Chapter 3 Flashcards
Investment Company
Corporation or trust though which investors may acquire an interest in large, diversified portfolios of securities by pooling their funds with other investors funds.
Types of Investment Companies
Face-Amount certificates (FAC) companies, management investment companies and unit investment trusts (UITs).
Face Amount Certificate (FAC) Companies
Contract between an investor and an issuer in which the issues guarantees payment of a stated (Or fixed) sum to the investor at some set date in the future. In return for this future payment, the investor agrees to pay the issue a set amount of money either as a lump sum or in periodic installments
Management Investment Companies
Actively manages a securities portfolio to achieve a stated investment objective. Is either closed end or open end.
Board of Directors
Management investment companies cannot have a board of directors that consists of more than 60% or interested persons in the investment company.
Front End Loads
Reflected in a funds public offering price. The charges are added to the NAV at the time an investor buys shares. Frequently referred to class A shares and have lower operating expense ratios.
Back End Loads
Also called contingent deferred sales charge or load (CDSC). Charged at the time an investor redeems mutual fund chares. A declining percentage charge that is reduced annually (example- 8% first year, 7% second year– typically drop to zero years 6-8 at which time are converted to class A shares). Frequently referred to as class B shares.
12b-1 Asset Based Fees
Permits the mutual fund to collect a fee for promotion or sales-related activities in connection with the distribution on shares. Fee is a percentage of of fund’s average net assets during the year. Fee is disclosed in prospectus. Annual fee cannot exceed .75% of net assets. If fee exceeds .25%, the fund cannot use the term no load.
Class A Shares (Front End Load)
Investors pay charge ay time of purchase
Class B Shares (Back-End Load)
Declines over time so investors pay the charge at redemption. Can be converted to class A over time.
Class C Shares (Level Load)
No sales charge to purchase; generally a 1% CDSC for one year with a continuous 12b-1 charge. Cannot be converted to class A shares
Class I Shares
Only sold to institutional investors, and usually have lower fees/expenses.
Class R Shares
Sold only to participants in retirement plans, may have 12b-1 fee that is lower than Class B and Class C shares– but higher than Class A
Breakpoints
Schedule of discounts fund offers
Letter Of Intent
Investor informs the investment company that he intends to invest additional funds necessary to reach the breakpoint within 13 months. LOI may be backed 90 days– but investor still has 13 months from time of initial purchase.
