SIE Exam: Unit 4 Flashcards
Packaged Investments
4: Face-amount certificates (FACs)
Not managed. Contract between investor and issuer in which issuer guarantees payment of a stated (face amount) sum to investor at some set date in the future. Investor pays fee, if pay in lump sum fully paid FAC. Very few FAC companies operate today.
4: Unit investment trusts (UITs)
Not managed. Organized as a trust. Create a portfolio of debt or equity designed to meet the company’s objectives. Sell redeemable interests (shares). Each share is undivided interest in underlying portfolio.
Fixed: terminates when bonds mature or at predetermined date. Portfolio is static, no active management or portfolio turnover.
Non-fixed: purchases shares of an underlying mutual fund.
4: Managed Investment Company (closed and open end)
Actively managed.
Closed-end: IPO is limited and closes
Open-end: perpetually offering new shares.
ETF, mutual fund, separate accounts
4: Closed-end Fund
Raise capital through common stock offering. Registers a fixed number of shares with SEC and offers them for a limited time. Can buy in secondary market after fund is closed. Can issue common stock, preferred stock, and debt securities. Intraday pricing.
4: Open-end Fund (mutual fund)
Only issues common stock. Continuous primary offerings, raise an unlimited amount of investment capital by continuously issuing new shares. Do not trade on secondary market. Priced at end of business day (NAV). Transactions entered by 4 PM
4: Annuity
Insurance contract designed to provide retirement income. Stream of payments guaranteed for a period of time, actual amount paid out may not be guaranteed.
4: Annuitization
One time irreversible election to give up ownership of the assets in return for a lifetime income guaranteed by the insurance company. Amount of income determined based on gender, age, account value, payout option, assumed interest rate (GAAPI).
4: Mutual Funds
Pool of investors money invested in various securities as determined by fund’s stated investment objective. Offer guaranteed marketability, each investor owns undivided interest, distributions at NAV, can reinvest, can be full or fractional shares.
Provide diversification, allow a minimum investment, can reduce sales charges based on investment size, voting rights, offer reinvestment of dividends (taxable), liquidate without disturbing portfolio balance, Form 1099, withdrawal plans, reinstatement provisions to reinvest w/o sales charge within 30 days, maximum sales charge is 8.5% of the POP.
4: Class A Shares (front-end load)
Have front-end loads. Sales charges paid at the time an investor buys shares and sales charge taken from total amount invested.
Best for large investments and longer time frames.
4: Class B Shares (back-end load)
Back-end load (contingent deferred sales charge). Paid at time an investor redeems. Sales load is a declining percentage charge reduced annually and applied to proceeds of any shares sold in that year. Drops to zero after an extended holding period (5 years). Shares then converted to A class and no sales charge applied at time of redemption. Better for long term investors with smaller investments.
4: Class C Shares (level-load)
Have a one year, 1% CDSC, a 0.75% 12b-1 fee, and a 0.25% shareholder services fee. Appropriate for short-term investors because become expensive if own for more than 4-5 years.
4: No-load shares
No sales charge, shares purchased at NAV. Can charge purchase fees, account fees, exchange fees, redemption fees.
4: Breakpoints
Quantity discounts on mutual funds, greater the investment the lower the sales charge.
4: Letters of Intent (LOI)
LOIs decrease immediate sales charge. Informs mutual fund of intention to invest additional funds necessary to reach the breakpoint within 13 months.
One sided contract binding to the fund only. If not completed in 13 months have to send a check for difference in sales charge or cash in escrowed shares to pay for difference
4: Rights of Accumulation
Investor can qualify for reduced sales charges. Are available for subsequent investments and do not only apply to initial transactions. Allow investor to use prior share appreciation to qualify for breakpoints, do not impost time limits.
4: Combination Privilege
Can combine investments in 2 or more funds within same fund family to reach a breakpoint.
4: Exchange privilege
Allow investor to convert an investment in one fund for an equal investment in another fund in the same family without incurring an additional sales charge. Considered a taxable event.
4: Breakpoint Sales
Sales just below the breakpoint. Must make investors aware of breakpoint schedule. Failure to disclose triggers a breakpoint sale violation.
4: Forward pricing
NAV calculated at end of each day, the price the customer receives is the next NAV calculated after receipt of redemption request. Always have to wait until next available calculation to determine the value of shares redeemed or number of shares purchased.
4: NAV Calculation
Changes daily, calculated at EOD.
Fund NAV=total assets - total liabilities
NAV per share= Fund NAV / shares outstanding.
4: Expense ratio
Compares management fees and operating expenses, including any 12b-1 fees, with the fund’s net assets.
Expense ratio = expenses / average net assets.
Includes manager fee, admin fees, BOD costs, 12b-1 fees.
Does not include sales charges or loads.
4: Full or Statutory Prospectus
Full and fair disclosure document that provides prospective investor with the material information needed to make a fully informed investment decision. Must be distributed before or during solicitation. Must contain key information to appear in clear and concise format and includes fund’s objective, investment policies, sales charges, management expenses, and services offered. Discloses 1, 5, and 10 year performance histories.
4: Summary Prospectus
Summary of key information. Investor must be able to access full prospectus. Cover page must include fund’s name and share class, ticker, if ETF market that it trades on, legend with toll-free number to request paper delivery of prospectus or website where can be downloaded.
Also must provide investment risks, performance, fees, investment objectives, investment strategies, related risks, portfolio holdings, management, shareholder information, financial highlights.
4: Statement of Additional Information (SAI)
Required to have for delivery in 3 business days of an investor’s request without charge. Includes fund’s history and policies, include fund’s consolidated financial statements (balance sheet, statement of operations, income statement, portfolio list).
