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Flashcards in chapter 18 Deck (65)
1

What are three distinct advantages to investing in an open-end investment company?

1) Diversification   2) Professional Management   3) Liquidity

2

 
Investment companies must send financial statements to customers every ____ months. 

6 months

3

What amount of an investment company's Board of Directors must be independent/unaffiliated?

majority

4

What are the three different types of investment companies?

 1) Face Amount Certificate Companies 2) Unit Investment Trusts (UITs) 3) Management Companies 

5

True or False: Mutual fund shares may be purchased and sold in the secondary market.

False

6

 Since mutual funds are considered primary market issues, they must be sold by ____________. 

prospectus

7

Are mutual funds considered marginable securities?

No. Investors must pay 100% of the purchase price.

8

According to industry rules, _____% is the maximum sales charge on mutual funds.

8.5%

9

What price is paid for mutual fund shares?

The Public Offering Price (POP). POP = NAV + Sales Charge (if applicable).

10

What does the following quote indicate about the fund? NAV: $9.20 POP: $9.20

it's a no-load fund

11

After the initial offering, where are shares of a closed-end management company purchased?

in the secondary market

12

 What terms are synonymous with a mutual fund's Net Asset Value (NAV)? 

bid price or redemption price

13

What price is paid for closed-end management company shares?

market price plus a commission

14

True or False: The market price of closed-end shares could be higher, lower, or equal to the NAV.

 
True. Shares can trade at a premium or discount to NAV based on supply and demand forces. 

15

 May closed-end funds issue more than one type of security? 

Yes. Closed-end funds may issue common stock, preferred stock, or bonds.

16

 Sales charge is always expressed as a percentage of the ________. 

POP (Public Offering Price)

17

 
To calculate the sales charge percentage for a mutual fund, the formula is: (______-______) ÷ ______ 

(POP - NAV) ÷ POP

18

 
To calculate the POP for a mutual fund, the formula is: ______ ÷ (______ - ___________) 

NAV ÷ (100% - Sales Charge %)

19

Define breakpoint.

Dollar levels of investment purchases that qualify for a reduced sales charge

20

What is the formula for determining the number of shares able to be purchased when reaching a breakpoint?

Dollars invested ÷ newly calculated offering price (based on the reduced sales charge)

21

Letters of Intent are valid for ____ months.

13 months

22

Letters of Intent may be back-dated for _____ days.

90 days

23

Is a letter of intent binding on the investor?

No, it is binding on the investment company

24

True or False: If a mutual fund investor chooses to reinvest dividends, taxes will be deferred.

False

25

Funds offer ______________________ to allow buyers to add all purchases made from a fund family to reduce sales charge.

rights of accumulation

26

True or False: To lower sales charges, investors add mutual fund purchases in all accounts using Rights of Accumulation.

True, but purchases must all be from same fund family

27

A _______________________ fund is one that invests in a specific industry or geographic region.

sector or specialized fund

28

 Into what does a growth fund invest? 

common stock

29

If a client's goal is preservation of principal, what fund would be most appropriate?

money-market fund

30

A fund whose portfolio is created to mirror the composition of a particular index is referred to as an ________ fund.

index fund

31

A fund whose portfolio is created to mirror the composition of a particular index is referred to as an ________ fund.

low expenses, passive management

32

___________________ is the balancing of investment classes according to an investor's investment objectives.

asset allocation

33

What funds are similar to an index fund, but trade in the secondary market like stock?

ETF

34

True or False: ETFs are marginable and may be sold short.

True

35

What is a fund's net investment income?

 Dividends + interest - expenses 

36

 
True or False: Regulated Investment Companies (under Subchapter M) may relieve their burden of paying tax on income. 

True.  only taxed on income retained

37

What are the requirements for being considered a Regulated Investment Company?

The fund must be a domestic company that distributes at least 90% of its net investment income

38

A Regulated Investment Company's net investment income will ultimately be taxed to the __________________.

shareholders

39

 What is the annual fee levied against a fund's assets to pay expenses of commissions, advertising, and sales literature? 

12b-1 fee

40

True or False: Custodian banks provide investment management service to a fund.

False. Custodian banks provide safekeeping for a fund's cash and securities.

41

A fund's management fee is typically calculated based on a percentage of _________________________.

assets under management

42

 
A ______ is a type of investment company which has a fixed portfolio of securities and is supervised, not managed. 

UIT

43

Are breakpoints available when investing in UITs?

YES

44

When a fund distributes a capital gain, is it the fund's or shareholder's holding period that is considered?

The fund's holding period is used to determine whether long-term or short-term.

45

A fund distributes a gain on shares held for 3 yrs. Joe has owned the fund shares for 6 months. How is Joe's gain taxed?

 
As a long-term capital gain, since the fund held the shares for three years. Joe's holding period is irrelevant. 

46

 What is a REIT? 

Real Estate Investment Trust

47

What amount of net income must a REIT distribute?

90%

48

The trading of REITs is most similar to what type of investment company?

 Closed-end management companies, since both trade in the secondary market (exchange or OTC) 

49

 
Is a REIT a form of direct participation program (DPP)? 

no, they do no pass through losses

50

 A REIT could derive income from what different sources? 

Interest (mortgage REIT), rent from both residential and commercial property, and capital gains (equity REIT)

51

If a REIT pays dividends, would the corporate dividend exclusion rule apply?

no

52

True or False: REITs are exempt from the registration requirements of the Securities Act of 1933.

False

53

 Is a mutual fund's redemption fee considered a sales charge? 

 No, since it does not go to selling brokers, but rather stays within the fund. 

54

 
What restrictions exist in describing a fund as no load? 

It may have no front-end or deferred sales charge, and a 12b-1 fee cannot exceed .25%.

55

What do the differences in mutual fund share classes represent?

different methods by which sales charge is collected

56

 
If the Hi-Tech Fund has a NAV of $4.25 and a POP of $4.50, what is its sales charge percentage? 

5.5%

57

 If the Green Fund has a NAV of $12.70 and a sales charge of 5.5%, what is the POP? 

$13.44

58

 
True or False: A breakpoint sale is a prohibited action of selling shares at just under where breakpoints are available. 

True

59

What are the important numbers associated with REITs?

 
90% income distributed, 5 or less may not own more than 50%, 100+ shareholders, 75% of assets invested in real estate 

60

True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.

 
False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit. 

61

Identify the acronym: ETF

Exchange-Traded Fund

62

Identify the acronym: NAV

Net Asset Value

63

Identify the acronym: POP

Public Offering Price

64

 If $25,000 is invested in an inverse ETF, what is the value if the market drops 10% on day 1, then rises 10% on day 2? 

Day 1: $25,000 x 1.10 = $27,500 and Day 2: $27,500 x .90 = $24,750

65

 If $25,000 is invested in an inverse ETF, what is the value if the market drops 10% on day 1, then rises 10% on day 2? 

 Day 1: $25,000 x .95 = $23,750 and Day 2: $23,750 x 1.10 = $26,125