Investment Company Flashcards

Questions and Answers

A fund that distributes at least 90% of its Net Investment Income to shareholders is termed a(n):

Registered fund

Income fund

Regulated fund (correct)

Tax exempt fund

The investment adviser of a mutual fund determines all of the following EXCEPT:

Purchases of securities into the portfolio

Percentage of cash or equivalents held in the portfolio

Investment objective of the fund (correct)

Sales of the securities from the portfolio

An investor wishes to buy mutual fund shares with the primary objective of aggressive growth. Based on this information, the appropriate recommendation is a:

Preferred stock fund

Balanced fund

Money market fund

Sector fund (correct)

The death benefit of a variable annuity contract applies _____ to annuitization.

prior Signup and view all the answers

Amount of REIT income that must be real estate related to qualify as an investment company.

75% Signup and view all the answers

A variable annuity is a(n):

Participating unit investment trust Signup and view all the answers

A 'specialty' fund is one which invests in:

One geographic area or one type of industry Signup and view all the answers

A customer redeems a mutual fund. The customer must be paid the money from the fund company within how many business days?

5 business days Signup and view all the answers

Mutual funds must send their financial statements to shareholders:

Semi-annually Signup and view all the answers

When comparing an Exchange Traded Fund to a Unit Investment Trust, the customer should be made aware that:

The secondary market for UITs is limited while ETFs are actively traded Signup and view all the answers

What is the main objective of investing in equity REITs?

Income and growth Signup and view all the answers

What does a BDC invest in?

Privately-held companies Signup and view all the answers

All of the following terms apply to publicly traded fund shares EXCEPT:

Redeemable Signup and view all the answers

The essential difference between an open end fund and closed end fund is that a(n):

Open-end fund has a different capital structure than a closed-end fund Signup and view all the answers

Which statement is TRUE regarding mutual fund offerings?

Fund shares can only be sold to the public at the Public Offering Price as stated in the Prospectus Signup and view all the answers

Which statement is TRUE regarding the ex date for a mutual fund?

The ex-date is set by the Board of Directors of the Fund Signup and view all the answers

The manager of a mutual fund is known as the:

Investment Adviser Signup and view all the answers

A customer contributed $50,000 to a variable annuity contract. The account value has grown over the years and the NAV is now $70,000. The customer is now age 60, and takes a lump-sum distribution of $25,000 to pay for expenses. Which statement is TRUE?

$20,000 of the distribution is taxable and $5,000 is not taxable Signup and view all the answers

Distributions from variable annuity contracts at retirement age are:

Taxable as ordinary income on any amount above the customer's cost basis Signup and view all the answers

All of the following are characteristics of Defined Benefit Plans EXCEPT:

If the corporation has an unprofitable year, the contribution may be omitted Signup and view all the answers

An income fund would likely invest in all of the following securities EXCEPT:

Income Bonds Signup and view all the answers

Spiders (SPDRs) are securities whose value is based upon the securities in the:

Standard and Poor's 500 Index Signup and view all the answers

The purchaser of a variable annuity bears all of the following risks EXCEPT:

Mortality risk Signup and view all the answers

A woman in the highest tax bracket has $105,000 to invest for her teenage child's college education. She wants to make sure that, if he doesn't attend college, that he will not have access to these funds. She should be advised to make the investment in a:

529 Plan Signup and view all the answers

In the year 2017, a divorced woman under age 50 collects $50,000 of alimony and child support as her sole source of income. The woman wishes to make a contribution to an Individual Retirement Account this year. Which statement is TRUE?

A contribution of up to $5,500 is permitted, but the contribution is not tax deductible. Signup and view all the answers

Which of the following can be purchased on margin?

Closed End Funds trading on the NYSE Signup and view all the answers

Which of the following is NOT defined as an 'investment company' under the Investment Company Act of 1940?

Real Estate Investment Trust Signup and view all the answers

An ETF that attempts to emulate the Standard and Poor's 500 Index employs what investment strategy?

