Unit Investment Trust (UIT)
1. Not actively managed; there is no BOD or investment advisor
2. shares are not traded in the secondary market, they must be redeemend by the trust
3. UITs are investment companies as defined under the Investment Company Act of 1940
Mutual Fund Classes
- Class A
- Class B
- Class C
Class A: Purchased at NAV + sales charge (front-loaded);; breakpoints available
Class B: Sales charge paid at redemption (back-end loaded); plus 12b-1 fees
Class C: 12b-1 fees charged quarterly
Class D: Level loaded plus a redemption fee
Open ended management company
- Redeemable to the issuer
- Not traded on the secondary market
Close ended management company
- Exchange-traded investments
- Trade in round lots (100 shares).
- Not redeemable by their issuer like MFunds
- Distribute cash dividends generated by the companies held in the portfolio directly to the owners of the HOLDR shares.
- Allow great flexibility in managing the tax consequences of the investment because the securities can be unbundled and traded individually, thus taking loses when advantageous and deferring gains when advantageous.
An investment company that holds which of the following does NOT meet the definition of a diversified investment company under the 1940 Investment Company Act?
A)80% of its assets in securities of 50 health care companies. B)8% of a given corporation's voting stock in its portfolio. C)4% of its assets invested in stock of a major publicly held corporation. D)33% of its assets in securities issued by a small-cap new issue.
he correct answer was: 33% of its assets in securities issued by a small-cap new issue.
An investment company that has invested 33% of its assets in any issue, small-cap or not, exceeds the limits set in the 75-5-10 test. This test requires that 75% of the assets be invested in securities issued by companies other than the investment company (regardless of the type of companies) so that no more than 5% of total assets are invested in any one company, and no more than 10% of an outside corporation's voting securities are owned by the investment company.
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 hedge funds.
The correct answer was: These funds, called funds of hedge funds, eliminate all of the risks associated with hedge funds.
Which of the following statements describe the conduit theory of taxation?
- A fund is not taxed on earnings it distributes provided distributions equal 90% or more of net investment income.
- Earnings distributed by a regulated investment company are taxed three times.
- Dividends and interest are passed through to the investor without the fund being taxed.
- Dividends and interest accumulate tax free to the shareholder.
The correct answer was: I and III.
Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level), and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder.
Which of the following two are TRUE of a leveraged exchange traded fund (ETF)?
- The leverage ETF may be purchased on margin.
- Securities within the leveraged fund portfolio may be purchased on margin.
- The leveraged ETF may never be purchased on margin.
- Securities within the leveraged fund portfolio may never be purchased on margin.
The correct answer was: I and II.
Because an exchange traded fund is purchased and sold on an exchange, the rules generally applying to all exchange products such as purchasing them on margin, would apply. Leveraged funds can use a number of different securities types including derivative products, and trading techniques such as trading on margin as a means of attaining the leveraged returns they promise.
Mutual fund shareholders are NOT taxed on:
A)capital gains distributions. B)interest distributions. C)unrealized capital gains. D)reinvested dividends.
The correct answer was: unrealized capital gains.
Interest, dividends, and realized capital gains are all taxed. However, unrealized capital gains are not taxed. Unrealized gains contribute to NAV appreciation and to a shareholder's capital gain upon redemption.
A stock mutual fund wishes to advertise itself as diversified. To be able to do so, the fund must invest:
A)no more than 5% of its assets in any one target company. B)All of these. C)at least 75% of its assets in securities other than its own. D)so that it holds no more than 10% of the voting stock of any one company.
Your answer, All of these., was correct!.
All of these choices comprise the 75-5-10 rule for diversified investment companies under the Investment Company Act of 1940. At least a minimum of 75% of the total assets must be invested in securities other than those of the investment company. Of the assets invested, no more than 5% of the funds total assets can be in any one company nor can the percentage ownership of any one company be more than 10%.
The open-end investment company share price quoted in the newspaper is the:
A)bid price. B)underwriter's concession. C)dealer's price. D)confirmed price.
The correct answer was: bid price.
Newspaper quotes of mutual fund shares always show the net asset value (NAV), often referred to as the bid price.
Which of the following statements best describes a breakpoint sale?
