SIE 6/7 - Investment Returns and Packaged Products

  1. Current yield formula
    CY = annual div (dollar amount)/current market price
  2. What are the four dividend dates?
    • Dividend/declaration date: the date the dividend is announced
    • Payment Date: date on which the dividend is distributed
    • Record Date: date on which you must own the stock to receive a dividend (trade must settle on/before record date)
    • Ex-Div Date: one business day before the record date
    • Stock begins to sell w/o its dividend
  3. What are the impacts of stock dividends?
    • No economic gain/loss or capitalization for share holders, and no change to equity ownership
    • Stated in % terms
  4. How is a stock dividend treated for tax purposes?
    Shares not taxed as income, total basis is unchanged (basis per share is decreased). S1P1 = S2P2
  5. Formula for current yield of bond
    Annual interest/current market price
  6. What is YTM?
    Yield to maturity of a bond. This includes 1) interest payments 2) interest from reinvesting the interest (compound interest) 3) gain/loss on the difference between current value and par value.
  7. Price vs yield relationship: Market Rates go up
    Price goes down, CY and YTM go up
  8. Price vs yield relationship: Market Rates go down
    Price goes up and CY/YTM go down
  9. Capital Gains: what are the difference bertween short and long term gains?
    • Short term is due to assets held for <=1 yr [taxed at ordinary rate]
    • Long-term is due to assets held for >1 yr [maximum of 20% tax]
  10. What are the types of investment companies?
    • FACs: Face Amount Certificate Companies - guaranteed growth rates
    • UITs: Unit Investment Trusts - fixed portfolios with passive management
  11. Management Companies - have closed end and open end products (open = mutual = not exchange traded, closed = exchange traded)
  12. Benefits of a mutual fund:
    • Professional management
    • Diversification
    • Liquidity (required by law to be liquid)
    • Convenience and cost
    • Exchanges at NAV
  13. What is the structure of a mutual fund?
    • Underwriter: Fidelity
    • Board: Both Fidelity/non Fidelity
    • Investment Advisor: Fidelity employee
    • Custodian Bank: Prevents stealing, hold's cash and securities
    • Transfer Agent: Issues, redeems, and cancels shares--distributes securities
  14. NAV formula and calculation time?
    • NAV = (Assets - Liabilities)/#Shares Outstanding
    • 4:00 PM each day
  15. What is POP?
    • NAV + any sales charges
    • NAV = bid POP = ask [fund company's perspective]
  16. Sales charge formula? Maximum sales charge?
    • (POP-NAV)/POP
    • Maximum 8.5%
  17. Front vs back-end Loads?
    • Front end load--sales fee charged right away upon buying
    • Back-end load--Assessed at redemption, percentage decreases as its been held for longer (called CDSC)
  18. 12b-1 fees?
    Fees that a fund levies against the fund's assets.
  19. What are the fees that a mutual fund can charge?
    • Management fee: paid to investment advisor, not tied to PnL
    • Admin Fee: Bank payments and transfer agent costs
    • Redemption Fee: Remains in the fund and benefits owners
  20. What does an expense ratio not include?
    Sales charges. It includes opex and management fees (including 12b-1 and admin). Just no sales charges.
  21. Class A vs B vs C shares?
    • A: front-end load, low 12b-1 fees, breakpoints available for large purchases
    • B: sales charge at time of sale, higher 12b-1, can convert to class A after 6-8 years
    • C: may have both front-end and deferred charge, higher 12-b1 fees (same as B), no conversion to class A
    • Never recommend b shares
  22. What is a no load fund?
    A mutual fund with no sales charges that may only charge annual 12b-1 fees up to 0.25%.
  23. What is an LOI in the context of mutual funds?
    • A non-binding provision that lets investors have extra time to qualify for breakpoint sales charges.
    • 13 month duration, may be backdated 90 days
  24. What are ROAs?
    • Rights of Accumulation--right to add up all purchases made from the same family of funds
    • When a breakpoint is crossed, current and future purchases may be able to get the better sales charge
    • Available to: purchaser, immediate family, fiduciary for account, trustee for trust, pension plans, investment clubs
  25. What's a withdrawal plan?
    • This allows investors to receive regular, periodic paymetns from their accounts.
    • NEVER advise a client to engage in a purchase and withdrawal plan at the same time.
    • Fixed dollar amount, fixed percentage, fixed time, fixed number of shares
    • Payments not guaranteed
  26. What are the sales practice violations for mutual funds?
    • Breakpoint sales: soliciting sales of amounts just below breakpoints
    • Recommending different fund families to get higher sallles charges
    • Switching between fund families to get funds (must justify why it's ok)
    • Excessive class b share purchases (since they don't qualify for breakpoints)
  27. Differences between closed-end and open ended funds?
    • Closed: one time issuance, may trade +/- NAV, sponsor doesn't have to redeem, secondary market, may be sold short
    • Open: Continually issue new shares (with prospectus), shares sold at POP, shares must be bought at the NAV, shares remain in the primary market, cannot be sold short
Card Set
SIE 6/7 - Investment Returns and Packaged Products
SIE 6 - Investment Returns