Chapter 4- Investment Companies Flashcards

Question

Index Funds

Answer 1

Attempts to mirror a particular index No active portfolio manager Expense Ratios are generally lower then most other funds

Answer 2

Invest in a portfolio of bonds Could be a specialized bond fund or a diversified bond fund Should consider interest rate fluctuation when investing in a bond fund. Value of the fund moves inversely to interest rates Best time to invest is when interest rates are high and expected to decline

Answer 3

Specialized bond fund that invests only in municipal bonds Dividends distributed are exempt from federal income tax (so lower dividend yields are expected) but appreciation is taxed federally

Answer 4

A fund that periodically offers to repurchase shares from shareholders Shareholders are not obligated to sell shares Details of repurchase timing and pricing is set in fund prospectus Considered closed end fund but function like an open end fund in that: Shares do not trade on the open market Shares are repurchased at NAV Shares are continuously offered at a price based on the funds NAV

Answer 5

Invest is high quality short term (less then 12 month) debt instruments Operating expense is high and has a significant impact on the total yield Considered the most liquid mutual fund because customer can make deposits and withdrawals at any time and they offer safety since the debt is short term credits dividends daily and pays dividends monthly Taxed as dividend income Capital gains are unlikely Average 90 day or less maturity Offer minimal risk 95% of investments must be in the top two tiers of ratings by a NRSRO (Nationally Recognized Statistical Rating Organization) No Sales Loads Minimum withdrawals are $500 NAV is $1.00 per share Invests in T-Bills, CDs, commercial papers, Bankers acceptance, and Eurodollars

Answer 6

-Neither a closed nor open end fund -Typically a distraction in fund questions -Form of investment vehicle for affluent or semi affluent investors -Not considered an investment company under the investment company act of 1940. Far fewer regulations - Established as Limited Partnerships - Use derivatives, private equities, currencies, long and short positions and leverage - Subject to much higher risk Not very liquid, able to sell only monthly quarterly or annually depending on the fund -Generally limited to Accredited investors and have high minimums

Answer 7

Similar to normal index funds Difference is ETF has shares that trade like common stock shares Can be passive or active Passive will mimic an index, transactions will be minimal and will match the index Active will try to beat their index by using a portfolio manager. To accomplish this they do more trading and are more expensive and volatile.

Answer 8

Bought and sold though out the trading day (unlike mutual funds that only trade at the end of trading) Can be bought on margin and can be sold short Annual expenses are generally low Commission charged like on common stock, no sales load Dividends are possible (but not usual) Settlement is T+2 Options are available

Answer 9

ETNs are debt instruments issued by banks Bank promises to pay back principal less investor fees at maturity Performance of ETN is linked to a specific index

Answer 10

Unsecured notes, principal not protected, but do participate in performance of a specific index If index declines the value of the ETN does as well. This means all of your principal may not be returned at maturity ETNs trade like stocks and can be sold short ETNs have a final maturity and can be callable

Answer 11

Generally a pass through tax entity, Fund is not taxed but the people that participate in the fund are. Reported on a K-1

Answer 12

Net worth or $2.2 million dollars or more or $1.1 million with that specific investment advisor

Answer 13

Since Hedge funds have less regulations they do not have standardized performance information so you can not simply compare one hedge funds performance to another

Answer 14

Gives investor the opportunity to invest in bonds without investing in 1 particular bond

Answer 15

A non-traditional ETF Borrow capital with the goal of generating higher returns, gains need to be higher then borrowing cost to be successful Also use derivatives such as futures and options Because of leverage gains and losses are magnified Maintenance margin requirements are higher for Leveraged ETFs (double for 200% leverage and tripled for 300% leverage)

Answer 16

Non-Traditional ETF Deliver the opposite of the performance of the benchmark AKA- short ETFs Can be leveraged Uses derivatives more heavily then leveraged ETFs

Answer 17

More volatile and risky then regular ETFs Reset or Rebalanced daily Most designed for single day trading FINRA believes that leveraged and inverse ETFs are not suited for retail investors that plan on holding them for more then 1 day

Answer 18

ETNs have counter party risk because liability to pay rests with the bank the and ETNs are unsecured If bank issuing ETN goes bankrupt then holder of the ETN becomes a creditor of the bank

Answer 19

Commodities Currencies Emerging Markets Strategy/Index

Answer 20

The IRS has not made a final ruling on ETNs Therefore ETNs do not pay dividends or have a coupon rate and the holders enjoy the benefits of paying long-term capital gains rates on ETNs held for more then 1 year

Answer 21

A pooled investment product that invests in other pooled investment products No additional restrictions if mutual funds are the focus If holding hedge funds in the funds then the investor must still meet accredited investor status

