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31 Cards in this Set
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The primary objective of a particular mutual fund is the payment of dividends, regardless of the market's current state. Capital growth is a secondary objective. Which of the following industry groups would be appropriate for the fund's portfolio?
A) Computer technology B) Consume appliances C) Public utilities D) Aerospace |
Answer: C
Utilities are defensive industries; they tend to pay dividends consistently. |
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All of the following are characteristics typical of a money market fund EXCEPT:
A) it has a high beta and is safest in periods of low market volatility. B) the underlying portfolio consists of ST debt instruments. C) it is offered as a no-load investment. D) its net asset value normally remains unchanged. |
Answer: A
A money market fund has almost no price volatility, since the underlying portfolio consists of low-beta instruments and the fund is deliberately managed for low beta. |
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All of the following statements regarding money market funds are true EXCEPT; B) investors pay a management fee. C) dividends accrue daily. D) investors can buy and sell shares quickly and easily. |
Answer: A
Interest on MMFs is not guaranteed or specified. MMFs are no-load funds with no redemption fee, but investors do pay a management fee. The dividends earned on an investor's shares are accrued daily.
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Mutual fund shares represent an undivided interest in the fund, which means that:
A) each investor owns a proportional part of every security in the portfolio. B) investors can only purchase full shares. C) the fund can only hold securities of certain companies. D) the number of shares outstanding is limited to a predetermined maximum. |
Answer: A
Each MF shareholder owns an undivided interest in the investment company's portfolio. Because each share represents one class of voting stock, the investor's interest in the fund is reflected by the number of shares owned. |
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If an investor wants to invest in the electronics industry but does not want to limit his investments to one or two companies, which type of fund would be MOST suitable?
A) Bond B) Money Market C) Hedge D) Specialized |
Answer: D
A specialized or sector fund invests 25% or more of its assets in a particular region or industry. |
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Last year, the bond market was profitable and ABC Fund had 70% of its assets in bonds. Next year, the fund's managers expect the stock market to do well, and will adjust the fund's portfolio so 60% of its assets will be invested in stock. ABC is probably what type of fund?
A) Specialized B) Aggressive growth C) Balanced D) Hedge |
Answer: C
A balanced fund is invested in both stock and bonds. The percentage invested in the two types of securities is adjusted to maximize the yield obtained. Percentages are seldom fixed and are usually at the discretion of the investment adviser. |
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If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors seeking tax advantages, ABC is a(n):
A) municipal bond fund B) corporate bond fund C) money market fund D) aggressive growth fund |
Answer: A
Municipal bonds are considered second only to US Gov't securities in terms of safety. Also, interest received from the bonds is generally exempt from federal income tax. |
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All of the following are advantages of investing in mutual funds EXCEPT:
A) the ability to qualify for reduced sales loads on the basis of accumulation of investment within the fund. B) the ability to have personal control over the investments in the portfolio. C) exchange privileges within a family of funds managed by the same management companies. D) the ability to invest almost any amount at any time. |
Answer: B
Control over the investments in the portfolio is given to the investment manager, not to the individual investors. |
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Each of the following is a characteristic of money market funds EXCEPT:
A) Portfolio of ST debt instruments B) Offered without a sales load. C) Stable NAV (net asset value). D) High beta. |
Answer: D
MMFs invest in a portfolio of ST debt instruments, such as T-bills, commercial paper and bankers acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1/share). Beta is a measure of volatility; MMFs have low betas. |
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A tax-exempt bond fund may invest in:
A) ST MM instruments B) common stock C) municipal bonds D) corporate bonds |
Answer: C
Bond funds will distribute taxable income or dividends unless invested in municipal bonds. Although dividend distributions from a municipal bond fund are tax exempt, capital gains distributions are fully taxable. |
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Which of the following types of MFs has capital appreciation as its investment objective?
A) Specialized B) Income C) Municipal bond D) Balanced |
Answer: A
An objective of high-capital appreciation is most likely realized by a stock fund. A specialized fund is one that invests in stocks of one particular industry or region, and its main objective is capital or price appreciation. |
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A mutual fund invested in bonds with medium-length maturities. As the bonds matured, the fund reinvested the proceeds and purchased LT bonds with maturities of up to 20 years. What might have happened to the fund if the reinvestment had occurred during a period when interest rates were rising?
