Textbook Chap 7 (SIE)

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

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

For a mutual find to issue shares publicly, what is the minimum net worth requirement?

$100,000

The _____ fee is assessed against the fund’s assets to pay for marketing and distribution costs.

12b-1

Every investment company that has more than ____ shareholders must register with the SEC.

100

Breakpoints are calculated based on all purchases made within a single ______.

fund family

What happens to the CDSC holding period when a client switches to a new fund family?

The clock is reset to day one whenever the client switches to a new fund family

What restrictions exist in describing a fund as no load?

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

Describe dollar cost averaging (DCA)

DCA involves investing a fixed-dollar amount intervals, regardless of the price of the asset

Does a unit investment trust (UIT) have a board of directors?

No. The entities are supervised by a board of trustees

What is a mutual find exchange?

When shares of one fund are sold and shares of another fund are bought from within the same family for no sales charge

A mutual fund’s sales charge is also referred to as the ______.

sales load

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

Rights of Accumulation

List some of the investors eligible for sales charge reduction in a mutual fund.

An individual and the members of her immediate family (spouses/dependent children), trustees, and pension plans

What is the formula for determining a mutual fund’s net assets?

Total assets (e.g, stocks, bonds, and cash) - total liabilities (e.g, expenses)

What price is paid for mutual fund shares?

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

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

90

What are the three requirements for a mutual find to qualify as diversified?

75% of assets must be invested; maximum of 5% can be in one stock; maximum of 10% of a firm’s voting stock may be owned

Is a redemption fee the same as a CDSC?

No. The CDSC is a sales charge, not a fee.

To which clients is an RR required to disclosed breakpoints?

All clients, regardless of the size of the proposed investment

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

UIT

Will new purchases affect a fund’s NAV?

No. The assets and number of shares increase proportionally

What portion of a fund’s assets must me invested in a prescribed manner for the fun to be diversified?

At least 75%

Open-end management companies are more commonly referred to as _____.

mutual funds

T/F: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.

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

What share class carries a back-end load?

Class B

What are the two types of management companies?

open-end and closed-end

What are some of the alternative names for a fund’s underwriter?

The sponsor, distributor or wholesaler

Identify the acronym: FAC

Face-Amount Certificate

T/F: A breakpoint sale is a prohibited action of selling shares at just under where breakpoints are available

true

Identify the acronym: SAI

Statement of Additional Information

T/F: Rights of Accumulation benefits may be combine with Letter of Intent benefits

False

What happens to Class B shares after a prescribed period?

The shares will automatically convert to Class A shares.

What type of investment company is priced once per business day?

Open-end investment companies (Mutual funds)

What are some of the advantages of investing in open-end investment companies (i.e mutual funds)?

Diversification, professional management, liquidity and ability to reduce sales charges

Identify the acronym: LOI

Letter of Intent

Describe a typical index fund’s expenses and management style

The expenses are generally low and it is passively managed

What share class carries a front-end load?

Class A

T/F: If a mutual find investor chooses to reinvest dividends, taxes will be deferred.

false

What would cause a bond fund’s assets to fall?

Either redemptions causing the loss of funds or an increase in rates causing a decrease to the portfolio’s value

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

Market price plus commission

Identify the acronym: NAV

Net Asset Value

Will liquidating a fund position at a loss affect a fund’s NAV?

No. The position has already been marked to market.

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

prospectus

Where can investors find information regarding how to buy, redeem, or exchange their mutual fund shares?

All of this information can be found in the prospectus

The sale of a mutual fund is also known as a share _____.

redemption

Clients redeeming mutual fund shares must be paid within _____ calendar days.

7

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

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

What is the maximum permissible 12b-1 fee?

1%. However, for no-load funds, the maximum 12b-1 fee is capped at .25%

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

Sector or Specialized

How often must a client receive reports from her mutual fund?

Semi-annually

T/F: Custodian banks provide investment management service to a fund

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

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

In the secondary market (like shares of stock)

Who disburses checks for capital gains distributions to a mutual fund shareholders?

The transfer agent, who is typically the paying agent as well

What share class carries a level load?