Passive asset management Signup and view all the answers

All of the following investment company terms are synonymous EXCEPT:

Offering Price Signup and view all the answers

The expense ratio of a mutual fund is a measure of:

Operating efficiency Signup and view all the answers

Which statement is TRUE regarding a variable annuity offering a GMIB?

The contract guarantees a minimum growth rate for the separate account at the time of annuitization Signup and view all the answers

Which of the following annuity payment options will continue payments to another person for their life after the annuitant dies?

Joint and Last Survivor Annuity Signup and view all the answers

Distributions from qualified retirement plans that are not rolled over into an IRA or other qualified plan are subject to:

20% withholding tax Signup and view all the answers

Which of the following statements are TRUE regarding contributions to 403(b) tax-deferred annuities and the distributions from these plans after age 59 1/2? (Select all that apply)

Contributions are made with before tax dollars Signup and view all the answers

Which of the following investment company securities is NOT redeemable?

Closed end fund shares Signup and view all the answers

Quotes for mutual funds in the news media show:

Net Asset Value and the Public Offering Price computed using the maximum sales charge imposed by the fund Signup and view all the answers

No load funds do not impose any of the following fees EXCEPT:

Management fee Signup and view all the answers

An individual wishes to have a fixed number of shares liquidated each month. He or she should elect which type of withdrawal plan?

Fixed shares Signup and view all the answers

A Special Situations Fund invests in:

Companies undergoing a takeover or bankruptcy Signup and view all the answers

When a variable annuity contract is "annuitized," which statements are TRUE?

The annuity unit value is variable Signup and view all the answers

When referring to guarantees in a variable annuity contract, a registered representative would be permitted to say all of the following EXCEPT:

"The contract may provide for a guaranteed return on investment in the separate account" Signup and view all the answers

Which of the following securities can be sold by an individual holding an investment companies/variable annuities (Series 6) registered representative's license? (Select all that apply)

Municipal Investment Trusts Signup and view all the answers

For an investor who has a Keogh Plan, which of the following statements are TRUE?

The plan is a tax qualified Signup and view all the answers

Which of the following statements are TRUE about non-contributory defined benefit retirement plans?

Annual benefit payments are fixed Signup and view all the answers

Which statements are TRUE about SEP IRAs?

The plan is established by the employer Signup and view all the answers

State-sponsored education savings programs that permit contributions to build tax-deferred are known as:

Section 529 plans Signup and view all the answers

The manager of an unregistered hedge fund charges a fee of "2 and 20." This means that investors are charged a(n):

Annual management fee against net assets of 2% plus a performance fee based on 20% of profits Signup and view all the answers

An investor in a "Ginnie Mae" mutual fund assumes all of the risks EXCEPT:

Credit Risk Signup and view all the answers

An annuitized account in a variable annuity is most similar to:

Pension payments Signup and view all the answers

Which statements are TRUE about variable annuities?

Earnings in the separate account build tax-deferred Signup and view all the answers

The maximum contribution to a Keogh is effectively...

20% of income or $54,000 Signup and view all the answers

Regularly scheduled investments of the same dollar amount in fund shares will most likely result in a:

Lower average price per share Signup and view all the answers

If the actual interest rate earned in the separate account underlying a variable annuity contract is higher than the "AIR" the annuity payment:

Will increase Signup and view all the answers

A client surrenders a variable annuity contract 5 years after purchase because of poor performance. Any surrender fee imposed:

Reduces sales proceeds Signup and view all the answers

An "annuity unit" of a variable annuity contract is a(n):

Accounting measure of the annuity amount to be received by the owner Signup and view all the answers

When comparing Real Estate Investment Trusts (REITs) to Real Estate Limited Partnerships (RELPs), which of the following statements are TRUE?

RELPs allows for flow through of gain Signup and view all the answers

Employees of non-profit organizations are permitted to establish tax-deferred retirement plans, similar to a Keogh, by making investments in a:

Tax sheltered annuity Signup and view all the answers

A customer redeems 1,000 shares of XYZ Fund. The computed Net Asset Value per share is $13 and the Public Offering Price is $13.68. The fund has a 1/2% redemption fee. The customer will receive:

$12,935 Signup and view all the answers

When comparing an ETN to an ETF, which statements are TRUE?