1. Decrease in yield 2. Decrease in income 3. Increase in yield 4. Increase in income |
Answer: 3 & 4
The longer a bond's maturity, the greater the risk to the investor. As a result, LT bonds generally pay higher interest rates than medium or short term bonds. If a fund replaces medium term bonds with LT bonds, the bonds would pay higher interest rates and thus generate more income. Additionally, as interest rates increase, so do yields. |
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If an investor is in a low tax bracket and wishes to invest a moderate sum to gain some protection from inflation, which of the following would you recommend?
A) GNMA fund B) Growth mutual fund C) Municipal unit investment trust D) Money market mutual fund |
Answer: B
Growth funds invest chiefly in common stock. Historically, common stock provides greater protection from inflation than debt securities do. |
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Which of the following funds would you recommend to a moderate-risk client seeking LT capital gains who also values professional stock selection.
A) Large cap growth fund B) S&P 500 index fund C) International index fund D) Small cap growth fund |
Answer: A
A large cap growth fund is the most appropriate choice for a moderate risk client because large capitalization stocks are generally less volatile than small cap stocks and provide LT capital growth. This is a more appropriate choice than the index fund because there is no stock selection there, only investing to parallel the index. |
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The net asset value (NAV) of an international bond fund can be expected to increase if:
1. Interest rates rise abroad 2. Interest rates fall abroad 3. The US dollar strengthens 4. The US dollar weakens |
Answer: 2 & 4
If interest rates fall, bond prices will rise, thus increasing the NAV of a bond portfolio. If the US dollar weakens, the value of other currencies will rise. This would also increase the NAV for a portfolio of international bonds. |
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If a customer purchases shares in a municipal bond fund, which of the following statements are TRUE?
1. Dividends are taxable 2. Dividends are not taxable 3. Capital gains distributions are taxable 4. Capital gains distributions are not taxable |
Answer: 2 & 3
Municipal bond funds distribute federally tax-free dividends, but any capital gain distribution is subject to taxation. The tax preferential treatment of mutual bonds is limited to the interest income earned, not the gains.
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If a mutual fund's objective is income, it would NOT hold which of the following securities in its portfolio?
A) Preferred stock B) Corporate bonds C) Income bonds D) US T-notes |
Answer: C
A fund designed to generate current income for its shareholders would not hold an income bond, also known as an adjustment bond. Income bonds pay interest only if the issuer has enough earnings to do so. They are often issued by companies coming out of bankruptcy. As a result, these bonds tend to trade like zeros. |
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The prospectus of the ABC Fund contains the phrase "will have at least one quarter of common stock instruments in the field of business machines." The ABC Fund is:
A) a growth and income fund. B) a specialized fund. C) a balanced fund. D) a diversified fund. |
Answer: B
A fund that makes a commitment to invest 25% or more of its profits into a particular economic or geographical sector is a specialized fund. |
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Which of the following mutual funds should an investment adviser representative recommend to a corporate client whose objective is current income with moderate risk?
A) Preferred stock fund B) Aggressive growth fund C) Money market fund D) High-yield bond fund |
Answer: A
Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. MMFs have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high, rather than moderate, degree of risk. |
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Your married customers, ages 48 and 50, have a combined annual income of more than $200K. They are concerned about the effects of rising inflation and since they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the MOST suitable for these customers?
A) ATF Overseas Opportunities Fund B) NavCo Tax-Free Municipal Bond Fund C) ABC Investment-Grade Bond Fund D) XYZ Government Income Fund |
Answer: A
Investment in an overseas equity fund will provide diversification not necessarily subject to US inflation. The tax-free fund will not provide additional diversification or the best hedge against inflation. A high-grade bond fund will not add diversification. |
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If your great-grandmother is interested in safety, liquidity and tax-free income, which of the following would you recommend?
A) Insured ST municipal bond fund B) High yield income fund C) Income bonds D) Exploratory oil and gas pool |
Answer: A
High-yield income funds usually invest in low-rated bonds; income bonds do not pay interest unless the board of directors declares a payment. An insured ST municipal bond mutual fund is relatively safe, very liquid and provides income free from federal tax. |
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Which of the following information should a registered representative obtain from a prospective client to ensure suitable investment recommendations?