Answer 22

Realized long term on the portfolio Always long term to the investor May be cash or shares Taxable each year Must distribute 100% of gains to investors at least once a year When paid NAV of the fund goes down Reinvested at NAV if reinvested, and no sales load is charged

Answer 23

Always taxed as ordinary income Fund deducts its operating income from dividends before distributing them to shareholders Must pay out at least 90% of the net investment income to be exempt from paying tax on the income distribution Reinvested dividends will increase investors cost basis Mutual Fund sets their own Ex-dividend date

Answer 24

Measures funds operating efficiency or operating cost most are low (less than 1%) Higher on mutual funds then UIT because UITs have no management fees Sales load are not included in expense ratios Formula is : Operating expenses/Average Net Assets = Expense ratio

Answer 25

Best measurement of fund performance. Considers funds dividends, capital gains and loses, and changes in NAV. Yield is based on dividends ONLY and if that is used in literature total returns must also be disclosed

Answer 26

Can use FIFO Specific Identification OR Average Cost Must choose 1 and stick with it LIFO is not allowed

Answer 27

Long term investors who are interested in accumulating more stock Dividends and capital gains distributions are all reinvested in the fund

Answer 28

Dividend payments Capital gains distributions Switch from one fund to another Redemption of fund shares

Answer 29

61 days (30 days before, trade date, 30 days after) Substantially significant is convertible bonds, convertible preferred stock, options, or the same common stock

Answer 30

Some companies allow switching between fund within the same company May have a charge but not a full sales load Viewed by the IRS as a sale and is taxed as such Note: Typically the cheapest way to switch out of a fund.

Answer 31

Class A Class B Class C Length of holding period determines the class shares you should purchase

Answer 32

Charge an upfront sales charge that max out at 8 1/2% Typically lower 12b1 fees. If investing a large amount at once will benefit from break points. Best option for long term holding periods

Answer 33

Back end loaded funds with contingent deferred sales loads Expenses are typically higher then Class A shares Sales load is charged on a declining scale, the longer you hold it the lower it gets Sales charges are based on the NAV at the time of purchase or sale, whichever is lower Charge higher 12b1 fees then class a shares

Answer 34

No upfront or back end sales load Have the highest annual expense charges Generally best choice for short term investor

Answer 35

Must be in the prospectus Can only change if a majority of shareholders vote to authorize a change Success of a fund is if they have met their objectives not compared to other funds R-Squared- a commonly used statistic used to show how much of the funds movement in price is explained by the benchmarks movement in price Minimum purchase amount and quantity discounts must be disclosed here

Answer 36

A funds investment objective and the funds performance

Answer 37

Annual charge against funds assets that are more advertising and marketing FINRA max fees - 0.75% of funds average NAV for funds paying marketing and distribution expenses 0.25% of funds average NAV for no load fund

Answer 38

To purchase funds an investor will submit a "fund application not an order ticket

Answer 39

Reduced sales charges for a larger quantity of investment usually obtained through a letter of intent or rights of accumulation

Answer 40

13 month period to reach a break point amount Can be backdated 90 days Must be informed of breakpoints or broker is in violation of FINRA rules Investment Clubs and investment advisors purchasing for a client are not eligible for break point discounts

Answer 41

An escrow account is created when you submit a letter of intent. If you fail to meet the objectives in a letter of intent the escrow account is liquidated to cover the remaining sales charges due

Answer 42

Occurs if investor is not informed on how to achieve the break point discount Usually signified by an amount that is just below a breakpoints discount Break point sales are prohibited

Answer 43

Permits a reduced sales charge if the total amount invested plus the additional investments combined exceed the sales charge break point Family accounts can be combined If account declines, shares can not be valued lower then their purchase price

Answer 44

LOI are valued based on the actual money that you invested ROA use current market value of the account

Answer 45

A Fund family may allow customers to redeem or sell shares in a fund and reinvest some or all of the proceeds without paying a sales charge or recoup some or all of a contingent deferred sales charge

Answer 46

Made in specific time period Must take place in the same account Shares must be subject to a front end of deferred sales charge Must comply with any other terms set by the investment company

Answer 47

Allow the purchase of class A Shares without paying the front end sales charge if the customer purchased the shares with proceeds from the sale in a different mutual fund by the same fund family in which the investor already paid a front end or back end sales charge Typically required to be completed within 30-90 days of the initial sale

Answer 48

Fees charged on the redemption or liquidation of mutual fund shares Based on NAV and usually charged by No-Load funds Open end. No Load, and UITs issues redeemable shares. Closed end do not so there is no redemption fees If done within the first 7 days all commissions and fees are returned to the investor Redemption fees and penalties must be disclosed in the funds prospectus

