CFS Practice Exam
2/8/04
1. What is the difference between closed-end mutual fund co & open-end mutual fund co as far as capitalization?
General Differences
· Closed end companies are companies that do not redeem the shares. Open end companies redeem shares.
· What determines the value of close-end companies shares are demand and supply.
· Open end companies value are determined by net asset value
· (Net Asset Value = NAV value of all the investments - all the expenses & liabilities)
· NAV/# of shares= NAV per share
· Closed end has a fixed capitalization. Open end can increase and decrease capitalization
2. Which four federal regulations affect investment companies?
· Investment Company Act 1940, Amended Act 1970
· Security Act of 1933 & 1934
· What are the funds objectives: Types of mutual funds (ex. bond fund, equity fund, balance fund, or sector fund), name of fund should reflect objective, diversified fund or non-diversified fund
· Rule of 5%, 10%, 75%(According to Inv Co Act 1940 mutual fund companies should not invest more than 5% in each security and should not own more than 10% of outstanding vote, if the mutual fund is diversified not more than 75% should be invested in that particular security. If non-diversified not more than 50%.
· Expenses and fees-
A. Expense:
12b-1 fees Most mutual funds charge this fee you for marketing such as adv, brochures, and distribution. (Percentage charged are .10%-1%)
Contingent Deferred Sales Load (CDSL) Fee- AKA Redemption Fees
Mutual fund companies only charge this fee sell your mutual fund earlier than your redemption period. (Fees charged range from 6%-7%)
Other things we should know about mutual funds are:
Marketability and Liquidity: Marketability means you can buy and sell quickly. Liquidity means you can convert to cash without major loss.
Exchange Privileges: within the same family of funds you can exchange to one type of fund to another with low expense.
Automatic Reinvestment and Automatic Withdrawal- When you buy mutual funds they give you dividends and you can sign something to authorize automatic reinvestment of withdrawal ( to designated person)
Level loaded Plan- Is Mutual fund level, front load, or end load?
Level Load means sales commission is evenly distributed.
Front load means transaction fees are charged at beginning of transaction.
End loan means transaction fees are charged at end of transaction.
No load fund – charges that will still apply are 12b-1 fees and redemption fees.
Types of Funds:
1. Government Bond Fund
2. Municipal Bond Fund (Munis)- Bond is only for 1 state
3. National Municipal Bond Fund- Bond includes other states
4. High Yield Bond
-Taxable
-Tax Free
5. Corporate Bond Fund
6. International Bond Fund
7. Hedge Fund Bond
-Currency Hedge
-Interest Rate Hedge
8. Growth and Income Fund
9. Equity Income Fund
10. International Equity Fund
11. Aggressive Growth Fund
12. Small Company Fund
13. Sector Fund
14. Metals Fund (Gold, Silver etc)
15. Natural Resource Fund
16. Utility Funds
17. Index Fund
18. Country Basket Fund
19. Flexible Income Fund
20. High Yield Fund
21. Investment Grade Fund (Anything over BB)
22. All Weather Fund
23. Money Market Fund
Some of these funds explained on www.mfea.com
3. Describe the major ramifications of these acts upon investment companies.
Investment company act requires that investment companies register with SEC
Act of 1933 & 1934 Companies have to disclose objectives
4. Explain how mutual fund can provide equal opportunities for both large and small investors.
· Dividend and capital gain depends on how much you invest
· Total return per dollar investment are equal no matter how much or little you invest.
5. List the symbols and footnotes used in newspapers described mutual funds?
p=There is a 12b-1 fee
r=there is a CDSL Fee AKA Redemption Fee
f= previous day prices
t= both 12b-1 and CDSL charges
e= capital gain distributed
x= income or dividend distributed
6. Which is the better measure of performance, yield or total return?
Total Return = Capital Gain return (realized or not realized) + dividend yield
7. Why should an investor with millions of dollars use mutual funds when a well-diversified portfolio is more affordable?
Seven Reasons
1. Diversification
2. Professional Management
3. Marketability
4. Exchange Privileges
5. Automatic Reinvestment
6. Automatic Withdrawal
7. Record keeping and Servicing
8. What are the two minimum requirements that a mutual fund company must comply?
· 5%, 10%, 75% rule
· 65% invested in whatever the title of the fund is
9. What are the Class A shares and Class B Shares?
· Class A has a front end load with a high yield
· Class B has a back end load and has 12b-1
10. When dollar loses against Euro, what will happen to value of investment in US Dollar in that fund? Will it increase or decrease?
