INVESTMENT COMPANIES EXAM
This exam tests the information found in the Investment Companies Module. If you would like more
information on a question than is given in the rationale in the Exam Answers, please refer to the section of text referenced in each answer.
1. A mutual fund has a net asset value (NAV) of $14.20, a sales charge of 8%, and a 1% redemption fee. If an investor wanted to redeem 500 shares of this fund, how much money would he receive?
(A) $6,461 (B) $6,466 (C) $7,029 (D) $7,100
2. Income distribution from a mutual fund can qualify for long-term capital gains tax status: (A) If the shares were held more than six months
(B) If the investment company is a “regulated” investment company (C) If the investment company is an income fund
(D) Under none of the above circumstances
3. A mutual fund paid $0.30 in dividends and $0.75 in capital gains during the year. The offer (ask) price at the end of the year is $6.50. What is the current yield on this fund?
(A) 4.1% (B) 4.6% (C) 5.9% (D) 7.5%
4. Which of the following is not redeemable by the issuer? (A) Closed-end investment company shares (B) Series HH bonds
(C) Open-end investment company shares (D) Debenture bonds
5. A mutual fund has increased in value because of a rise in the market. That would be: (A) A capital gain
(B) Appreciation (C) A profit (D) None of the above
6. Listed below are a group of mutual funds. If an investor sells his shares in IDS mutual fund, he will receive:
Net Asset Value Offer Price Net Change
Founders Group 11.55 12.67 - .05
FPA Fund 12.70 13.85 + .07
Franklin Group 5.14 NL + .09
IDS 13.42 14.63 - .08
(B) $13.42 (C) $14.55 (D) $14.63
7. Listed below are a group of mutual funds. Franklin Group fund is a:
Net Asset Value Offer Price Net Change
Founders Group 11.55 12.67 - .05
FPA Fund 12.70 13.85 + .07
Franklin Group 5.14 NL + .09
IDS 13.42 14.63 - .08
(A) No-load fund (B) Balanced fund (C) Closed-end fund (D) Growth fund
8. A money market mutual fund will invest in all of the following, except: (A) A non-negotiable certificate of deposit
(B) A banker’s acceptance (C) Commercial paper
(D) A repurchase agreements
9. The primary difference between an open-end and closed-end investment company is: (A) The capitalization
(B) The stocks they purchase
(C) How they figure the net asset value (D) The bonds they purchase
10. An investor has $72,000 to invest in mutual funds. He decides to invest equal amounts in three mutual funds. The customer is not told by the broker that the three funds offer reduced sales charges on investments in excess of $25,000. Based upon the above information, which of the following is true?
I. The investor has achieved diversification by buying three mutual funds and will probably make a profit.
II. The broker has violated the “breakpoint sale” provision of the NASD as to a quantity discount on a large purchase.
III. The broker has not violated the NASD Rules of Fair Practice because he followed the customer’s instructions and purchased the three different mutual funds.
(A) II only (B) III only (C) I and II only (D) I and III only
11. What kind of investment company makes no provision for future purchases or redemptions? (A) An open-end management company
(B) A unit investment trust
(C) A closed-end management company (D) A face-amount certificate company
13. An investor who bought 200 shares of Pioneer Fund would pay: Bid price Offer price Change
Pioneer Fund 4.60 5.03 + .05 Putnam Fund 7.85 8.56 + .08 (A) $920 (B) $1,006 (C) $920 + commissions (D) $1,006 + commissions
14. The board of directors of a mutual fund would like to change the investment objectives of the fund. This could be done provided that:
(A) The management could switch at their discretion without a vote of the shareholders. (B) More than 10% of the stockholders voted for the change and the board of directors
approved.
(C) More than 50% of the voting shares held by stockholders voted for the change.
(D) Holders of the fund were given the choice of switching into a similar fund with the same objectives.