A)Sale of investment company shares in anticipation of a distribution scheduled to be paid shortly. B)Sale of investment company shares in dollar amounts above the point at which the sales charge is reduced. C)Compensation generated by commissions from a client who has reached another breakpoint, paid to the registered representative after he no longer works for the member. D)Sale of investment company shares in dollar amounts slightly below the point at which the sales charge is reduced on quantity transactions, to make a higher commission
The correct answer was: Sale of investment company shares in dollar amounts slightly below the point at which the sales charge is reduced on quantity transactions, to make a higher commission.
A breakpoint sale is a violation of the Conduct Rules. It occurs when a broker permits a client to purchase shares in an amount immediately below the amount that would qualify the client for a discounted sales charge, without informing him of the breakpoint.
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?
- It must be in writing.
- It must provide for a 45-day right of refusal.
- It must provide that the member will sell at NAV only when selling to the public.
- It must provide for a refund of the concession by the member to the underwriter if the shares are redeemed within 7 business days of the sale.
The correct answer was: I and IV.
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 public offering price, not the NAV.
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)Money market mutual fund. C)Municipal unit investment trust. D)Growth mutual fund.
The correct answer was: Growth mutual fund.
Growth funds invest chiefly in common stock. Historically, common stock provides greater protection from inflation than debt securities do.
Last year, ABC Mutual Fund paid dividends of $1.50 per share and distributed $.80 per share in capital gains. The fund has a bid price of $13.50 and an asked price of $14.20. What is the fund's current yield?
A)0.1. B)0.162. C)0.1056. D)0.0492.
The correct answer was: 0.1056.
Find the current yield of mutual fund shares by dividing the annual dividend by the POP (asked price). $1.50 ÷ $14.20 = 10.56%.
Under the Conduct Rules, the maximum sales charge on any transaction involving an open-end investment company share is:
A)8.5% of the net asset value . B)8.5% of the offering price. C)9% of the net asset value. D)9% of the offering price.
The correct answer was: 8.5% of the offering price.
Open-end investment companies (mutual funds) are limited to a maximum sales charge of 8.5% of the offering price.
A board of directors member for a mutual fund must serve a minimum term of:
A)1 year. B)3 months. C)2 years. D)6 months.
The correct answer was: 1 year.
Mutual fund board of directors members must serve a term of at least 1 year, and cannot serve more than 5 years without being reelected.
If a customer submits a redemption order to her broker/dealer after the close of the New York Stock Exchange, she will receive a price based on the net asset value computed:
A)the previous business day. B)the same day regardless of when the order is received. C)within the next 2 business days. D)the next time the fund computes it.
The correct answer was: the next time the fund computes it.
Orders to redeem shares are executed at the next computed price.
Reference: 10.7.3.1 in the License Exam Manual.
The practice of dollar cost averaging requires the investor to:
A)buy a security in a falling market and sell it in a rising market. B)sell a security in a falling market and sell it in a rising market. C)sell a security in a falling market and buy it
in a rising market. D)buy a security in a falling market and buy it in a rising market.
The correct answer was: buy a security in a falling market and buy it in a rising market.
Dollar cost averaging requires the investor to invest a fixed amount of money on a regular basis regardless of whether the stock market is rising or falling.
All of the following terms apply to municipal unit investment trusts EXCEPT:
A)managed. B)registered. C)regulated. D)redeemable.
The correct answer was: managed.
Municipal UITs buy bonds and hold them until redemption or call. The bonds are not actively traded so the portfolio is not managed but is overseen by a trustee.
If a mutual fund's objective is income, it would NOT hold which of the following securities in its portfolio?
A)Income bonds. B)Corporate bonds. C)U.S. T-notes. D)Preferred stock.
The correct answer was: Income bonds.
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 zeroes.
An agent has recommended investments in the XYZ fund family to his customers for 10 years. He is referred by one of his customers to a prospect who has inherited $500,000 as beneficiary of a life insurance policy. The prospect tells the agent she has never invested in the market before, is risk averse, and wants safety of principal to be the first priority with liquidity second. The agent recommends the following investments:
XYZ government bond fund, B shares $200,000
XYZ large-cap growth and Income B shares $150,000
XYZ liquid reserve money
market $150,000
The correct answer was: unsuitable because it does not address the customer's two primary objectives.
The customer's objectives of safety and liquidity are not satisfied by these recommendations. The government bond fund and large-cap growth and income fund are both subject to market risk and, as Class B shares, are subject to a contingent-deferred sales charge in the event the customer wishes to access the funds before the back-end load expires. The back-end load is not consistent with the customer's liquidity objective.
