Question 1

Which of the following types of investment companies pays out 90% of its net investment income to shareholders?

Accepted Answer

regulated. Investment companies regulated by the Internal Revenue Code Sub-chapter M are required to pay out a minimum of 90% of their net income annually to their shareholders.

Question 2

Bubba wishes to invest $50,000 in three mutual funds offered by different underwriters with growth as the main objective. A recommendation to purchase only one such fund for $50,000 might be more suitable to Bubba if:

Accepted Answer

the purchase of one fund would probably be made at a break point allowing more dollars to be invested in fund shares. There is nothing inherently unsuitable about recommending three different funds. However, in most cases, a single fund offers satisfactory diversification and can be purchased with a reduction in sales charge.

Question 3

Which of the following may occasionally be purchased at a discount from net assets value?

Accepted Answer

closed-end funds. Mutual funds are purchased at NAV (when no-load) or NAV plus a sales charge. The pricing of closed-end funds is determined by market activity and has no direct link to NAV.

Question 4

What type of mutual fund would invest in equities and bonds?

Accepted Answer

balanced. These funds invest for growth with stock and income with bonds.

Question 5

Which of the following statements is not true about a letter of intent?

Accepted Answer

a shareholder may not redeem any shares for 13 months. Redemptions are permissible at any time. However, since escrowed shares are set aside to cover the difference in sales loads based on terms of the letter, redemptions prior to 13 months may liquidate the escrow account and thus return to the investor 100% of net asset value.

Question 6

A bank or trust company that is acting as custodian for a mutual fund does which of the following?

Accepted Answer

physically protects the fund's assets. The custodian holds the assets of the fund. The transfer agent redeems and issues fund shares.

Question 7

The cost of maintaining an investment in a mutual fund is best reflected in the:

Accepted Answer

expense ratio. Custodial fees are negligible and the sales charge is a one-time expense. The "best" reflection of mutual fund costs is the expense ratio.

Question 8

An "accumulation unit" of a variable annuity is used to determine which of the following?

Accepted Answer

the value of the annuitant's contract before annuity payments begin. Accumulation units determine contract value. Payout are determined by annuity units.

Question 9

Which of the following is not an investment company within the terms of the Investment Company Act of 1940?

Accepted Answer

a holding company dealing in mineral leaseholds. The other choices are the three classifications of investment companies under the 1940 act.

Question 10

Which of the following is not usually an additional function of a mutual fund's custodial bank?

Accepted Answer

investment advisor. The custodial bank is usually also selected for other functions, but not as investment advisor. That assignment is generally performed by a special advisory firm or the mutual fund management company.

Question 11

A management group may serve an investment company as its:

Accepted Answer

both A and C. The custodian must be independent of the investment company.

Question 12

Which of the following organizations usually has a prominent role in guiding investment policies of mutual funds?

Accepted Answer

the management group. The management group is actually comprised of the management company (including the underwriter) and the investment advisor.

Question 13

Which of the following is not a practice of a mutual fund custodian?

Accepted Answer

lending the fund's securities to banks or broker/dealers. This practice is not permitted under federal law.

Question 14

Approval for a registered investment company to change is investment objective from income to growth is required from which of the following?

Accepted Answer

a majority of the shareholders. Any factors that materially affect the interests of shareholders must be approved by a majority vote of the shareholders.

Question 15

Under the Investment Company Act of 1940, what is the minimum net worth of a registered investment company?

Accepted Answer

$100,000. This was a considerable amount of money in 1940.

Question 16

Which of the following pairs of terms are synonyms in connection with most mutual funds?

Accepted Answer

net asset value and redemption price. Investors redeeming shares of mutual funds receive the net asset value.

Question 17

Under what circumstances may a registered investment company change its investment objective?

Accepted Answer

after approval by a majority vote of the shareholders. All vital interests of the shareholders are subject to their majority vote.

Question 18

A mutual fund custodian is paid according to which of the following specifications when receiving deposits from a shareholder's reinvestment plan?

Accepted Answer

a processing fee. Many custodian banks charge the custodian fee to the mutual fund rather than the individual shareholder.

Question 19

If a mutual fund has invested its assets by allocating about one-third each for bonds, preferred stocks, and common stocks, it is identified as:

Accepted Answer

a balanced fund. A balanced fund varies its investments among these categories of holdings.

Question 20

A mutual fund with an 8% load and a 1% redemption fee carries a current quote of $6.25 - $6.79. If an investor has tendered his shares for redemption on that basis, the per share price he will receive is approximately:

Accepted Answer

$6.19. The fund has a redemption fee of 1%. This is about 6 cents based upon the bid price. Subtracting that from the $6.25 bid results in $6.19.

Quiz 2: Investment and Securities