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55 Cards in this Set
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- Back
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Investment Clubs:
1. can take advantage of breakpoints on mutual fund purchases. 2. cannot take advantage of breakpoints on mutual fund purchases. 3. are permitted to purchase new equity issues at the POP (current price). 4. are not permitted to purchase new equity issues at the POP. |
Answer: 2 & 3
Investment clubs are not considered restricted persons under the rules regarding sales of a new issue, and therefore are eligible to purchase new security issues. Note that if a registered rep (restricted person) were a member of an investment club, the club would be prohibited from buying a new equity issue. Investment clubs are never permitted to take advantage of breakpoints available on MF purchases. |
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A broker/dealer selling open-end investment co. shares will be required to return its entire selling concession if the principal underwriter has to repurchase those shares from a customer within how many business days from the trade date?
A) 7 B) 15 C) 30 D) 60 |
Answer: B |
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According to the Investment Company Act of 1940, an open-end investment company must compute its NAV:
A) annually B) no less frequently than once per day C) weekly D) monthly |
Answer: B
MFs may calculate the value more often than once per day and will disclose this fact in the prospectus. |
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An investment company share purchased at its NAV that can always be redeemed later at its then-current NAV is a:
A) Class B share B) Class D share C) Class C share D) Class A share |
Answer: C
Class A shares are purchased at NAV plus sales charge. Class B shares pay the sales charge upon redemption. Class D shares have a level load plus a redemption fee. Class C shares have only a level load (a 12b-1 fee), which is taken from net assets during the year. |
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Under the Investment Company Act of 1940, redemption payments for mutual fund shares must be made within how many days?
A) 7 B) 5 C) 10 D) 15 |
Answer: A
If a customer tenders MF shares for redemption, payment must be made within 7 calendar days, unless the NYSE is closed on other than a weekend or holiday, or the SEC grants an exception. |
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Under the Conduct Rules, the maximum sales charge on any transaction involving an open-end investment company share is:
A) 8.5% of the NAV B) 9% of the NAV C) 9% of the offering price D) 8.5% of the offering price |
Answer: D
Open-end investment companies (MFs) are limited to a maximum sales charge of 8.5% of the offering price. |
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The maximum sales load may be charged on the purchase of shares from an open-end investment co. that offers all of the following EXCEPT:
A) Rights of accumulation B) Exchange privileges C) Quantity discounts D) Dividend reinvestment at NAV (not POP) |
Answer: B
Investment companies may charge the max sales load of 8.5% if they offer dividend reinvestment at NAV, rights of accumulation and quantity discounts (breakpoints). If a fund offers none of these features, it cannot assess a sales charge of more than 6.25%. |
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The management fees paid by an investment co. are part of:
A) the underwriting agreement B) the operating expense of the fund C) the custodial fees D) the sales load |
Answer: B
The management fees paid by an investment co. are part of the operating expenses of the fund. Custodial fees are also part of the operating expenses. A sales load is a selling cost contained within the underwriting agreement. |
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A mutual fund's expense ratio is found by dividing its expenses by its:
A) public offering price B) income C) dividends D) average annual net assets |
Answer: D
expense ratio = expenses/avg annual net assets |
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Potential investment co. clients should be advised to investigate a fund by looking at which of the following:
1. investment policy 2. number of shares outstanding 3. custodian bank 4. portfolio |
Answer: 1 & 4
Investment policy, track record, portfolio and sales load should all be researched when assessing a fund. The identity of the custodian bank for the fund, or the number of shares outstanding, does not bear on its performance or suitability. |
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After a MF's 10th year, performance stats must show results for each of the following periods EXCEPT:
A) 3 years B) 1 year C) 5 years D) 10 years |
Answer: A
MF perfomance stats must show results for 1, 5 and 10 years or the life of the fund, whichever is shorter. |
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If a RR is comparing 2 MFs for a customer, which of the following comparisons would NOT be permissable?