15. A “sales breakpoint” of a mutual fund is:
(A) A dollar amount for a purchase of a mutual fund where a volume sales charge discount is given
(B) A share amount for a purchase of a mutual fund where a volume sales charge discount is given
(C) The point at which a letter of intent can be obtained (D) The point at which a letter of intent can be backdated
16. Which of the following is responsible for the safekeeping of the securities owned by a mutual fund? (A) The registrar
(B) The custodian bank (C) The sponsor (D) The transfer agent
17. A mutual fund investor most interested in current yield would probably purchase: (A) A growth fund
(B) A specialized fund (C) A no-load fund (D) An income fund 18. The custodian bank of a mutual fund:
(A) Manages the fund
(B) Acts as the distributor of the fund
(C) Holds the fund’s cash and securities and performs essential clerical functions but does not manage the fund
(D) Guarantees investors against any loss that may be incurred if the fund should decline in value
19. A mutual fund NAV is calculated to be $16 at the end of the day. The offer price for a minimal purchase is $17.39. The fund has sales breakpoints every $25,000 and a purchase of $50,000 to $75,000 would have a 5% sales charge. If a customer purchases $70,000 worth of the fund that day, the customer would receive approximately:
(A) 4025 shares (B) 4,157 shares
(C) 4,166shares (D) 4,375 shares
20. A mutual fund has a bid price of $15 and an ask price of $15.65. The fund has distributed a capital gain of $2.05 and a dividend of $0.38 during the past year. The yield for the fund was:
(A) 2.15% (B) 2.43% (C) 2.53% (D) 15.5%
21. An investor has purchased 2,000 shares of DFM Mutual Fund in September. Two months later, the fund distributes a $0.05 dividend and a $1.10 capital gain distribution. How will the investor treat these for tax purposes in that tax year?
I. The dividend will be treated as ordinary income. II. The dividend will be treated as a short-term capital gain. III. The capital gain distribution is treated as a short-term gain. IV. The capital gain distribution is treated as a long-term gain. (A) I and III
(B) II and III (C) I and IV (D) II and IV
22. Which of the following are synonymous? (A) Bid price and management fee (B) Selling price and bid price
(C) Net asset value and redemption price (D) Net asset value and offering price 23. Which of the following are true about mutual funds?
I. The maximum sales charge is 7%.
II. Investors can receive a reduced sales charge if they sign a 10-month letter of intention to purchase a certain dollar amount of mutual fund shares.
III. Under the “rights of accumulation” option, investors can receive a reduced sales charge on new purchases when a “breakpoint” is reached.
IV. No-load funds may charge a liquidation fee when an investor sells the fund.
(A) I only
(B) III only (C) III and IV only (D) I, II, and IV only
24. Someone interested primarily in income would be least likely to purchase: (A) An aggressive growth fund
(B) A government bond fund (C) A high-yielding bond fund (D) An income fund
25. An investor owns 1,000 shares of a mutual fund. The offering price is $12 per share and the fund charges an 8% sales charge and has a 1% redemption fee. If the investor redeemed his shares he would receive:
(D) $12,000
26. Which of the following statements about investment companies are true?
I. All dividend distributions are exempt from taxes under current federal income tax laws. II. An investment company qualifies as a “regulated” investment company if it distributes
90% of its capital gains to its shareholders.
III. Dividend and capital gains distribution can never be added together when computing the yield of a mutual fund.
IV. A “regulated” investment company will be taxed at corporate income tax rates on all income and dividend distributions that are not distributed to its shareholders. (A) I and II only
(B) II and III only (C) I and IV only (D) III and IV only
27. As a custodian bank for a mutual fund, a bank can act in all of the following capacities, except: (A) Transfer agent and registrar
(B) The holder of the fund’s securities for safekeeping (C) Dividend and capital gains disbursing agent (D) Distributor of mutual fund shares (the sponsor)
28. A type of investment company that distributes 90% of its net investment income to its shareholders is called:
(A) Balanced (B) Diversified (C) Dual-purpose (D) Regulated
29. A mutual fund has a net asset value of $17.40 and a sales charge of 6% on a quantity discount. What is the ask price at that quantity of purchase?
(A) $10.44 (B) $18.44 (C) $18.51 (D) $29.00
30. The purchase price of a no-load fund is determined by: (A) The net asset value plus a sales charge (B) The net asset value plus a commission
(C) The net asset value as computed at the end of the business day (D) The supply and demand for the fund
31. An investor’s pledge to purchase a specified amount of a mutual fund within a specified period of time is called:
(A) A promissory note (B) An investment letter (C) A letter of intent (D) A stock power
32. Which of the following statements regarding mutual funds is true?
(A) The custodian bank cannot act as the transfer agent of the fund.
(B) The underwriter (sponsor) receives a management fee that is based upon the total assets of the fund.
(C) The investment adviser is responsible for all purchases and sales of securities held in the fund’s portfolio and receives a management fee based upon the total assets of the fund. (D) The investment adviser receives a sales charge as compensation for managing the
securities in the fund’s portfolio.