A FINRA member broker/dealer trading in shares of an open-end investment company may NOT buy shares of the fund:
A)at a discount from the public offering price. B)for the purpose of resale at a later date. C)for the firm's own investment purposes. D)to cover existing orders
The correct answer was:for the purpose of resale at a later date.
A broker/dealer may buy shares only to fulfill existing orders or for its own investment account, not for inventory.
A purchase or redemption order for investment company shares must be executed at a price based on the:
A)<i>best</i> net asset value computed the same day the fund receives the order. B)net asset value computed at the close of trading on the NYSE the day before the fund receives the order. C)net asset value next computed after the fund receives the order. D)net asset value last computed before the fund receives the order.
The correct answer was: net asset value next computed after the fund receives the order.
Purchase or redemption of mutual fund shares occurs at the net asset value next calculated after the fund receives the order; this is known as forward pricing.
f a customer transfers his holdings from one fund to another within the same family of funds, what are the tax consequences?
A)On the transaction date, any gain or loss is recognized for tax purposes. B)No gain or loss is recognized until redemption. C)Losses are deducted and gains are deferred. D)Gains are taxed and losses are deferred.
The correct answer was: On the transaction date, any gain or loss is recognized for tax purposes.
An exchange is a taxable event. The cost basis of the shares in the original account must be compared to their redemption value. Any gain or loss is recognized in the year of the exchange. The exchange privilege allows the investor to avoid paying an additional sales charge. It does not allow the investor to avoid taxes.
An open-end investment company that does not distribute at least 90% of its net income:
A)is liable for federal taxes on its net income. B)does not require a restricted type of management. C)is unable to retain all or part of its realized capital gains. D)continues to qualify as a registered investment company based on interpretations of the IRS.
The correct answer was: is liable for federal taxes on its net income.
Investment companies that do not distribute at least 90% of their net investment income become liable for federal income taxes on all the net investment income. Shareholders would also be responsible for taxes on any distributions received. By distributing 90% of investment income, open-end companies can avoid double taxation.
To make a public offering, a registered investment company must have a minimum net worth of:
A)100000. B)$100 million. C)$10 million. D)$1 million.
The correct answer was: 100000.
Investment companies are not required to register an offering with the SEC unless they have a net worth of $100,000.
A customer seeks a significant long-term investment in the Ajax fund, a growth-oriented mutual fund. To take advantage of breakpoints applicable to large investments, the customer should purchase:
A)Class A shares. B)Class C shares. C)Class D shares. D)Class B shares.
The correct answer was: Class A shares.
For initial purchases, breakpoints are only available if the customer purchases Class A shares, which are sold with a front-end load deducted from the initial investment. A substantial purchase can often reduce the sales charge to zero. Class-B and Class-C shares are sold with annual 12b-1 fees as well as a contingent deferred sales charge. Class D shares are sold with a level sales load plus a redemption fee.
Which of the following constitutes selling dividends?
A)Encouraging investors to postpone purchases of mutual fund shares until after the ex-date for a dividend distribution. B)Enticing customers to buy mutual fund shares just before the ex-dividend date. C)Encouraging customers to sell their mutual fund shares just before the ex-dividend date. D)Withdrawing dividends, rather than reinvesting them in additional shares.
The correct answer was: Enticing customers to buy mutual fund shares just before the ex-dividend date.
Selling dividends is an unethical sales practice in which a member intentionally misleads customers into believing they will receive the equivalent of a rebate on their investments because the fund will soon pay a distribution. The customers suffer out-of-pocket losses because the cash immediately coming back is dividend income subject to tax. At the same time, the NAV of the fund is reduced.
Financial information CANNOT be used in a mutual fund prospectus if the information is older than:
A)16 months. B)60 days. C)12 months. D)9 months.
The correct answer was: 16 months.
A mutual fund prospectus may not contain information that is more than 16 months old.
The capital structure of an open-end investment company might include:
A)preferred stock, common stock, and bonds. B)preferred and common stock with no bank borrowing. C)only one capital issue with limited bank borrowing.
D)only capital issues with no bank borrowing.
Your answer, only one capital issue with limited bank borrowing., was correct!.
Open-end investment companies may only issue redeemable common stock. Preferred stock, bonds, and other forms of senior securities are not allowed. Bank borrowing is allowed subject to certain limitations.
