Investment Companies and Other Packaged Products

Question 1

Identify the acronym: POP

Answer 1

Public Offering Price

Question 2

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

Answer 2

A fund’s management fee is typically calculated based on a percentage of assets under management.

Question 3

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

Answer 3

No. Unlike DPPs, REITs do not pass through losses.

Question 4

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

Answer 4

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

Question 5

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

Answer 5

False

Question 6

Are breakpoints available when investing in UITs?

Answer 6

Yes

Question 7

Describe a typical index fund’s expenses and management style.

Answer 7

The expenses are generally low and it is passively managed.

Question 8

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

Answer 8

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

Question 9

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

Answer 9

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

Question 10

Is a letter of intent binding on the investor?

Answer 10

No. However, the letter is binding on the investment company.

Question 11

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

Answer 11

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

Question 12

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

Answer 12

It’s a no-load fund.

Question 13

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

Answer 13

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

Question 14

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

Answer 14

The formula is (POP - NAV) divided by POP ($4.50 - $4.25 = $.25 ÷ $4.50 = 5.5%).

Question 15

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

Answer 15

False. Mutual funds are always considered new issues and are bought and sold through the fund.

Question 16

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

Answer 16

Sales charge is always expressed as a percentage of the POP (public offering price).

Question 17

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

Answer 17

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

Question 18

What is a REIT?

Answer 18

Real Estate Investment Trust

Question 19

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

Answer 19

No

Question 20

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

Answer 20

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

Question 21

What do the differences in mutual fund share classes represent?

Answer 21

The different methods by which the sales charge is collected

Question 22

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

Answer 22

A Regulated Investment Company’s net investment income will ultimately be taxed to the shareholders.

Question 23

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

Answer 23

True. However, the purchases must all be from the same fund family.

Question 24

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

Answer 24

Investment companies must send financial statements to customers every 6 months.

Question 25

What is the annual fee levied against a fund's assets and used to pay expenses of commissions and retail communications?

Answer 25

12b-1 fee

Question 26

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

Answer 26

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

Question 27

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

Answer 27

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

Question 28

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

Answer 28

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

Question 29

What price is paid for mutual fund shares?

Answer 29

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

Question 30

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?

Answer 30

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

Question 31

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

Answer 31

To calculate the POP for a mutual fund, the formula is: NAV ÷ (100% - Sales Charge %)

Question 32

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

Answer 32

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

Question 33

Letters of Intent are valid for ____ months.

Answer 33

Letters of Intent are valid for 13 months.

Question 34

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

Answer 34

Exchange-Traded Funds (ETFs)

Question 35

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

Answer 35

True

Question 36

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

Answer 36

In the secondary market (like shares of stock)

Question 37

What are the important numbers associated with REITs?

Answer 37

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

Question 38

What amount of net income must a REIT distribute?

Answer 38

90%

Question 39

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

Answer 39

Market price plus a commission

Question 40

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

Answer 40

Money-market fund

Question 41

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

Answer 41

1) Diversification 2) Professional Management 3) Liquidity

Question 42

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

Answer 42

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

Question 43

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

Answer 43

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

Question 44

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

Answer 44

False. Registration is required for REITs.

Question 45

What restrictions exist in describing a fund as no load?

Answer 45

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

Question 46

Define breakpoint.

Answer 46

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

Question 47

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

Answer 47

The formula is NAV ÷ (100% - Sales Charge %). $12.70 ÷ 94.5% = $13.44.

Question 48

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

Answer 48

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

Question 49

A REIT could derive income from what different sources?

Answer 49

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

Question 50

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?

Answer 50

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

Question 51

Identify the acronym: NAV

Answer 51

Net Asset Value

Question 52

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

Answer 52

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

Question 53

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

Answer 53

According to industry rules, 8.5% is the maximum sales charge on mutual funds.

Question 54

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

Answer 54

A majority

Question 55

What are the three different types of investment companies?

Answer 55

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

Question 56

Identify the acronym: ETF

Answer 56

Exchange-Traded Fund

Question 57

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

Answer 57

True

Question 58

Are mutual funds considered marginable securities?

Answer 58

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

Question 59

Into what does a growth fund invest?

Answer 59

Common stock

Question 60

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

Answer 60

True. Regulated Investment Companies will only be taxed on the income retained.

Question 61

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

Answer 61

Letters of Intent may be back-dated for 90 days.

Question 62

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

Answer 62

Bid price or Redemption price

Question 63

What is a fund's net investment income?

Answer 63

Dividends + interest - expenses

Question 64

If $25,000 is invested in an inverse ETF, what is the value if the market rises by 5% on day 1, then drops 10% on day 2?

Answer 64

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

Question 65

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

Answer 65

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