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What is the formula to calculate the POP of a mutual fund?
The formula is POP = NAV / (100% - Sales Charge %).
What should be the primary consideration when deciding on a mutual fund investment?
The investor's investment objectives.
What is a breakpoint sale?
A violation where a registered rep suggests an investor purchase a mutual fund just below the breakpoint to avoid a discounted sales charge.
What is the nature of money market funds?
They consist of money market securities, which have maturities of one year or less and are highly liquid and safe.
How is the average cost basis calculated?
By dividing the total cost of all shares purchased by the total number of shares owned.
Are cash dividends from mutual funds taxable for investors?
Yes, they are taxable regardless of whether taken in cash or reinvested.
What impact do dividends have on a mutual fund's NAV?
The NAV will decrease by the amount of the dividend on the ex-date.
What is the difference in expense between mutual funds and ETFs?
Mutual funds typically have higher fees than ETFs because they are actively managed.
What is the role of a custodian in a mutual fund?
The custodian acts as the caretaker of the fund’s securities, holding all securities purchased for safekeeping.
What does a transfer agent do for a mutual fund?
Handles transactions with customers, including issuing, redeeming, and cancelling fund shares.
What is a unit investment trust (UIT)?
A type of investment company that issues redeemable securities representing an undivided interest in a fixed trust, without active management.
What is the uniqueness of an open-end mutual fund?
It continuously offers and redeems shares based on investor demand.
How are closed-end fund shares traded?
They are bought/sold on an exchange at market prices, which may differ from NAV.
What types of securities can open-end and closed-end funds issue?
Open-End: Only common shares; Closed-End: Common, preferred, and debt securities.
What distinguishes the share classes and fees of open-end and closed-end funds?
Open-End: A, B, C shares with 12b-1 fees; Closed-End: Single share class with brokerage commissions, no 12b-1 fees.
Which fund types allow for short selling and margin purchases?
Closed-End Funds allow this; Open-End Funds do not.
Which investment vehicles offer a continuous primary offering?
Mutual Funds offer a continuous primary offering to investors.
Which products allow for redemption of shares at NAV?
Mutual Funds and UITs allow redemption at NAV.
Which fund types trade on an exchange and which do not?
Closed-End Shares and ETFs trade on an exchange. Open-End Funds do not.
Which investment vehicles have a stated termination date?
Only UITs have a stated termination date.
What happens when a Unit Investment Trust (UIT) reaches its termination date specified at its creation?
The trust is dissolved and no longer active.
A mutual fund is best described as which two of the following?
I. An open-end investment company
II. A closed-end investment company
III. A security that is exempt from the provisions of the Securities Acts of 1933 and 1934
IV. A security that is subject to the provisions of the Securities Acts of 1933 and 1934
I & IV: Mutual funds are open-end investment companies and are subject to regulation under the Securities Acts of 1933 and 1934.
An investor wants an ownership interest in a specific portfolio of bonds for the next 20 years without paying high management fees. Which investment is most suitable?
A. A closed-end bond fund
B. A fixed income mutual fund
C. A structured note
D. Units in a bond UIT
D. UITs hold a fixed portfolio of securities for a defined term, often with lower fees since there is no active management.
An investor wants to purchase a diversified portfolio of domestic and international securities at a “cheap” price. Which investment opportunity is most appropriate?
A. Shares of a global market index fund available at a POP of $5.00
B. Shares of an international equity closed-end fund priced at $13.33 when NAV is $13.32
C. A purchase of a world bond open-end fund at the price next calculated
D. Shares of a global income fund with an NAV of $17.01 but trading at a current price of $16.44
D. Purchasing closed-end fund shares at a discount to their NAV allows investors to acquire assets below their calculated value—an opportunity not available with mutual funds, which must be bought at POP.
What is a static portfolio in the context of a Unit Investment Trust (UIT)?
The fund's investment portfolio is static; it is not actively managed, offering a passive investment approach.
How does a Unit Investment Trust (UIT) differ from an Exchange Traded Fund (ETF)?
Both hold diversified portfolios, but ETFs trade on exchanges and have shares that can fluctuate in price based on market demand, unlike UITs.
How do Unit Investment Trusts (UITs) cater to income-seeking investors?
UITs provide predictable income streams from their fixed portfolio, making them suitable for investors seeking regular returns over a set period.
What happens to a UIT's portfolio over time?
The portfolio’s composition remains the same, which means the trust will hold the same assets until the termination date.
What are the cost benefits of investing in a Unit Investment Trust (UIT)?
Low management fees due to passive management and a fixed portfolio, suitable for cost-conscious investors.
Mutual funds are a popular choice among investors because of the features they offer. Major selling points include
diversification, professional management, affordability and liquidity
How liquid are mutual funds?
Shares can be redeemed at any time for the current NAV, providing investors with easy access to their funds.
What is the role of the Board of Directors in a Mutual Fund?
Hires an investment adviser to manage the fund's portfolio, implement investment objectives, and oversee daily trading activities.
Which two of the following statements regarding a closed-end fund's expense ratio are true?
I. It includes the fund's management fee and administrative fees
II. It includes only the fund's administration fee
III. It must be included in the fund's prospectus
IV. It must be included in the fund's statement of additional information but not in the prospectus
I and III
Correct Answer
A closed-end fund's expense ratio includes the fund's management fee and administrative expenses. It must be included in the fund's prospectus.
A mutual fund share report shows a NAV of $4.10 and POP of $4.20. The sales charge percent that applies to this transaction is
1.19%
1.22%
2.38%
2.44%
2.38% - Sales charge is a percentage of the POP. To calculate, find the amount of the sales charge ($4.20 - 4.10 = .10) and divide it by the POP. 0.10/4.20 = 2.38%.
How often is a mutual fund required to send information to their investors on holdings and performance?
Annually
Semi-annually
Quarterly
Monthly
semi-annually
All of the following practices are prohibited in the sales of mutual fund shares EXCEPT
A redemption request that is received today is processed at the NAV calculated at the previous day's close
An investor is encouraged to engage in a trading strategy that involves regularly purchasing and redeeming shares within a short time frame to take advantage of share pricing inconsistencies
A registered representative recommends that an investor make frequent regular purchases of the same mutual fund with a fixed investment each time
An investor is encouraged to purchase shares in a fund just before the ex-dividend date to receive the dividend distribution
A registered representative recommends that an investor make frequent regular purchases of the same mutual fund with a fixed investment each time
Dollar cost averaging involves the systematic investing of a fixed dollar amount on a regular basis - weekly or monthly, for instance - regardless of fluctuating prices in the market. It is successful if it achieves an average cost per share that is lower than the average price per share. Late trading is the prohibited practice of redeeming or purchasing shares at a price
Jim is checking the financial page of a website and notices that the net asset value of a product is higher than the public offer price of the product. The product that Jim is looking at is most likely a (an)
open-end investment company
master limited partnership
variable rate demand note
closed-end investment company
Correct Answer
When the net asset value is higher than the public offer price, this means the product is selling at a discount. This is most likely to occur with a closed-end investment company. With a traditional open-end investment company, the net asset value will be lower than the public offering price.
When is a mutual fund allowed to buy securities on margin?
Only in the first 10 trading days of each month
Only after opening a margin account
Only with special permission from the SEC
Never
Correct Answer
Mutual funds are prohibited from selling securities short and also from buying securities on margin or with borrowed funds.