A front-end sales load is defined as the:
A)difference between the public offering price and the net asset value of a mutual fund share. B)commissions paid on the purchase or sale of securities. C)concessions allowed on the purchase or sale of securities. D)fee paid to the investment adviser.
The ex-date for a closed-end fund listed for trading on the NYSE is set by:
A)FINRA. B)the NYSE. C)the SEC. D)the board of directors of the fund.
The correct answer was: the NYSE.
The ex-dates for
closed-end funds(typically 2 business days before the record date) are determined by the exchanges on which they trade. The ex-date for open-end funds (typically the business day following the record date) i s determined by the board of directors of the fund.
Which of the following types of mutual funds has capital appreciation as its investment objective?
A)Balanced. B)Specialized. C)Income. D)Municipal bon
The correct answer was: Specialized.
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.
When comparing exchange-traded funds (ETFs) to mutual funds, some features available in ETFs that are NOT found in the mutual funds would include the ability to:
- correlate to a specific index.
- sell short.
- be bought and sold on margin.
- represent an entire portfolio, or basket of securities.
A)I and II. B)II and III. C)III and IV. D)I and IV.
The correct answer was: II and III.
Unlike mutual fund shares, ETF shares can be traded on margin and sold short. They are similar in that they both represent an entire portfolio or basket of securities and both can have portfolios correlated to a specific index.
An investor who makes transactions once a month using dollar cost averaging would:
A)buy the same number of shares of a stock. B)buy the same dollar amount of stock. C)allocate assets
equally among cash, stocks, and bonds. D)put equal amounts of money in a bond and stock mutual fund.
The correct answer was:buy the same dollar amount of stock.
In the dollar cost averaging investment strategy, the amount of dollars invested each month remains constant. Accordingly, the investor will automatically buy more shares when the price is low to reduce the average cost per share.
All of the following statements concerning investment companies are true EXCEPT:
A)to be considered a diversified investment company, the company must invest in both equity and debt instruments. B)an investment company that invests the majority of its assets in one industry may still qualify as a diversified company. C)a nondiversified company is any management company not classified as a diversified company. D)a diversified company can be either an open-end or a closed-end investment company.
The correct answer was: to be considered a diversified investment company, the company must invest in both equity and debt instruments.
A diversified investment company could be either a closed-end company or an open-end company. There is no requirement for a diversified company to have both equity and debt in its portfolio. An investment company can follow the 75-5-10 diversification formula and still invest within one industry (e.g., a technology fund).
A client invests $2,200 in an open-end investment company and signs a letter of intent for a $10,000 breakpoint. If he deposits $11,000 6 months later, which of the following statements is TRUE?
A)He will receive a reduced load on $10,000 worth of the shares. B)He will receive a reduced load on $8,800 worth of the shares. C)He will receive a reduced load on $13,200 worth of the shares. D)He will not receive any reduction in the sales load.
The correct answer was: He will receive a reduced load on $13,200 worth of the shares.
An investor signing a letter of intent has 13 months to contribute funds to reach the reduced load. The sales charge in this case, then, 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.
Which of the following statements regarding fixed municipal unit trusts are TRUE?
- The trust is managed.
- The trust is not managed.
- The portfolio can be traded.
- The portfolio can not be traded.
A)II and III. B)II and IV. C)I and IV. D)I and III.
The correct answer was: II and IV.
Fixed unit trusts are not managed; the portfolio of securities does not change. As bonds mature or are called, the proceeds are distributed pro rata to the unit holders. These units are redeemable by the issuer or its agent.
Exchange traded funds:
- pass on capital gains to investors annually.
- can be bought and sold throughout the trading day.
- have high expense ratios.
- have low expense ratios.
The correct answer was: II and IV.
Noted advantages of Exchange Traded Funds (ETFs) are that they have low operating costs and thus low expense ratio's and can be bought and sold throughout the trading day.
Reference: 10.1.1.3.1 in the License Exam Manual.
FINRA rules require that, if a customer redeems mutual fund shares within 7 business days of purchase:
A)the member firm must forfeit the concession earned. B)the customer is entitled to receive the original NAV or the current NAV, whichever is higher. C)the fund must report the redemption promptly to the SEC. D)the representative who sold the shares will be subject to a Code of Procedure hearing.
The correct answer was: the member firm must forfeit the concession earned.
If a customer redeems mutual fund shares within 7 business 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.