Class C

What is a mutual fund’s largest expense?

The management fee paid to its investment adviser

When must the Statement of Additional Information (SAI) be distributed to clients?

Upon request

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

It’s a no-load fund.

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

A majority

A mutual fund shareholder’s tax liability is reported on Form ______/

1099

How may a closed-end fund be capitalized?

Closed-end funds may issue bonds, common stock, or preferred stock to raise capital

What’s the purpose of a redemption fee?

The redemption fee is designed to discourage investors from redeeming shares to quickly

Identify the acronym: UIT

Unit Investment Trust

On Monday at 5:00pm., a customer places a call to sell (redeem) her mutual fund shares. What price will she receive?

Tuesday’s NAV. Since the client missed the 4:00pm close, she will receive the next calculated NAV

T/F: Exchanging mutual fund shares avoids taxes, while switching is taxable

False. both exchanging and switching mutual fund shares are taxable events

Identify the acronym: CDSC

Contingent Deferred Sales Charge

A mutual fund’s POP = ____ + ____________.

NAV + Sales Charge

What happens to Class B shares after a prescribed number of years?

They convert to Class A shares

What is the formula for computing a mutual fund’s net asset value (NAV)?

Net assets / total shares outstanding

What’s the advantage to reinvesting dividends back into a mutual fund?

In addition to compounding, most mutual funds will allow investors to reinvest at the NAV (i.e., with no sales charge)

Is a UIT considered managed or unmanaged?

Unmanaged, since the holdings are unsupervised as opposed to actively managed

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

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

List the three types of investment companies

Face-Amount Certificate, Unit Investment Trust (UIT), and Management Companies

Into what does a growth fund invest?

common stock

A mutual fund mist have a minimum net worth of $______ in order to offer its shares to the public

$100,000

Identify the acronym: SBI

Shares of Beneficial Interest (This represents a client’s UIT holdings)

Do some mutual funds issue fractional shares?

Yes. This is a common practice

Does a mutual fund’s board of directors make individual stock selections?

No. The board sets the fund’s objectives, whole the IA makes the portfolio selections

The purchase of a mutual fund is also know as a share _____.

issuance

What is the typical voting criterial for a mutual fund?

One vote allowed per one share owned

what must be included in a mutual fund confirmation?

potential redemption fees or CDSCs that may apply

T/F: To lower sales charges, investors add mutual fund purchases in all accounts using Rights of Accumulation

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

Are open-end investment companies considered managed or unmanaged?

Open-end funds (mutual finds) are managed by an investment advisor

A client invested $21,000 which has grown to $25,000. On what amount is his breakpoint based?

$21,000. Breakpoints are based on the amount contributed

Who must approve a change to mutual fund’s objective?

The majority of voting shares (not shareholders)

Which share class is typically appropriate for an investor with an uncertain time horizon?

Class C

What is not included in a mutual fund’s expense ratio?

The sales charge, since only fees are included

Letters of Intent are valid for _____ months

13

How may a mutual fund be capitalized?

Mutual (open-end) funds may only issue common stock to raise capital.

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

12b-1 fee

Typically, a mutual fund’s ex-dividend date is the business day _____ the record date

following

T/F: Engaging in breakpoint sales is allowed when dealing with larger investors

False. selling shares at amounts just below where a breakpoint is available is prohibited with all types of clients

May a Class B share be referred to as a “no-load” share?

No. This is a violation of FINRA rules

T/F: Investors can buy fractional shares of a mutual fund

True. Investors are not required to purchase full shares of a mutual fund

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

Dollar invested / newly calculated offering price (based on the reduced sales charge)

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

NAV / (100% - Sales Charge %)

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

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

With what should a client be concerned if an RR recommends a Class B share switch between fund families?

The holding period will be reset to zero in the new fund family and/or a CDSC may apply on the redemption

T/F: Mutual fund share purchases and redemptions settle in one business day.

False. Unlike stocks and bonds, mutual funds don’t have a fixed settlement date. Many funds settle on the same day

The _________________ is synonymous with the ask for a mutual fund

public offering price (POP)

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

1) Diversification 2) Professional Management 3) Liquidity