The value will increase. As the value of the Euro increases you can buy more (Purchasing Power)
11. What are the two regulations that insure stability of money market fund?
Maturity should not be more than 120 days otherwise it isn’t a money market
Rating should be P1 & P2
Rating Companies: Morning Star, S & P, Moody’s
12. How can a closed end fund provide a higher yield than open yield fund?
Closed end fund is purchased at discount this creates a higher yield than open yield fund.
13. Describe the three different types of REITs.
Equity REITs
Mortgage REITs
Hybrid REITs
14. What are the differences between sponsors, trustee, of REITS?
Evaluator set a retail price or redeeming price
A sponsor maintains the secondary market
Trustee overlooks the responsibilities of the manages
15. Are there any open-end mutual funds that invest in close-end funds?
Yes. Example Specialty funds (mortgage funds) that invest REITs
Calculation Questions
1. What is the Correlation Co-efficient?
2. What is the standard deviation?
3. What is dollar weighted return?
4. What is time weighted return?
5. What is expected weighted return?
6. What is annualized rate of return?
7. What is a risk- adjusted rate of return?
8. What is the average rate of return?
9. What is geometric rate of return?
10.What is total rate of return?
What is duration of a bond?
What is yield to maturity?
CFS lecture 02/15/04
Investment Company Quiz from 02/08/04
1. Which of the following is not an investment company?
A. a closed-end mutual fund
B. a custodial investment trust
C. an open-end mutual fund
D. a real estate investment trust
E. a unit investment trust
2. For tax purposes, a REIT is treated as a:
A. corporation
B. limited partnership
C. general partnership
D. trust
3. WEBS (World Equity Benchmark Shares) represent:
A. single-country index funds
B. a basket of call options
C. 10 individual stocks from each of 12 different countries
D. an expensive way to trade in securities (or options)
4. What are the risks of mutual fund investing?
A. yields may be lower than total returns
B. managers may unexpectedly invest in less than 15 companies
C. managers may unexpectedly invest in one sector
D. security values may fluctuate
E. investment income may be distributed
5. The tax statements sent out by a mutual fund are referred to as:
A. 1040s
B. Substitute 1099s
C. Dividend, Interest, & Capital Gains Reconfirmations
D. Form 1044s
E.
6. Where can you find a list of a mutual fund’s largest holdings?
A. the Prospectus
B. the Statement of Additional Information
C. the Statement of Changes in Net Assets
D. the Annual Report
E. the newspaper
7. Which section of the prospectus documents how the investment manager of the mutual fund will meet the fund’s objective?
A. the Condensed Financial Information section
B. the Investment Objective section
C. the Investment Policies section
D. the Management section
E. the Shareholder Rights section
8. Balanced funds are also referred to as:
A. flexible income funds
B. asset allocation funds
C. “all weather” funds
D. total return funds
9. Which cost/expense incurred by a mutual fund is not required to be disclosed in the prospectus?
A. operating expenses
B. brokerage expenses
C. total expenses
D. sales loads
E. 12b-1 fees
10. Which share class includes a back-end sales charge if the investor liquidates the mutual fund in less than 5 years?
A. class A shares only
B. class B shares only
C. class C shares only
D. class A & B shares
E. class B & C shares
11. Which share class always includes a 12b-1 fee?
A. class A shares only
B. class B shares only
C. class C shares only
D. class A & B shares
E. class B & C shares
12. Which category of mutual funds carries the greatest degree of default risk?
A. money market funds
B. government bond funds
C. municipal bond funds
D. corporate bond funds
E. Treasury bond funds
13. An index fund that replicates the S&P 500 is:
A. equally weighted with all 500 stocks
B. equally weighted with most of the 500 stocks
C. heavily weighted by the stocks with the largest market capitalization
D. heavily weighted by technology stocks
14. Under the Investment Act of 1940, a mutual fund may not own more than _____ of the outstanding voting securities of any company (stock).