ETNs have both credit risk and market risk Signup and view all the answers

Which of the following statements are TRUE regarding the taxation of payments from variable annuities?

LIFO accounting is used to determine the taxation Signup and view all the answers

Exchange traded index funds:

Can be traded anytime during exchange trading hours at net asset value Signup and view all the answers

Quotes published in the news media for mutual funds show:

Ask price at NAV plus maximum sales charge Signup and view all the answers

What does a BDC invest in?

Privately-held small-cap and mid-cap companies Signup and view all the answers

A customer dies, leaving his $300,000 IRA account to his 3 daughters, who are age 46, 50, and 52. Which daughter's life expectancy would be used to determine the minimum annual payout to be made from the IRA?

The 52 year old daughter's age Signup and view all the answers

In 2017, an individual earning $60,000 makes an annual contribution of $1,500 to a Traditional IRA. Which statement is TRUE?

This person can contribute a maximum of $4,000 to a Roth IRA Signup and view all the answers

A 60-year-old customer asks about the tax consequence of taking distributions from his Traditional 401(k) plan. You should tell him that:

All withdrawals are taxable at ordinary income tax rates Signup and view all the answers

Which of the following terms apply to fixed unit investment trusts?

Unmanaged Signup and view all the answers

Mutual fund sales charge %

ask-bid/ask Signup and view all the answers

Which is the BEST definition of an "annuity unit"?

An accounting measure upon which the amount of pay out is determined Signup and view all the answers

A client surrenders a variable annuity contract 5 years after purchase because of poor performance. Any surrender fee imposed:

Is not deductible Signup and view all the answers

Which of the following funds MUST be a closed-end fund?

Net Asset Value = $10 / Purchase Price = $9.50 Signup and view all the answers

Exchange Traded Funds (ETFs) are:

Regulated by the SEC and FINRA Signup and view all the answers

Redemption always takes place at the...

NAV Signup and view all the answers

Which annuity payout option usually results in the largest periodic payment?

Life Annuity Signup and view all the answers

An "accumulation unit" of a variable annuity contract is a(n):

Accounting measure of the owner's interest in the separate account Signup and view all the answers

Real Estate Investment Trusts are:

Traded in the over-the-counter market Signup and view all the answers

Payments received by the owner of a tax qualified variable annuity are:

100% taxable as investment income Signup and view all the answers

Which of the following are characteristics of Defined Contribution Plans?

The annual benefit varies dependent on the number of years that the employee is included Signup and view all the answers

Which statements are TRUE when comparing UTMA Custodian Accounts to Coverdell Education Savings Accounts?

Contributions to Coverdell Education Savings Accounts are limited to $2,000 annually Signup and view all the answers

The minimum price at which an open end fund share can be purchased is:

Net Asset Value Signup and view all the answers

Which of the following statements are TRUE regarding management fees imposed by mutual funds?

Management fees are deducted from fund gross investment income before any dividend distributions are made Signup and view all the answers

Study Notes

Mutual Fund Shares

Class B shares impose a contingent deferred sales charge and a 12b-1 fee.
Investment clubs and omnibus accounts do not qualify for breakpoints on mutual fund purchases.

Investment Funds and Types

A regulated fund distributes at least 90% of its net investment income to shareholders.
Sector funds are suitable for investors aiming for aggressive growth.

Variable Annuities

During the accumulation phase, both dividends and interest, along with capital gains, are tax-deferred.
The death benefit applies prior to annuitization.
Contributions to variable annuities are not tax-deductible, while distributions are taxable.

REITs

REITs issue shares of beneficial interest representing an undivided interest in real estate investments.
To qualify under Subchapter M, at least 75% of REIT income must be real estate-related; qualifying sources include net rental income and interest from mortgages.

