Unit 4 Checkpoint Exam Flashcards
Under the Investment Company Act of 1940, which of the following is not considered an investment company?
A) Separate account within a variable annuity
B) Face-amount certificate company
C) Hedge fund
D) Unit investment trust
Investment companies include face-amount certificates, unit investment trusts, and management companies (both open- and closed-end). The separate account within a VA is a type of open-end management company. Hedge funds are organized as private investment companies (often limited partnerships), which are excluded under the definition of investment company under the Investment Company Act of 1940.
How well did you know this?
Not at all
Class B mutual fund shares are also called
A) back-end load shares.
B) CDSC shares.
C) deferred-load shares.
D) reverse load shares.
A) back-end load shares.
Class B mutual fund shares are bought with no sales charge at the time of purchase. The sales charge is paid instead at the time of redemption, or at the back end. Hence, they are known as back-end load shares. For this type of share, the sales charge percentage is reduced each year of ownership, typically becoming zero after five years. At this time, they convert to Class A shares.
How well did you know this?
Not at all
An investor can take advantage of intraday price changes due to normal market forces when investing in which of these?
I. Closed-end funds
II. Exchange-traded funds
III. Hedge funds
IV. Open-end funds
A) I and IV
B) III and IV
C) I and II
D) II and III
C) I and II
I. Closed-end funds
II. Exchange-traded funds
Both closed-end funds and ETFs trade in the marketplace based upon supply and demand. Open-end funds use forward pricing and generally price only once per day (usually at the end of the trading day). Most hedge funds are organized as private investment partnerships and are considered illiquid. Some have minimum holding requirements known as lock-up provisions, and in that light, their interests do not reliably trade intraday. Information on ETFs can be found in Unit Five under Learning Objective 5.l.
Investment Companies—Open End vs. Closed End
Investment Selection
In the world of investing, mutual funds are not the only type of investment company; however, they are most popular. The Investment Company Act of 1940 created three types of investment companies: Face Amount Certificate Companies, Unit Investment Trusts and Management Companies.
A management company is an investment company that manages a portfolio of securities for its shareholders. Mutual funds fall into this category. Management companies are divided into two categories: open-end or closed-end. The main difference between the two is that an open-end company makes a continuous offering of its shares, while a closed-end company makes a one-time offering of its shares.
Open-End Investment Companies
An open-end investment company makes a continuous offering of its shares that are redeemable. An open-end investment company is the technical term for a mutual fund. The purchase price of a fund is the net asset value, plus any commission or sales charged.
Closed-End Investment Companies
A closed-end company makes a one-time offering of its shares that are not redeemable. It issues shares of common stock, from which capital will be raised, and builds a portfolio of securities. The purchase price is determined by supply and demand; therefore, a closed-end fund shares can sell at a discount from net asset value or at a premium over net asset value.
Below is a chart comparing the characteristics of open-end companies and closed-end companies:
https://www.brainscape.com/flashcards/unit-4-checkpoint-exam-10657762/packs/19005546https://www.henssler.com/investment-companies-open-end-vs-closed-end/