Answer 49

Automatically long term Step up in basis to market value on the date of death

Answer 50

Requires the delivery of a new prospectus Can be a summary prospectus or statutory prospectus

Answer 51

Investment objectives Fee Table Investment risk and performance Management- investment advisors and portfolio managers Purchase and sales of fund shares Tax Information Financial intermediary compensation

Answer 52

The Fund Names Class share or shares offered Identify that it is a summary and where the full prospectus can be found Date of first issue use of the summary prospectus A legend- and this must provide a website and email address where investors can obtain additional information including the statutory prospectus

Answer 53

Must contain everything from the summary prospectus but in more detail Must include: Minimum purchase requirements Quantity discount amounts (Break points) Fund management fees Fund Financial Statements DOES NOT includes NAV since that changes daily

Answer 54

satisfied by sending out, or giving directly, the summary prospects to investors and posting the statutory prospectus on the internet

Answer 55

Current summary prospectus, statutory prospectus, Statements of additional information and Most recent annual and semi annual report to shareholders must be: accessible free of charge and remain up for at least 90 days on the website address on the cover page of the summary prospectus

Answer 56

Funds have 3 business days after receiving request for information to send it out. Information must remain available for a minimum of 6 months after the date an email was sent

Answer 57

Variable annuities Face amount certificate companies open end investment companies Unit Investment Trusts (UITs) Contractual plans Closed end funds no longer need to deliver hard copies upon sale. Having it posted on the internet is now satisfactory. But a hard copy must be provided upon request

Answer 58

Provides investors with full and fair disclosure Require Information to be sent to SEC at least annual, but usually quarterly Information to be sent to investors semi annually Continually offer a prospectus that is updated at least annually (can not be used if over 16 months old) No predictions or projections on investment Companies

Answer 59

Customer must pay for shares within 2 business days of the trade Customer must be paid within 7 Calendar days of redemption of shares

Answer 60

If there is a Bona Fide contract in place before retirement commissions may be paid to a RR or their beneficiaries after the RR retires, only on funds

Answer 61

Must be disclosed in the prospectus may only be paid by the member firm not the fund directly Includes discounts, concessions, fees, commissions, overrides, sales loads, loans and employee benefits

Answer 62

Are no required to be in the prospectus include up to $100/person/year, merchandise and prizes, travel expenses associated with educational meetings and occasional meals

Answer 63

Members and associated person can never be compensated with securities of any kind

Answer 64

Recommending a customer switch from one family of funds to another without investment justification is a violation imposes sales charges and tax liability unnecessarily Mutual fund investing should be long term not short term

Answer 65

Statement of why the comparison is being made must be present Data comparisons must be for the same time period Investments must be similar Performance comparisons are allowed but must not be misleading Investment objectives must be disclosed

Answer 66

Must include Standardized performance index Maximum sales charges Total annual fund operating expense ratio

Answer 67

Must have a minimum Net worth of $100,000 before they can be offered to the public 40% of the board must be non-affiliated Cash and securities must be held at a custodian, usually a bank

Answer 68

Must be contained in all prospectuses Must be on front page of prospectus Unlawful for a sales person to represent that the SEC has approved a security

Answer 69

Allow managers to dip into the funds assets annually to pay for marketing, distribution and other promotional expenses including commissions Must be disclosed in the prospectus but the way they are being used do not have to be disclosed Must be approved annually by the shareholders

Answer 70

Manages the funds portfolio of securities Is paid a management fee based on the average daily net asset value of the fund Investment contract is voted on by the board of directors for an initial 2 year contact and then yearly after that

Answer 71

Buys shares from the fund at NAV and sales them to the public with a sales charge or ti a dealer with a discount Receives an underwriting concession that is contained within the sales load

Answer 72

Typically a bank Safekeeping of the cash and securities in a portfolio Can serve as transfer agent, registrar, and/or dividend disbursing agent May NEVER be associated with sales or call a distributor Their main function is to provide record keeping and clerical services

Answer 73

Issues fund shares Redeem fund shares Disburses dividend and capital gain distribution and keeps records of these Sends statements to shareholders and keeps records of purchases and redemption

Answer 74

out of the funds assets

Answer 75

Fixed Percentage Plan Fixed Number of Shares Plan Fixed Dollar Plan

Answer 76

May be taxed as capital gains on the sale of shares or as ordinary income if the withdrawal was made from investment income

Answer 77

They are diversified portfolios of Municipal and Corporate bonds One of three types of investment companies with no management fee and a low percentage sales charge that invests in a fixed portfolio of corporate or municipal bonds. They are supervised but not managed

Answer 78

Senior Shares

Answer 79

Investment Income and Dividends

Chapter 4- Investment Companies Flashcards

(103 cards)