A. 5%
B. 10%
C. 25%
D. 50%
à Rule of 75%; 10%; 5%: a mutual fund must invest 75% of its money; a mutual fund may not own more than 10% of the outstanding voting power; a mutual fund may not invest more than 5% into a company.
15. Which category of mutual fund should be selected to generate tax-free income?
A. floating-rate bond funds
B. government bond funds
C. state municipal bond funds
D. corporate bond funds
E. international bond funds
à Federal government bonds are exempt from state taxes.
State government funds: No federal taxes and if a resident of that state, then no state taxes also – double exemption
For example: Mindy (California resident) buys California Bond fund, gets double exemption.
What are the Risks of Mutual Funds?
Total Return = Dividend yield + Capital Gain Yield
Total Return =(Income/ Purchase Price) + (Selling Price – Purchase Price) / Purchase Price
Risk = Less than Expected What you Expected More than Expected
Downside Riskà ß Upside Risk
CFS lecture 02/15/04 Annuities
Variable Annuities
Five major characteristics of annuity
1) Managed by professionals
2) Diversified investment
3) Separate accounts
· Issuers of annuities must keep their money separate from the money intended for the annuities. Money is safe even if the company goes bankrupt
4) Good death benefits
· Regular Death Benefits: Choice of market value vs. summation of premium payments minus expenses
· Enhanced Death Benefits: Increase your death benefit by 5% maximum each year.
5) Deferred tax payment
When you buy annuities, you are involved with several people.
· Insurers: (Putnam, American Express)
· Owner of the Annuity: has power of the annuity (to sell, cancel, change beneficiaries, etc)
· Annutant: buys annuity on behalf of another person.
Ex. Husband buys annuity for wife, husband will OWN the annuity and will get the tax benefits. Wife will get the annuity if husband dies and then become the owner.
· Beneficiary: person that gets the annuity when death occurs
Single premium and multiple premium annuities
· Single Premium- one lump payment made
· Multiple Premium- two kinds of multiple premium annuities. One kind is a flexible premium contract. Within set limits, you pay as much premium as you want, whenever you want. In the other kind, a scheduled premium annuity, the contract spells out your payments and how often you'll make them.
Three Types of Payouts
· Lump Sum Payments
· Annuitazation of Annuity: (not a good choice) when you start, cannot stop. Pay taxes when money
· SWP (Systematic Withdrawal Payout): does not have to be fixed, can be changed or stopped at any time.
Immediate Annuity vs. Deferred Annuity
· Can start payout immediately
Deferred Annuity
· Payouts start later
Fixed rate Annuity: three different benefits
· Rate of annuity fixed, regardless of the market.
· Principle guarantee, interest guarantee
· Death Benefit guarantee
Reasons to Annuitize
· Steady source of income
· Tax advantage
· Avoid pre-59 penalties
Disadvantages to Annuitize
· Rate of return is low, non-competitive
· Once annuity payments start, they cannot stop (potential tax implications)
Fixed Annuity is safer than Variable Annuity
Fixed has low downside risk, Variable Annuity has great upside risk.
Fixed Annuity Reserve Requirement
· The company that issued the annuity, must set aside enough money to cover/ guarantee the annuity. Must be separate from the company’s other funds.
Four ways to avoid IRS penalties
· Die
· Become disabled
· Annuitize
· Get over 59 ½ years of age
Variable Annuity
· Can have a guaranteed death benefit, but will charge for it
· What will be the percentage of fees? Answer: 1.1% - 1.5% of the total premium Added each time you pay a premium.
Free Bailout Provision
If the rate of renewing the contract is less than 1%, then you will have the option to end without penalty.
Combination of Annuity and CD à CD/Annuity (Issued by insurance companies)
· Benefits of annuity – no taxes. As long as you keep renewing the CD/Annuity, you avoid taxes
· Liquidity of CD – Short term. Can be cashed out at anytime
Equity Index Annuity (EIA)
· Diversified
· No Downside Risk (but if the index goes up you only get 80%; this pays for the annuity when the market is down)
· There is a floor. They give you a minimum 3% even if the market crashes.
Split Annuity
· Portion of the money can be distributed and portion can be reinvested.
Hybrid Annuity
· Portion of payments go to fixed annuity and portion goes to variable annuity