Tax Implications

Distributions from variable annuities at retirement are taxable as ordinary income on amounts above the cost basis.
529 Plans are suitable investment options for college education savings, ensuring restricted access to funds if not used for education.
Distributions from qualified retirement plans that are not rolled over are subject to a 20% withholding tax.

Investment Company Securities

An open-end fund computes Net Asset Value (NAV) daily, while a closed-end fund does not.
Closed-end fund shares are not redeemable, unlike open-end fund shares and series EE bonds.
Investment companies regulated by the Investment Company Act of 1940 include various formats, but REITs are excluded.

Financial Statements and Experiences

Mutual funds are required to send financial statements to shareholders semi-annually.
Expense ratios reflect mutual fund operating efficiency and are generally higher for funds with 12b-1 plans.

Retirement and Savings Accounts

Health Savings Accounts (HSAs) can be employer-established and funded with tax-deductible contributions.
Contributions to 403(b) plans are made with before-tax dollars, and distributions are fully taxable.

Market and Trading

Closed-end funds trading on the NYSE can be purchased on margin, unlike mutual funds.
ETFs emulating the S&P 500 Index employ passive asset management strategies.

Annuity Payment Options

A joint and last survivor annuity continues payments to another person after the annuitant's death.
Variable annuity contracts may guarantee a minimum growth rate for the separate account at the time of annuitization.

Unique Fund Types and Strategies

Specialty funds invest in a single geographic area or industry, while a Special Situations Fund targets corporate bonds rated below investment grade or corporate opportunities.### Takeover and Bankruptcy
Companies undergoing a takeover or bankruptcy are often involved in significant financial restructuring.
A takeover can be a hostile or friendly acquisition, changing ownership and possibly management.
Bankruptcy is a legal status where a company cannot repay its debts and may lead to liquidation or reorganization.
Chapter 11 bankruptcy allows companies to reorganize while continuing operations, whereas Chapter 7 leads to liquidation of assets.

Variable Annuities

When annuitized, the number of annuity units is fixed while the unit value is variable.
Guarantees in variable annuity contracts include a minimum income benefit and death benefits, but not a guaranteed return on investment.
Securities that can be sold include municipal investment trusts and bond funds.

Keogh Plans and Retirement Accounts

A Keogh Plan is tax-qualified, meaning contributions can lower taxable income.
Distributions from a Keogh are taxable on both original contributions and earnings when taken after age 59½.

Defined Benefit Retirement Plans

Contribution amounts vary, while annual benefit payments are fixed under non-contributory plans.

SEP IRAs

Established by employers, SEP IRAs have considerably higher contribution limits than Traditional or Roth IRAs.

Education Savings Programs

Section 529 plans allow tax-deferred growth for educational expenses.

Hedge Fund Fees

A "2 and 20" fee structure includes a 2% annual management fee and a 20% performance fee on profits.

Ginnie Mae Funds

Investors assume risks such as fluctuations in net asset value, reinvestment, and prepayment risks, but not credit risk.

Variable Annuity Characteristics

Contributions are not tax-deductible, while earnings grow tax-deferred.
Liquidation of a variable annuity incurs a surrender fee that reduces sales proceeds and is not deductible.

ETNs vs. ETFs

ETNs carry both credit risk and market risk; ETFs solely have market risk.
Strategic investing in ETFs often results in lower average expense ratios compared to mutual funds.

Tax Implications

Payments from tax-qualified variable annuities are fully taxable as investment income.
Withdrawals from a Traditional 401(k) are taxable at ordinary income rates.

Management Fees in Mutual Funds

Management fees compensate fund advisers and are deducted from gross investment income before dividends are paid to shareholders.

Miscellaneous

Real Estate Investment Trusts (REITs) trade on stock exchanges, allowing for passive investment income.
Understanding the differences in redemption methods and pricing strategies is crucial for maximizing investment returns.

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Description

This quiz focuses on important concepts related to mutual fund shares, particularly Class B shares. Test your knowledge with multiple statements and definitions to better understand investment companies and their operations.