33. A mutual fund investor who redeems his shares will receive: (A) The bid price of the previous day’s close (B) The current offering price
(C) The next computed bid price on the day the shares are sold (D) The next computed ask price on the day the shares are sold
34. Your customer wishes to invest $50,000 in three different mutual funds with income as his main objective. You should notify your customer that if he invested the entire $50,000 in one fund he could save money because of the quantity discount on large purchases available through:
(A) Automatic reinvestment of dividends and capital gains (B) The availability of a withdrawal plan
(C) The possibility of exchanging one fund for another without paying a sales charge (D) Purchases at “sales charge breakpoints”
35. What is the offering price of a mutual fund that has a net asset value of $14.35 and an 8% sales charge? (A) $11.50
(B) $13.20 (C) $15.50 (D) $15.60 36. Mutual funds are also known as:
(A) Open-end investment companies (B) Closed-end funds
(C) Front-end loads (D) No-load funds
37. Which of the following statements is true about closed-end investment companies? (A) The amount of outstanding shares is constantly increasing.
(B) The shares are sold at the current market price. (C) The shares are sold at the current net asset value. (D) They are continually offering new shares for sale.
38. Which of the following statements about a closed-end investment company is correct? (A) It is continually issuing shares.
(B) Its shares can be redeemed by the issuing investment company. (C) Its shares are sold in the open market at their current offering price. (D) It can issue only common stock.
39. As far as open-end companies are concerned, which of the following is true regarding dividend and capital gains distributions:
(A) They can be combined to determine the total yield.
(B) The taxes can be deferred if they are invested in additional mutual fund shares. (C) Dividends are taxed as long-term capital gains.
(D) They can automatically be reinvested in additional shares if the fundholder chooses to do so.
40. Ace Investment Company has an offering price of $19.45 and a net asset value of $17.90. If they have had a $0.75 dividend and a $1.35 capital gain distribution for the year, what is the yield of the mutual fund?
(A) 3.6% (B) 3.9% (C) 10.8% (D) 11.7%
41. A customer buys 100 shares of an investment company and pays the market price plus a commission. The investor has bought shares issued by a(n):
(A) Closed-end investment company (B) No-load fund
(C) Open-end investment company (D) None of the above
42. The following closed-end investment companies are listed in The Wall Street Journal: Net Asset Value Market Price
Circle Investment Co. 23.75 24.25
CNA Investment Co. 21.85 21.50
A customer purchasing shares of the CNA Investment Company at the current market price would pay: (A) $21.50 + a sales charge
(B) $21.85 + a sales charge (C) $21.50 + a commission (D) $21.85 + a commission
43. A specialized or specialty fund invests in stocks that are primarily: (A) Special situations
(B) Traded in the OTC market
(C) In a particular industry or geographical area (D) In many industries
44. If the net asset value is $13.45 and the ask price is $14.40 for Shady Green Investment Co., the sales charge is what percent of the offering price?
(A) 6.6% (B) 7.1% (C) 7.2% (D) 9.3%
45. An investor is purchasing a large amount of Mary Jane Mutual Fund. Normally the fund has an 8% sales charge, but when purchasing a certain minimum amount, the fund charges only 6%. If the net asset value is $22.40 at the time of the purchase of an amount allowing the 6% sales charge, what is the offering price the customer has to pay per share?
(A) $23.74 (B) $23.83 (C) $24.34 (D) $24.19
46. On a particular day Pigeon Hole Investment Co. had an NAV of $12.65 and an offer price of $13.75. The fund has sales breakpoints every $20,000 so that there is a 6% sales charge on a quantity purchase of $50,000. If an investor purchases $50,000 that day, approximately how many shares would the investor receive?
(A) 3,636 shares (B) 3,715 shares (C) 3,728 shares (D) 3,952 shares
47. Investment companies with no management fee and low sales charges that invest in a fixed portfolio of municipal or corporate bonds are categorized as:
(A) Open-end investment companies (B) Unit investment trusts
(C) Closed-end investment companies (D) Face-amount certificate companies
48. All of the following statements regarding a letter of intent are true, except: (A) A letter of intent is good for 13 months.
(B) A shareholder’s privilege to redeem shares is suspended during the time the letter of intent is in effect.
(C) A letter of intent may be backdated for up to 90 days.
(D) When shares are purchased under a letter of intent, it is customary for the fund to hold some shares in escrow in the event the additional payment is not made, and an additional sales charge will be required.
49. Which of the following must be registered as an investment adviser under the Investment Adviser’s Act of 1940?
(A) A broker giving advice on which investments are best for his clients
(B) A broker/dealer firm that sends out suggestions on the best buys of the week (C) A broker who gives advice to some of his clients and charges a fee
(D) A broker who sends out market tips from the firm
50. An investor buys ABC mutual fund. The fund sends a capital gains distribution three months later. Eleven months after purchasing the shares, the investor has to sell the mutual fund due to personal reasons for a capital gain. Which of the following are true?
