- quantity discounts on mutual fund sales charges - only apply to Class A shares - allow investors to combine orders among related accounts in order to achieve a better breakpoint

Investment Companies Flashcards by brandon demery

This act defines investment companies in the US.

The Investment Company Act of 1940

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Face-amount certificates, unit investment trusts, mutual funds, and management companies are all

investment companies

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a corporation or trust that pools investors’ money and then invests that money in securities on their behalf

an investment company

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a contract between an investor and issuer in which the issuer promises to pay a stated (face) amount to the investor at a set date in the future

Face-Amount Certificates (FACs)

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Unit Investment Trusts (UITs)

an investment company organized under a trust
do not have boards of directors; they have trustees
create a portfolio of securities designed to meet the UIT’s objectives
portfolio is fixed; it is not managed

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True of False) FACs and UITs are managed and trade in the secondary market.

False: FACs and UITs are not managed. Once the portfolios are composed, they do not change. FACs and UITs do not trade in the secondary market; they are redeemable only through the issuer.

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The most familiar type of investment company is the _ . This company actively manages a securities portfolio to achieve a stated investment objective. These companies may be closed-end or open-end.

management investment company

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issues common stock to raise capital
registers a fixed number of shares with the SEC and offers them to the public
After the IPO, investors may buy or sell shares in the secondary market.
may also issue bonds and preferred stock
may be called publically traded funds
Once the shares have been sold, the fund is closed to new investors.

Closed-End Investment Companies

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Open-End Management Companies

most common type is the mutual fund
ONLY issues common stock
do not specify the number of shares they intend to issue
register an open offering with the SEC (continous primary offering)
do not trade in the secondary market
redeems shares at the fund’s NAV

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True or False) Mutual funds may issue partial shares.

True: Mutual funds may issue full or partial shares.

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Current market value (CMV) +commission; price determined by supply and demand

Closed-End investment company pricing

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Open-end investment company pricing is

NAV + sales charge; selling price determined by formula in the prospectus

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Mutual fund owners have an _ _ in the fund. No owner has a higher status over another.

undivided interest

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Maximum sales charge for mutual funds is

8.5% of the public offering price (POP)

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do not trade on the secondary market
shares have guaranteed liquidity; fund guarantees investors may redeem shares
investors purchase shares directly from fund
fund portfolios managed by investment advisers or investment managers

mutual funds

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sales charges are paid at the time an investor buys shares
sales charge is taken from the total amount invested
best for investors with large investments and longer time frames

Class A (Front-End Load) Shares

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Class B (Back-End Load) Shares

have a back-end sales load, also called contingent deferred sales charge (CDSC)
sales charge is paid at the time an investor redeems shares
sales load is reduced by a percentage each year after purchase

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best for investors with smaller investments and longer time frames

Class B (Back-End Load) Shares

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These shares are commonly described as having a level load. Instead of a front-end load, they have a .25% service fee, charged quarterly. Best for investors with short time frame, at least a year but not more than five years.

Class C (Level-Load) Shares

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shares directly marketed to the public,
shares purchased at NAV
no sales charges
purchase fees, account fees, exchange fees, and redemption fees

No-Load Shares

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The _ usually drops to zero after an extended holding period, usually five to seven years. At that time, the shares are converted to _ shares so that no sales charge would be applied at the time of redemption.

back-end load; *Class A *

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Breakpoints

quantity discounts on mutual fund sales charges
only apply to Class A shares
allow investors to combine orders among related accounts in order to achieve a better breakpoint

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True or False

Investment clubs may take advantage of breakpoint benefits.

FALSE: Investment clubs may not get breakpoints.

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A person who plans to invest more money with the same mutual fund may decrease the sales charges by signing a . The _ tells the fund company of the investors plan to add funds to their account within a _ period.

Letters of Intent (LOI); 13-month

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An LOI may be backdated up to _ days.

**True or False**) Both *breakpoints* and *breakpoint sales* are good for customers.

**False:** A breakpoint sale is a sale just below a breakpoint, which can be viewed as an effort by representatives to make higher sales charges.

* are available only for later investments, * allow for reduced sales charges that will not apply to the first transaction, * allow the investor to use any growth in the share price to qualify for breakpoints, and * do not impose time limits.

rights of accumulation

(total assets – total liabilities) / outstanding shares =

NAV per share

The NAV must be calculated at least _.

once per day

Expenses that the fund pays to maintain its operation would be considered the fund's _.

liabilities

True or False) All mutual funds, both load and no load, have expense ratios.

True: Expenses include manager's fee, administrative costs, BOD costs, and 12b-1 fees.