A) 2 equity funds with slightly different investment objectives, even if the differences and their consequences are carefully explained. B) A LT bond fund to a shorter term bond fund to demonstrate the trade offs that exist between risk and return. C) Equity growth fund to a MMF with the intention of convincing an investor to purchase the growth fund. D) Comparing diversified growth funds from 2 different fund families. |
Answer: C
A characteristic of MMFs is that they deliberately avoid growth. Thus, for the growth investor, a comparison of a MMF to a growth fund is an unfair comparison. |
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Under the Investment Co. Act of 1940, MFs must send financial statements to shareholders at LEAST:
A) annually B) semiannually C) monthly D) quarterly |
Answer: B
Under the Investment Co. Act of 1940, MFs must provide semiannual and annual reports to shareholders. |
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A MF must, at minimum, provide which of the following periodic reports to shareholders?
1) Audited annual reports 2) Unaudited annual reports 3) Audited semiannual reports 4) Unaudited semiannual reports |
Answer: 1 & 4
An investment co. must send an unaudited report to shareholders at least semiannually and an audited report of its financial condition at least annually. |
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In the sale of open-end investment co. shares, the prospectus must be delivered:
A) at or before redemption B) to the client either before or during the sales solicitation C) within 7 days of request D) before the sales solicitation |
Answer: B
Potential MF customers must receive a prospectus before or during the sales solicitation. |
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Investment co. shareholders must receive financial reports at least semiannually. All of the following are true regarding these reports EXCEPT:
A) the report is regulated under FINRAs rules regarding communications with the public. B) one of the semiannual reports must be audited C) a valuation of all securities in the IC portfolio as of the date of the balance sheet provided in the report must be included D) a statement of all compensation paid to the board of directors must be included |
Answer: A
The reports are required to be supplied to IC shareholders under the Investment CO. Act of 1940. They are prepared and distributed by the investment companies. Unless forwarded by broker/dealers to their customers, the semiannual reports would not be regulated under FINRAs communication with the public rules for broker/dealers. |
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In the sale of open-end investment co. shares, the prospectus:
A) is not necessary B) must be delivered before the sales solicitation C) must be delivered at, or before, the delivery of the fund share certificate D) must be delivered to the client either before or during the sales solicitation |
Answer: D
The sale of MF shares requires that the client receive the prospectus before or during a sales solicitation. |
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A fund must inform its shareholders of their right to reinvest dividends at NAV:
A) at the time of each distribution. B) only at the time of original purchase. C) annually. D) quarterly. |
Answer: C
A fund must notify shareholders of their right to reinvest at least annually (usually communicated through the annual report). |
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When discussing MFs with a customer, each of the following statements are prohibited EXCEPT:
A) The income yield of the fund consists of both dividends and capital gains. B) Get a few friends to join with you to form an investment club and you may qualify for a breakpoint. C) Buy the shares on record date in order to receive the dividend. D) Buy shares of different funds in the same fund family and you may qualify for a breakpoint on the total purchase. |
Answer: D
Most funds provide a combo privilege, allowing investors to aggregate purchases made in different funds in the same family to qualify for a breakpoint. The income yield of a MF includes dividends only. A group of friends is not eligible for a breakpoint (investment clubs are not eligible). "Selling dividends" is a prohibited practice because of the immediate tax liability incurred with the dividend and share price adjustment that results after the dividend distribution. |
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All of the following events will affect the NAV per share of a MF EXCEPT:
A) The fund receives cash dividends on the securities in its portfolio. B) The fund pays dividends to its shareholders. C) Wholesale redemption of fund shares. D) Changes in the market value of the fund's portfolio of securities. |
Answer: C
Dividends paid and received by the fund directly affect NAV. Changes in the portfolio value affect NAV because the securities are marked to market daily. While share redemption will reduce total net asset value, the number of shares outstanding decreases in proportion, so the NAV per share stays the same. |
