SIE exam chapter 4

investment company

a business that specializes in pooling funds from individual investors and investing them

face-amount certificate (FAC)

A contract between an investor and an issuer in which the issuer guarantees payment of a stated (face amount) sum to the investor at some set date in the future

Unit Investment Trust (UIT)

An investment company that sells redeemable shares in a professionally selected portfolio of securities. It is organized under a trust indenture, not a corporate charter.

Debt Fixed UIT

purchases a portfolio of bonds and terminates when the bonds in the portfolio mature

Equity fixed UIT

purchases a portfolio of stocks and terminates at a predetermined date

Nonfixed UIT

purchases shares of an underlying mutual fund

Managed Investment Company

actively manages a securities portfolio to achieve a stated investment objective

Closed-end investment companies

Raises capital for its portfolio by conducting a common stock offering of a fixed number of shares

Open-End Investment Companies (Mutual Funds)

Only issues one class of security, which is common stock. Can continuously issue new shares

mutual fund

fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets

Class A shares (front-end load)

Shares have front-end sales changes. The changes are paid at the time an investor buys shares and the sales change is taken from the total amount invested.

Class B Shares (back-end load)

Sales charges are paid at the time the investor sells shares and is taken away at from the total proceeds

Class C shares (level load)

Typically has a one year , 1% CDSC, .75% 12b-1 fee, and a .25% shareholder service fee. These fees never goes away. ( appropriate for those investors that have short time horizon)

No-load shares

No sales charge is applied, funds are purchased at NAV

Breakpoints

Quantity discounts on mutual funds, the greater the dollar amount of a purchase, the lower the sales charge (only applies to Class A)

Letters of Intent

Letter signed by an investor who plans to invest more money in the future to reduce the overall sales charge

Rights of Accumulation

A privilege that allows mutual fund shareholders to receive sales charge discounts based on the current value of their investment in a fund or all funds in a family

Combination Privilege

Investors can combine separate investments in two or more funds within the same family to reach breakpoint

Exchange privilege

Allow an investor to convert an investment in one fund for an equal investment in another fund in the same family without incurring additional sales charges

total assets - total liabilities

NAV formula

Net assets of the fund/shares outstanding

NAV per share

Expense ratios

Compare the management fees and operating expenses with the fund's assets

Fund's expenses/average net assets

Expense ratio formula

Forward Pricing

Always have to wait for the next calculation to determine the value of shares redeemed

NAV + Sales Charge

Public Offering Price formula

Breakpoint Sale

The sale of mutual fund shares in an Amount just below the level at which the purchaser would qualify for reduced sales charges. This violates the Conduct Rules.

Full (statutory) prospectus

full and fair disclosure document that provides a prospective investor with the material information needed to make a fully informed investment decision

Summary Prospectus

Includes an application that investors can use to buy the fund's shares; standardized summary of key information taken from the fund's full or final prospectus

Pipeline tax theory

Triple taxation can be avoided if the mutual fund qualifies under Subchapter M of the Internal Revenue Code - if the mutual fund acts as a pipeline for the distribution of net investment income, the fund may qualify as a regulated investment company and subject to tax only on the amount of investment income the fund retains (must distribute at least 90% of their NII to shareholders)

Annuities

insurance contract that provides regular income, supplements retirement income, tax-deferred investment plans

annuity

A stream of equal installments made at equal time intervals

Mortality Guarantee

Promise to pay the annuitant no matter how long they live

Death Benefit

Allows beneficiaries to receive the greater of the contribution amount or the current value if the owner dies during the accumulation period

Annuitization

one time and irreversible election to give up ownership of the assets of the annuity in return for a lifetime income guaranteed by the insurance company

1035 exchange

Funds in an annuity can be transferred to another annuity with no tax implications