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Flashcards in Chapter 6 Investment Companies Deck (26)
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Investment Companies is

corporation (sometimes a trust) that invests the pooled funds of investors; typically into a diversified portfolio of securities

- Allows investors to own an interest in a greater number of securities which are professionally selected and managed


Types of Investment Companies See Slied 86 also

1. Types of Investment Companies
2. Unit Investment Trust (UIT)
3. Management Company
A. Open-End Fund (Mutual Fund)
B. Closed-End Fund


Exchange-Traded Funds (ETFs) is an investment company that

consists of a basket of securities which is intended to track an index.

 -Shares trade in the secondary market; may be sold short
 -Commission is paid on trade
- Intra-day pricing
 -May be purchased on margin


Mutual Fund Pricing

What is the difference between NAV (bid) and POP(ask)?

NAV - Price at which client redeems
POP-Price at which client buys

Difference between the NAV and POP is the sales charge


To calculate NAV per share:

(Total Assets – Total Liabilities)/
Number of Shares Outstanding


Sales Charges (Class A Shares)

What are Front-End Loads -

 -Added to NAV at the time the shares are purchased
 -Split between distributor and broker-dealer
 -Shareholders’ investment, less the sales charge, is invested in the portfolio


Methods to Decrease Sales Charge

What are Breakpoints?

Breakpoints are dollar levels at which sales charge is reduced


Methods to Decrease Sales Charge

What is the Letter of Intent (LOI)

Letter of Intent (LOI) is an optional provision allowing investor to qualify for a breakpoint without initially depositing the entire amount required

-13 month time period
-May be back dated 90 days


Methods to Decrease Sales Charge

Rights of Accumulation / Breakpoints
-To calculate the sales charge for an addition to a fund account, the following are added to the new amount:

• Current value of the investor’s account
• Current value of other accounts in the same family of funds owned by the:
• Same individual or
• Immediate family (spouse, dependent children)
-If the total crosses a new breakpoint, current and future purchases will have a reduced sales charge
-ROA includes appreciation (uses current value of each account)


Sales Charges (Class B Shares)

Deferred Sales Charges

-Assessed at time the investor redeems (deducted from NAV)-In addition to a disclosure in the prospectus, purchase confirmation must state that a sales charge may be assessed upon redemption

-May be dependent on the length of time the shares were owned, then called “contingent deferred sales charge”


Conduct Rules
Prohibited Actions:

Breakpoint sales

-Solicited sales at amounts just below a breakpoint
•Representatives splitting money among different fund families to prevent a breakpoint threshold from being crossed


Conduct Rules
Prohibited Actions:

Selling dividends

Inducing a client to purchase shares because of an impending dividend
•Since prices will be adjusted downward on the ex- dividend date, there is no monetary benefit


Conduct Rules
Prohibited Actions:
Discounting of mutual fund prices

•Only based on breakpoints found in the prospectus


A new client has recently deposited $300,000 with your firm. You notice that the client’s RR has purchased shares of different growth funds offered by various fund families. Each purchase is for an equal amount. What may be occurring here?

Breakpoint sales


Hedge Fund what is it?

A form of private investment fund; typically for wealthy investors

Not a registered investment company

Use strategies involving derivatives, leverage, and selling short

Generally illiquid since restrictions may be placed on investors withdrawing money

Not required to publish NAV on a daily basis


Which of the following is NOT considered an Investment Company? A(n):

a.Exchange Traded Fund
b.Closed-End Fund
c.Unit Investment Trust
d.Hedge Fund

d. Hedge Fund


Red Flag Issue

Which of the following is considered an investment company?
a.An open-end fund
b.A real estate investment trust (REIT)
c.A GinnieMae security
d.A hedge fund

a. open-end fund


6-1 How often is a mutual fund company required to send shareholders a semiannual report?

Once a year.

Required to send detailed financial reports at least twice a year. one semiannual and one annual.


6-3 (no 2) Tom recently invested $1K in the Brookside Income Fund. When he received his statement, he was surprised actual amount invested was $955. Which class of shares did Tom most likely purchase?

A. Class A shares

They typically carry a front-end load, which means that the sales charge is deducted before the purchase of the fund shares.


6-4 A reduced sales charge be received if the investor signs a letter of _____.

A letter of intent


6-5 All of the following are categorized as investment companies, EXCEPT :
a. Unit investment trust
b. Real estate investment trust
c. Face-amount certificate
d Open-end management company

b. Real estate investment trust

REIT - similar to investment companies, but not categorized as such because they invest in a pool of real estate holdings. Investment companies invest in pool of SECURITES, not real estate holdings.


6-6 A couple want to invest $2 K into their baby sons college education. What fund would you recommend?
a. money market fund
b. short-term US government bond fund
c. muni bond fund
d. diversified common stock fund

D. Diversified common stock fund

Since the baby wont start college for 18 years stock would be the best choice since over the long-term stocks tend to provide better returns than bond funds. If teen then bond fond would be better.


6-7 A Balanced Fund is

fund that can invests in cash, bonds, and preferred and common stocks. varied proportions


6-8 Objective of a municipal bond fund is what ?

Tax-exempt income


6-9 Mutual funds offer investors all of the following except

a. Professional management
b. Tax deferral
c. Diversification
d. Convenience

b. tax deferral


6-10 Strong box Trust Company is the Acropolis Fund's custodian. Its main function is to :

Safeguard its assets