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All of the following are redeemable securities EXCEPT:
A) Variable Annuities B) REITs C) MFs D) UITs |
Answer: B
A redeemable security has no secondary market. To sell (redeem) a redeemable security, the investor must go back to the issuer or its agent. REITS trade in the secondary markets; either on exchanges or OTC. |
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If the value of securities held in a fund's portfolio increases, and the amount of liabilities stays the same, the fund's net assets:
A) decrease B) stay the same C) are more liquid D) increase |
Answer: D
An appreciation in value of fund assets, without a corresponding increase in liabilities, leads to an increase in the fund's net asset value (total assets minus liabilities = net assets). |
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An investment co. share purchased at its NAV that can always be redeemed later at its then-current NAV is a:
A) Class B share B) Class D share C) Class C share D) Class A share |
Answer: C
Class A shares are purchased at NAV plus sales charge. Class B shares pay the sales charge upon redemption. Class D shares have a level load plus a redemption fee. Class C shares have only a level load (a 12b-1 fee), which is taken from net assets during the year. |
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The exchange privilege offered by open-end investment companies allows investors to:
A) exchange shares of one open-end fund for another in the same fund family at a NAV basis. B) exchange personally owned securities for shares of the investment co. C) purchase new fund shares from dividends. D) delay the payment of taxes on shares. |
Answer: A
Exchange privileges allow an investor to convert the value of shares held in one fund for those of equal value in the same family. Remember that conversion is a taxable event; if the shares converted have increased in value, capital gains taxes will be due. |
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5 years ago, the ABCD mutual fund bought 200K shares of Comet Industries at an avg price of $42.25. After a series of accounting scandals, the shares are now trading at $6. If the fund decides to sell its shares, what will be the impact of the sale of the shares on the NAV of the ABCD fund?
A) The NAV will fall. B) The NAV will rise. C) This depends on whether the fund can claim a tax loss on the sale. D) The NAV will not change. |
Answer: D
Portfolio holdings in a MF are marked to the market each day. Therefore, the NAV of the fund already reflects the current value of each security in its portfolio. When the fund sells the position, the value of the stock is replaced by an equivalent amount of cash, so NAV does not change. |
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Which of the following statements regarding 12b-1 fees is TRUE?
A) These fees are charged against the assets of the fund to defray distribution expenses. B) These fees are assessed on Class-B shares only. C) These fees are charged to customers who redeem their shares within 6 months of purchase. D) These fees are assessed on Class A shares only. |
Answer: A
These fees are used to offset distribution expenses of the fund and are charged against the assets of the fund, and may be assessed against Class A, B & C shares. |
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A customer wishes to invest $800K in the Ajax Fund, an open-end company with a LT growth objective. In order to take advantage of breakpoints, you recommend that the customer purchase:
A) Class B shares B) Class C shares C) Class A or Class C shares D) Class A shares |
Answer: D
Class A shares come with a front-end load that can be reduced or eliminated by breakpoints. Class B shares come with a back-end load combined with 12b-1 fees. Class C shares assess 12b-1 fees. Class B or C shares cannot take advantage of breakpoint reductions. |
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A father opens 4 custodial accounts, for each of his children, with the same MF co. He invests $15K in each account. The fund co. has breakpoints at $50K, $100K and $200K. The sales charge is:
A) based on the total $60K investment and qualifies for the $50K breakpoint. B) based on a $15K investment and is charged for each account. C) based on the total $60K investment and qualifies for the $100K breakpoint. D) ineligible for a breakpoint discount because these are custodial accounts. |
Answer: A
An investment made by one person in 4 custodial accounts for his children at the same fund co. would qualify for the breakpoint that is applicable to the total amount invested. In this case, $60K was invested, so the applicable breakpoint is $50K. |
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An investor redeems 200 shares of ABC Fund, which has no redemption fee. If the quote is $12.05 bid, $13.01 asked, what amount will the investor receive?