I. The capital gains distribution is a short-term gain. II. The capital gains distribution is a long-term gain. III. The sale for a capital gain is a short-term gain. IV. The sale for a capital gain is a long-term gain. (A) I and III
(B) I and IV (C) II and III (D) II and IV
51. Which of the following is the best description of a breakpoint sale?
(A) The point at which an investor will receive a reduced sales charge
(B) The point below which an investor makes a purchase and the broker does not inform the investor of the possible sales breakpoint
(C) The point at which a sale will be broken because the investor did not pay in time (D) The point at which the mutual fund will refuse the order
52. What is the expense ratio of a mutual fund? (A) Net operating expenses
(C) Gross operating revenues Management fees (D) Management fees
Gross operating revenues
53. The managers of a mutual fund are paid in which of the following ways?
(A) They are paid a percentage of the amount they earn in interest and dividends. (B) They are paid a percentage of the profits they make on the securities they hold. (C) They are paid a percentage of the net assets they manage.
(D) They are paid a percentage of all net gains and income they derive for the fund. 54. A mutual fund has listed that it charges each account holder 12b-1 fees. These fees can be used for
which of the following? I. Advertising
II. Front-load broker’s commissions III. Management fees
IV. Sales charges V. Expenses of the fund (A) I and IV only (B) I and III only (C) II and V only (D) III and V only
55. Under which of the following circumstances can a fund sell shares at less than the public offering price?
(A) At no time
(B) To a broker to fill a customer’s order or to a broker/dealer for the firm’s own account (C) To a non-NASD member to sell to a customer
(D) To a non-NASD member to sell to an NASD member who is buying for a customer 56. A mutual fund receives a letter from an investor informing the fund that he would like to redeem all of
his shares of the fund for personal reasons. How long does the fund have to mail the proceeds to the client?
(A) Three business days (B) Five business days (C) Seven calendar days (D) 10 calendar days
57. An open-end investment company can borrow money at certain times to help it through a cash shortage during redemptions. What is true regarding the amount the fund can borrow?
(A) The fund can borrow up to 25% of the fund’s assets. (B) The fund can borrow up to 33% of the fund’s assets. (C) The fund can borrow up to 50% of the fund’s assets. (D) The fund can borrow up to 100% of the fund’s assets.
58. Which of the following is true regarding the borrowing practices of an open-end investment company? (A) The net asset value must be four times the bank borrowing.
(B) The net asset value must be three times the bank borrowing. (C) The net asset value must be five times the bank borrowing. (D) The net asset value must be 10 times the bank borrowing.
59. What percent of the board of directors of an open-end investment company can be made up of people directly associated with the fund itself?
(A) 20% (B) 33% (C) 40% (D) 60%
60. Which of the following is true of all investment companies? I. Minimum capitalization is $100,000.
II. Margin purchases for stocks and bonds are not allowed.
III. At least 40% of the investment company’s board of directors must be from outside the fund.
IV. A majority vote of the shareholders must approve a change in the objectives of the investment company.
V. A majority vote of the shares must approve a change in the objectives of the investment company.
VI. A prospectus must be given to any purchaser of new shares of the investment company. (A) I, II, III, IV, and VI only
(B) I, II, III, V, and VI only (C) II, V, and VI only (D) I, II, and IV only
61. Mr. Lockhart is interested in purchasing shares of the HLY Global Equity Fund. He is new to mutual funds, but a friend of his recommended this particular loaded fund as a good investment. Mr. Lockhart is reading the prospectus on this fund but is still confused about how much he will pay for each share of this fund. Which of the following best describes what Mr. Lockhart will pay per share?
(A) The bid (B) The net asset value
(C) The net asset value plus a sales charge (D) The net asset value minus a sales charge
62. All mutual funds are obligated to send shareholders statements on their accounts at least: (A) Weekly
(B) Monthly (C) Quarterly (D) Annually
63. Which of the following statements is not true regarding sales breakpoints?
(A) Registered representatives are not required to inform customers about breakpoints, provided a prospectus disclosing these is given to the client.
(B) Spouses investing together can qualify for breakpoints.
(C) Partnerships and investment clubs are not allowed to qualify for breakpoints. (D) Registered representatives are required to inform customers of breakpoints even if a
prospectus disclosing these is provided to the client.
64. Mrs. Blaylock is interested in purchasing shares of the JNK Emerging Markets Income Fund. She is