SEC regulations for securities issued by investment companies prohibit which of the following?
- Closed-end funds from issuing preferred stock.
- Open-end funds from issuing preferred stock.
- Closed-end funds from issuing bonds.
- Open-end funds from issuing bonds.
The correct answer was: II and IV.
Closed-end funds may issue more than one class of security, including debt issues and preferred stock. Open-end funds may issue only one class of security: redeemable, voting common stock; they may not issue senior securities.
All of the following describe the price of a no-load mutual fund EXCEPT:
A)bid. B)NAV. C)POP. D)book value.
The correct answer was: POP.
No-load open-end investment company shares are sold to investors and redeemed through the issuer at their book value, which is the same as their net asset value, or bid price.
Net asset value per share for a mutual fund can be expected to decrease if the:
A)fund has experienced net redemption of shares . B)issuers of securities in the portfolio have made dividend distributions. C)securities in the portfolio have appreciated in value. D)fund has made dividend distributions to shareholders .
The correct answer was: fund has made dividend distributions to shareholders .
The NAV per share will rise or fall relative to the value of the underlying portfolio. If dividends are distributed to shareholders, the fund's assets decrease and their per-share value will decline accordingly. Appreciation of the portfolio and dividends received will increase the value. Redemption of shares will have no impact on the NAV per share as the money paid out is offset by a reduced number of shares outstanding.
Which of the following is the least suitable mutual fund transaction?
A)Encouraging an investor in a high-tax bracket with an income objective to invest in a municipal bond fund. B)Encouraging a retired 65-year-old investor to invest a small percentage of his savings in a large-cap growth fund. C)Encouraging an investor in his early 30s to invest in an emerging markets mutual fund. D)Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence.
The correct answer was: Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence.
Encouraging a mutual fund 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 charges.
or a customer interested in buying an inverse exchange traded fund (ETF) tracking the performance of the Standard & Poor’s 500 index, which of the following market views would make that purchase most inappropriate?
A)Bullish B)Bearish C)Neutral D)Both bullish or bearish
The correct answer was: Bullish
Inverse ETFs are designed to deliver returns that are opposite of the benchmark index they are tracking. Therefore, buying an inverse ETF that tracks the S&P 500 index at a time when the market outlook is bullish would be most inappropriate. If the index rises with the anticipated bullish market, the fund that delivers returns that are the opposite of the index would fall in value.
If a mutual fund's net asset value is $9.30 and its sales charge is 7%, its offering price is:
A)10.7. B)9.97. C)10. D)9.95.
The correct answer was: 10.
To determine the selling price of the shares when given the NAV, divide the NAV by 100% minus the sales load: NAV / (100% - SL%) = public offering price. In this case, $9.30 divided by 93% (.93) = $10.
he principal underwriter of an open-end investment company is also known as the:
A)dealer. B)sponsor. C)registrar. D)trustee.
The correct answer was: sponsor.
A mutual fund's underwriter is also known as the sponsor or distributor of the fund.
After a mutual fund's tenth year, performance statistics must show results for each of the following periods EXCEPT:
A)3 years. B)10 years. C)1 year. D)5 years.
Your answer, 3 years., was correct!.
Mutual fund performance statistics must show results for 1, 5, and 10 years, or the life of the fund, whichever is shorter.
If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as a:
A)utilities fund. B)closed-end company. C)growth fund. D)unit investment trust.
Your answer, unit investment trust., was correct!.
A unit investment trust issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed, it is not traded.
Letters of intent may be backdated up to how many days?
A)90. B)120. C)60. D)30.
Your answer, 90., was correct!.
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.
Which of the following statements regarding a unit investment trust is NOT true?
A)It invests according to stated objectives. B)It is considered an investment company. C)It charges no management fee. D)Overall responsibility for the fund rests with the board of directors.
he correct answer was:Overall responsibility for the fund rests with the board of directors.
A unit investment trust has no board of directors; rather, it has a board of trustees. A UIT must follow a stated investment objective (as must any investment company) and does not charge a management fee because it is not a managed portfolio.
Closed-end investment companies:
- continuously issue new shares.
- generally make a one-time public offering of shares.
- may issue debt securities.
- may not issue preferred stock.
The correct answer was: II and III.
Publicly traded, or closed-end, funds generally make a one- time offering of shares which then trade on the secondary market. Unlike mutual funds, they may issue both bonds and preferred stock.