A) $2602 B) $2410 C) $1098 D) $2275.50 |
Answer: B
If a mutual fund has no redemption fee, the investor will receive the bid price/sh (NAV), multiplied by the number of shares being redeemed. In this case, the investor would receive $2410 ($12.05 x 200 shs). |
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Mutual fund Class B shares assess:
A) no load B) a deferred sales load C) a level load D) a front-end load |
Answer: B
Class B shares carry a deferred sales load. This is sometimes referred to as a back-end load. Class A shares carry a front-end load. Class C shares carry a level load. |
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A breakpoint sale is defined as the sale of MF shares in an amount:
A) just below the dollar amount at which the sales charge is reduced. B) at or above the dollar amount at which the sales charge is reduced. C) just below the public offering price (POP) of the fund. D) required as the minimum investment in a fund as specified by the SEC. |
Answer: A
The term "breakpoint sale" refers to the violation that occurs when a sale is made just below the point at which the investor would receive the reduced sales charge. The practice earns a higher commission for the salesperson but it is not in the interest of the customer. |
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A retiree contacts an agent to discuss investing his retirement savings of approx. $2.1M & his investment objective is LT growth. The rep and customer discuss the advantages & disadvantages of diversifying among 5 different MFs within 2 fund families, as opposed to purchasing just 1 fund. Consequently, the rep made the following recommendations:
XYZ Emerging Growth Class B XYZ Research Class B XYZ Investors Growth Stock Class B ABC Capital Enterprise Class B ABC Capital opportunity Class B
These recommendations are:
A) suitable b/c the customer fully understands all of the ramifications & is satisfied. B) unsuitable b/c Class A shares in either/both fund family could be purchased for a sales charge breakpoint discount at or near 0%. C) suitable b/c they achieve the diversification the customer seeks. D) unsuitable b/c the investments are not equal in amount. |
Answer: B
Class A shares in most MFs provide breakpoint sales charge discounts so there is no sales charge when purchasing $1M worth of shares (or less in some cases). Class A shares also have lower operating expenses than Class B shares. The retired investor would be subject to back-end loads with Class B shares if the funds were needed unexpectedly within a few years. |
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If a RR is seeking to sell shares of a MF to a client, which of the following statements would be accurate and permissible regarding her recommendation?
1. When the client redeems his shares, he will not immediately know their dollar value. 2. If the client invests just before the dividend distribution, he can benefit by receiving the added value of that dividend. 3. If the client purchases the shares of 2 or more funds in the same family of funds, he may be entitled to a reduced sales charge. 4. The purchase of Class B shares always provides the greatest return on investment. |
Answer: 1 & 3
The purchase of 2 funds in the same family of funds may qualify an investor for combination privileges. At redemption, he will receive the next price calculated (forward pricing), which is not yet known. Class B shares, or deferred sales charge shares, may or may not provide the best return. Share class suitability can depend upon the amount invested and the client's individual needs. Lastly, while the dividend is received if the fund shares are purchased before the ex-dividend date, there is no added value. The fund share price is reduced by the amount of the dividend on the ex-dividend date, just as it would be for a cash dividend paid on equity securities. |
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A purchase or redemption order for investment co. shares must be executed at a price based upon:
A) NAV computed after the fund receives the order. B) NAV last computed before the fund receives the order. C) NAV computed at the close of trading on the NYSE the day before the fund receives the order. D) best NAV computed the same day the fund receives the order. |
Answer: A
Purchase or redemption of MF shares occurs at the next NAV calculated after the fund receives the order; this is known as forward pricing. |
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Letters of intent may be backdated up to how many days?
A) 120 B) 90 C) 30 D) 60 |
Answer: B
The time limit for a letter of intent is 13 months, but the letter may be backdated up to 90 days from the date it was filed. In that case, the investor has 10 months to complete the letter. |
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A front-end sales load is defined as the:
A) fee paid to the investment adviser. B) concessions allowed on the purchase or sale of securities. C) difference between the POP (public offering price) and the NAV of a MF share. D) commissions paid on the purchase or sale of securities. |
Answer: C
A sales load is the difference between the POP and the NAV per share of the fund. |
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An investor redeems 300 shares in ACE fund. When he bought the shares at $12, the NAV was $11.08. If the current POP is $12.50 and the NAV is $11.80, the investor receives:
A) $3540 B) $3324 C) $3600 D) $3750 |
Answer: A
Shares are redeemed at NAV. 300 shs x $11.80 = $3540. |
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A MF's unrealized loss last month results in which of the following?
1. Lower NAV per share. 2. Lower dividend payments to shareholders. 3. Reduction in the proceeds payable to shareholders who liquidate their shares. 4. Higher tax liability to shareholders. |
Answer: 1 & 3
An unrealized loss is the same as a decrease in NAV. An investor receives less at redemption than she would have received if the redemption had taken place before the asset's depreciation. |
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A client invests $2200 in an open-end investment co. and signs a letter of intent for a $10K breakpoint. If he deposits $11K 6 months later, which of the following statements is true?