Expense Ratio

calculated by dividing a fund's expenses for a year by its average net assets for that same year

generally have expense ratios between 1% and 1.5% of a fund's average net assets

Stock funds (mutual funds that invest in stocks)

Bond funds typically have an expense ratio between

0.5% and 1% *(less aggressive funds have smaller expense ratios)*

NAV + SC | NAV plus a sales charge (SC)

public offering price (POP) | price an investor pays for a share

All mutual fund transactions are considered to be conducted on the _ market.

**primary market** because all purchases and redemptions go through the issuer

On a _ , the POP will always exceed the NAV. On a _ , NAV will be equal to POP.

*load fund* , *no-load fund*

The NAV may be higher, lower, or equal to the POP for

a **closed-end** fund trading in the secondary market

four disclosure documents (prospectuses) associated with a mutual fund

full prospectus, summary prospectus, statement of additional information, and omitting prospectus

A fund offers shares with NAV of $11.40, a POP of $12.00, and pays a dividend of $0.15. What is the sales charge for this mutual fund?

**5%,** The formula is NAV + SC = POP. The difference between NAV and POP in this question is 60 cents but recall that **SC is always expressed as a percentage of POP**. $0.60 / $12.00 is 0.05

True or False) The net asset value (NAV) of a mutual fund is reduced after paying a dividend.

True: Paying a dividend would reduce the net assets of the fund without reducing the number of shares outstanding, which would reduce the NAV per share.

**True or False)** A decline in the market value of the portfolio would cause a change in the net asset value (NAV) of a mutual fund share.

**True:** A decline in the market value of the portfolio would reduce the net assets of the fund without reducing the number of shares outstanding, which would reduce the NAV per share.

# Fill in the blank generally don't assess management fees because the portfolio is static and requires no active management; there is no need for an investment adviser to monitor and trade positions within portfolio

Unit Investment Trust (UITs)

What is a closed-end investment company?

A closed-end investment company is a type of investment fund that raises capital through an initial public offering (IPO) and then trades on a stock exchange, with a fixed number of shares.

True or False: Open-end investment companies issue shares that can be bought and sold at any time.

True

Fill in the blank: A _____ investment trust is a type of investment company that sells a fixed number of shares and invests in a specific portfolio of securities.

unit

What distinguishes open-end investment companies from closed-end investment companies?

Open-end investment companies continuously issue new shares and redeem existing shares, while closed-end companies have a fixed number of shares.

Which type of investment company typically trades at a premium or discount to its net asset value (NAV)?

Closed-end investment company

- provides an investor with material information to help make informed decision - must be provided before or during solicitation - can be delivered electronically - must include: fund's objective, investment policies, sales charges, management expenses, expense ratio, and services offered

full (statutory) prospectus

- summary of key information from full prospectus - may be delivered electronically - must include a legend on the cover page - also provides fee tables, risks and performance, shareholder information, etc.

Summary Prospectus (Rule 498)

- provides additional information for investors - must be provided within three business days of investor's request - includes balance sheet, statement of operations, income statement, and portfolio's standing to-date

Statement of Additional Information (SAI)

- considered a fund advertisement - often referred to as "tombstone ad" - not sufficient to solicit a trade

Omitting Prospectus (Rule 398)

Mutual Fund Dividend Dates

1. Declaration date 2. Record date and Payable date 3. Ex-dividend date The **record date** is the date by which investors must be shareholders of record to receive a declared dividend.

The prospectus (statutory) also discloses _ _ and _ year performance histories, or performance over the life of the fund, whichever is shorter.

1-, 5-, and 10-year

Unit investment trusts are investment companies, but not _ under the Investment Company Act of 1940.

management companies, UITs have **fixed portfolios** so, they require no investment advisers to place trades

_ funds are organized as private investment companies (often limited partnerships), which are excluded under the definition of investment company under the Investment Company Act of 1940.

Hedge

How often may a mutual fund calculate a new net asset value (NAV)?

There is no limit to the number of times NAV may be calculated. However, it must be calculated at least once per business day, and one of those calculations must occur after the close of trading (4:00 pm ET) on the U.S. exchanges.

- can limit the number of investors - typically require large or minimum initial investment - organized as private investment partnerships

hedge funds

What is a mutual fund?

A mutual fund is an investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities.

True or False: Unit Investment Trusts (UITs) have a fixed portfolio that does not change over time.

True

Fill in the blank: Unlike mutual funds, investors in Unit Investment Trusts typically do not have the ability to ________ their investments in the portfolio.

actively manage

Which of the following is a key difference between mutual funds and unit investment trusts? A) UITs have a fixed number of shares B) Mutual funds do not have management fees C) UITs are more liquid than mutual funds.

A) UITs have a fixed number of shares

Investment Companies Flashcards

(62 cards)