condensed version of the prospectus May be delivered instead of statutory prospectus

Answer 11

Provides micro-details on fund operations

Answer 12

Required disclosure report to regulators, which includes: --Market recaps over the previous year --Fund manager comments --Investment summary (details on fund portfolio) --Financial statements (balance sheet, income statement) --Financial highlights (income, expenses, returns)

Answer 13

Required disclosure report to shareholders, which includes: --Investment summary (details on fund portfolio) --Financial statements (balance sheet, income statement) --Financial highlights (income, expenses, returns)

Answer 14

assessed to current shareholders of investment companies, in order to market the fund to new share holders

Answer 15

affiliated with fund sponsors and other parties associated with the fund

Answer 16

Mutual funds are redeemable Transactions only occur with the issuer Completed through forward pricing (The cut-off time for mutual fund purchases and sales is 4:00 pm ET, the closing time for the stock markets. If you were to place a buy order for a mutual fund before 4:00 pm ET, you would receive that day’s NAV, also known as the fund’s “closing price.”mutual funds don’t start calculating their daily NAVs until after the market closes. Once it closes, the fund calculates the market value of all of its securities, plus factors in deposits and withdrawals. This data is then used to calculate the fund’s new overall NAV. The term ‘forward pricing’ comes from this pricing structure. When a customer submits a transaction request, they do not know the NAV price they will be subject to. The NAV, which will be the basis for the customer’s transaction price, will be “forwardly” calculated (in the future).

Answer 17

NAV= (net assets) / (shares outstanding) Fund value on a per share basis Calculated once per trading day Purchase price for no-load funds

Answer 18

If sales charge given in percent (%) POP= (NAV) / (1-SC%) If the sales charge is given in dollars ($) POP= NAV + SC

Answer 19

Bought at POP, sell at NAV POP is also known as the “ask” price NAV is also known as the “bid” price Max load = 8.5% of POP SC%= (POP - NAV) / POP (front-end loaded funds - recv next closing NAV per share)

Answer 20

Capital gains distributions may only occur once per year The BOD sets the ex-dividend date

Answer 21

Must be fulfilled within seven days

Answer 22

within same fund family, convert with no sales charge (but exchg subject to tax if fund is sold at a gain)

Answer 23

Capital gains (growth) Dividend distributions Capital gains distributions

Answer 24

ront-end loaded funds Sales charge assessed at purchase Subject to breakpoint schedules Low or no 12b-1 fees Suitable for: -Longer-term investors -Larger investments of money

Answer 25

Pledge to deposit breakpoint shortfall Lower sales charge assessed Lasts 13 months Can be backdated up to 90 days Retroactive charge if not fulfilled (cannot include appreciation or loss)

Answer 26

Failure to notify investors of breakpoint FINRA violation subject to penalties

Answer 27

Allows merger of multiple purchases for lower sales charge

Answer 28

Back-end loaded funds (CDSCs) Sales charges assessed at redemption Moderate 12b-1 fees Suitable for: -Longer-term investors -Smaller investments of money

Answer 29

No sales charge or a 1-year CDSC (Known as level load - since low or no CDSC) High 12b-1 fees Often includes 1 yr holding period - if liquided less than one year, SC is accessed. Suitable for: -Short-term investors

Answer 30

Marketing and promotion fees used to reduce expense ratio Maximum fee of 1% ---Distribution fee max = 0.75% ---Service fee max = 0.25% Funds limited to 7.25% loads if charging maximum 12b-1 fee Cannot market fund as “no load” if charging higher than 0.25%

Answer 31

Tax regulation for certain securities Taxable income passed to investors Also known as the “conduit” rule, AVOID TAXATION Must pass 90% of **net** investment income to qualify （not gross）

Answer 32

Funds that engage in Subchapter M are called

Answer 33

During primary offering: --Sold in the primary market --Prospectus delivery required After primary offering: --Traded in the secondary market (negotiable) --No prospectus delivery is required

Answer 34

Purchased at market price Subject to commissions NAV represents the fund’s book value Market price could be: --Higher than NAV --Same as NAV --Lower than NAV

Answer 35

Unique type of closed-end fund Do not trade in the secondary market Sold to investors daily at NAV plus a potential sales charge Considered redeemable securities (subject to repurchase offer limits) Redeemable at specific intervals (monthly, quarterly, semi-annually, or annually) Subject to considerable liquidity risk More capability to invest in illiquid investments with high returns Tend to be subject to high: -Sales charges -Expense ratios (high management fees) -12b-1 fees -Redemption fees

Answer 36

Structured as open-end management companies Negotiable securities

Answer 37

Track the performance of indexes Pursues the return of the overall market

Answer 38

Aim to match the returns of a benchmark index Low expense ratios

Answer 39

Picking the best individual securities in the market Attempts to outperform indexes

Answer 40

“Spyders” = S&P 500 ETF “DIAmonds” = Dow Jones Industrial Average ETF “Qubes”** = Nasdaq 100 ETF

Answer 41

Trade status: -ETFs are negotiable -Mutual funds are redeemable ETFs have lower expense ratios ETFs are more tax efficient

Answer 42

regulated similarily, track and invest in same type of index but indexed funds purchase once per day vs ETF purchase throughout

Answer 43

Picking the best individual securities in the market Attempts to outperform indexes

Answer 44

Aim to outperform the returns of a benchmark index Higher expense ratios than passive ETFs

Answer 45

Provide an opposite return of the index Only suitable for sophisticated investors

Answer 46

Provide amplified gains and losses Amplify at 200% and 300% rates Only suitable for sophisticated investors

Answer 47

Provide an opposite return of index with amplified gains and losses Amplify at 200% and 300% rates Only suitable for sophisticated investors

Answer 48

market value does not neccessarily closely track their NAV, active ETF NOT aim maintain market value close to index values Passive ETFs - neogitiable, trade throughout the day, close to linked index and daily caulcuated NAV

Answer 49

Debt instruments Promise to pay the return of an index have an maturity date Subject to default risk (credit risk) Negotiable securities Can be bought on margin Can be sold short (like ETF, based on performance of an underlying index) (unlike ETF, ETNS are NOT management companies and have maturity dates)

Answer 50

Fixed portfolios of securities No ongoing portfolio management No management fees Redeemable with the issuer Some UITs may trade in the secondary market

Answer 51

Registered investment companies Prospectus provides key disclosures Redeemable with the issuer

Answer 52

UITs may trade in the secondary market Mutual funds are only redeemable (no secondary market) UITs maintain fixed portfolios Mutual fund portfolios are managed* UITs have no management fee Virtually all mutual funds have management fees

Answer 53

Generally provide instant diversification Professional expertise and management

Answer 54

Investing fixed amounts consistently over time More shares are purchased in market declines Results in lower average cost vs. average price

Answer 55

A = actual return - expected return Measures over or underperformance of a portfolio or security Positive alpha = overperformance Zero alpha = meeting expectations Negative alpha = underperformance determine the effectiveness of a fund manager

Answer 56

Volatility measure as compared to the market (benchmark index) >1 = more volatile than market 0-1 = less volatile than market <0 = moves opposite of the market

Ch 7 - Investment companies Flashcards

(80 cards)