A) He will not receive any reduction in the sales load. B) He will receive a reduced load on $13,200 worth of the shares. C) He will receive a reduced load on $10K worth of the shares. D) He will receive a reduced load on $8800 worth of the shares.
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Answer: B
An investor signing a letter of intent has 13 months to contribute funds to reach the reduced load. The sales charge in this case will be based on the total investment of $13,200. If at the end of the 13 months, the investor had not invested up to the breakpoint, the fund would liquidate enough shares to pay the difference in sales load. |
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A letter of intent for a MF does NOT contain which of the following provisions?
A) The fund can halt redemption during the period of time the letter of intent is in effect. B) The time limit is 13 months. C) The letter can be backdated 90 days to include a previous deposit. D) The fund will keep some of the initially issued shares in an escrow account to ensure payment of the full sales load. |
Answer: A
A letter of intent is not binding on the client in any way. Should the client decide to liquidate the account before completing the letter, the company will reduce the redemption by the amount of shares held in escrow. |
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All of the following describe the price of a no-load mutual fund EXCEPT:
A) POP B) NAV C) bid D) book value |
Answer: A
No-load, open-end investment co. shares are sold to investors and redeemed through the issuer at their book value, which is the same as their NAV or bid price. |
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For a MF that collects 12b-1 fees, which of the following statements are TRUE?
1. The fund may use the money to pay for mailing sales literature. 2. Advertising materials must always state that the fund is no-load. 3. The fund may use the money to pay for commissions on portfolio transactions. 4. The fund's prospectus must disclose the fee. |
Answer: 1 & 4
12b-1 fees may be used only to cover promo and other distribution expenses for funds that are distributors of their own shares. Fee amounts must be disclosed in the prospectus. The fund may not use term "no-load" in any communications with the public if the 12b-1 fee and other service fees exceed 25% of average net assets. |
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When is the sales charge deducted from purchases of MF shares made under a letter of intent?
A) When each letter of intent is completed. B) When each purchase is made. C) Monthly D) Annually |
Answer: B
When the customer makes the first investment under a letter of intent, the reduced sales charge applies immediately and to each subsequent investment. With each additional investment, the same reduced charge is deducted. If the customer does not invest the amount stated in the letter, the full sales load applies retroactively to the total investment. |
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A MF that charges 12b-1 fees may use the money to cover all of the following EXCEPT:
A) printing costs B) management fees C) sales fees D) promotion fees |
Answer: B
12b-1 fees may not be used to pay for the portfolio manager's fees; only for sales promotions and fees, and other activities relating to the distribution of the fund's shares. |
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The POP for a MF as quoted in the financial press reflects:
A) the minimum sales charge the fund distributor collects. B) no sales charge because the offering price depends upon the quantity purchased. C) the maximum sales charge the fund distributor collects. D) the average sales charge for the preceding 3 months. |
Answer: C
The POP for a quoted MF includes the maximum sales charge the fund distributor can assess. |
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Which of the following is TRUE about a sales agreement between a principal underwriter and a member, which enables the member to receive a discount from the public offering price?
1. It must be in writing. 2. It must provide for a 45 day right of refusal. 3. It must provide that the member will sell at NAV only when selling to the public. 4. It must provide for a refund of the concession byt he member to the underwriter if the shares are redeemed within 7 business days of the sale. |
Answer: 1 & 4
All sales agreements must be in writing, provide for a 7 day refund of the concession and include a stipulation that the member will maintain the POP, not the NAV. |
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If a MF's NAV is $9.30 and its sales charge is 7%, its offering price is:
A) $10 B) $9.95 C) $9.97 D) $10.70 |
Answer: A
To determine the selling price of the shares when given the NAV, divide the NAV by 100%, minus the sales load: NAV/(100% - SL%) = POP. In this case, $9.30/93% (.93) = $10 |
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XYZ Tech Fund permits rights of accumulation. A shareholder has invested $9K and signed a letter of intent for $15K. If his reinvested dividends during the 13 months total $720, how much money must he contribute to fulfill the letter of intent?