1. Professional society memberships 2. Languages spoken 3. Liquidity needs 4. Number of dependents |
Answer: 3 & 4 |
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If a couple has a LT growth objective and is willing to accept a reasonable amount of risk, which of the following mutual funds is MOST suitable for them?
A) MMF B) Corporate bond fund C) Municipal bond fund D) Common stock fund |
Answer: D
A common stock fund will help the couple meet their LT growth objective. |
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If a client prefers mutual fund investments in companies that primarily generate capital appreciation to companies that pay a steady dividend, what type of mutual fund and associated investment objective would you recommend?
A) An index fund B) An income fund C) A growth and income fund D) A growth fund |
Answer: D
A growth mutual fund invests in stocks that are growing rapidly and stresses capital appreciation rather than income. The key is that the growth and appreciation are synonymous. |
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If a married couple with a LT growth objective is considering a mutual fund and they are concerned about the fund's annual expenses, they should select a:
A) common stock fund with a low portfolio turnover B) common stock fund with a high portfolio turnover C) LT corporate bond fund D) preferred stock fund |
Answer: A
Of the choices given, common stock is the only vehicle capable of providing LT growth. Preferred stock will provide dividends, but it will not provide much growth as it trades like a bond in line with interest rate changes. Of the two common stock funds, the one with the lower portfolio turnover will have lower annual expenses. |
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Which of the following mutual fund portfolio allocations would probably be MOST suitable for a 40 year old professional who states that he is an aggressive investor?
A) 50% small cap stocks, 50% US Gov't securities B) 5% small cap stocks, 5% international stocks, 90% large cap stocks C) 50% small cap stocks, 25% international stocks and 25% large cap stocks D) 50% corporate bonds, 50% municipal bonds |
Answer: C |
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A mutual fund portfolio consists entirely of stocks of companies with either new products just released in the market place or companies holding patents pending. This mutual fund is best described as a:
A) Dow theory fund B) Index fund C) Combination fund D) Special situation fund |
Answer: D
Special situation funds buy securities of companies that are considered to be in a position to benefit from special nonrecurring situations. Those could be: new management, new products, patents pending, takeover or turnaround situations. |
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Lifecycle funds embody all of the following characteristics EXCEPT:
A) These funds are usually structured as funds of funds so that the entire composition of the fund portfolio consists of funds offered by the same fund family. B) The asset allocation of the fund will be adjusted regularly to keep risk and reward balanced optimally, given the time remaining until the target date is reached. C) The objective assumes that as an investor nears retirement, the investor's tolerance for risk will diminish. D) As the fund moves closer to its target date, the portfolio holdings will be adjusted to gradually assume more and more risk. |
Answer: D
Lifecycle (aka Target funds) are managed in such a way as to lessen the amount of risk associated with the portfolio as it gets closer to its target date, which is usually the anticipated time of retirement for the fund investor. |
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A registered representative speaking to a customer is explaining registered funds that invest in nonregistered hedge funds. Which of the following statements would NOT be correct?
A) These funds generally allow purchases with an initial investment that is lower than what would be required to invest directly in a hedge fund. B) Hedge funds are directly available to sophisticated (accredited) investors, while funds of hedge funds allow all investors to invest in hedge funds indirectly. C) To divest of your fund of hedge fund investment, the shares will need to be redeemed by the mutual fund issuer. D) These funds, called funds of hedge funds, eliminate all of the risks associated with the hedge funds. |
Answer: D |
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Which of the following statements are TRUE of mutual fund dividend distributions?
1. The fund pays dividends from net investment income. 2. A single taxpayer may exclude $100 worth of dividend income from taxes annually. 3. An investor is liable for taxes on distributions, whether taken in cash or reinvested in the fund. 4. An investor is not liable for taxes if he automatically reinvests distributions. |
Answer: 1 & 3
Mutual funds pay dividends from net investment income and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash. |
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Which of the following investment co. portfolios is supervised rather than managed?
A) UIT B) Closed-end bond fund C) REIT D) Regulated open-end fund |
Answer: UIT
An UIT buys securities and holds them until redemption or until a specified future date. The securities in the portfolio are not traded, so no manager is needed. A REIT is not considered to be an investment co. |