A) $9K B) $15K D) $5280 |
Answer: C
The shareholder must contribute the full $15K, so he owes an additional $6K. Reinvested dividends and changes in the NAV do not count toward a breakpoint during the period of a letter of intent. |
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A MF has NAV of $7.80/sh and the fund pays its underwriter a concession of $0.12/sh. If the fund has a sales load of $0.50/sh and an administrative fee of $0.15/sh, how much does the investor pay/sh to purchase a Class A share of this fund?
A) $7.80 B) $8.42 C) $8.57 D) $8.30 |
Answer: D
The investor pays the POP when purchasing MF shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge ($7.80 + $0.50 = $8.30). The concession and administrative fee are not included. |
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A customer has been following several investment co. quotes in the paper. She notices that the GEM fund has a NAV of $12 and a POP of $12.50, and that the ABC fund has a NAV of $11.50 and a POP of $10.98. She should conclude that:
A) ABC and GEM are both UITs. B) GEM may be an open or closed-end fund and ABC is a closed-end fund. C) both are open-end funds. D) ABC is an open-end fund and GEM is a closed-end fund. |
Answer: B
The price for open-end funds is determined by adding the sales charge to the NAV. An open-end fund can never have a POP less than its NAV, therefore ABC cannot be an open-end fund. |
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FINRA rules require that, if a customer redeems MF shares within 7 business days of purchase:
A) the rep who sold the shares will be subject to a Code of Procedure hearing. B) the member firm must forfeit the concession earned. C) the customer is entitled to receive the original NAV or the current NAV, whichever is higher. D) the fund must report the redemption promptly to the SEC. |
Answer: B
If a customer redeems MF shares within 7 b.days of purchase, any concession earned by the member firm that sold it to him must be returned to the underwriter. The same rule applies to variable annuities. |
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A RR has just explained to a customer that to purchase a particular security, the customer would pay the asking price + a commission, not a sales charge. The RR is speaking of:
A) an open-end fund. B) a mutual fund. C) all management co. offerings. D) a closed-end fund. |
Answer: A closed-end or ETF is purchased on an exchange or OTC where buyers pay the ask price plus a commission. Open-end (mutual) funds are purchased at the POP, which includes a sales charge. Management co. offerings include both open-end and closed-end funds. |
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A customer buys AC Growth Fund and enjoys a substantial paper capital gain. When he believes the market has reached its peak, he switches into AC Income Fund within the AC family of funds. He incurs a small service fee, but is not charged an additional sales charge. What is the tax effect?
A) The tax basis of AC Income Fund is adjusted to reflect the gain in the AC Growth fund. B) It is a tax-free exchange. C) Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase. D) Any gain or loss is deferred until he liquidates the AC Income Fund. |
Answer: C
The exchange is treated as a sale of the Growth Fund shares followed by a purchase of the Income Fund shares. The gain or loss is determined by comparing the cost basis of the Growth Fund shares with the NAV at the time of the exchange. Any difference is a capital gain or loss, even though the proceeds were immediately used to purchase the income fund. |
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If you invest in a front-end load MF and choose automatic reinvestment, you should expect that:
1. dividend distributions will be reinvested at NAV. 2. dividend distributions will be reinvested at POP. 3. capital gains distributions will be reinvested at NAV. 4. capital gains distributions will be reinvested at POP. |
Answer: 1 & 3
MFs that offer automatic reinvestment of dividends and gains distributions must do so at NAV. |
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Which of the following is the LEAST suitable MF transaction?
A) Encouraging a retired 65 yr old investor to invest a small percentage of his savings in a large-cap growth fund. B) Encouraging an investor in his early 30s to invest in an emerging markets MF. C) Encouraging an investor in a high tax bracket with an income objective to invest in a municipal bond fund. D) Encouraging a MF shareholder to switch from one fund family to another while a deferred load is in existence. |
Answer: D
Encouraging a MF shareholder to switch from one fund family to another while a deferred load is in existence is not in the client's best interest, as the client might be subject to substantial additional sales charge. |
