SIE Module 5 Test Bank

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1. Which of the following statements is correct regarding types of mutual funds?

A. International funds invest both in the United States and in foreign markets.

B. Asset allocation funds are designed for individuals in certain phases of the life cycle.

C. Sector funds are not well diversified and should represent a small portion of the portfolio.

D. Index funds typically have higher costs because they are actively managed by the investment company.

2. Which of the following statements is correct regarding types of mutual funds?

A. Global funds invest exclusively in foreign markets.

B. Sector funds allow managers considerable flexibility in allocating the portfolio among the three major asset classes.

C. Specialty funds invest solely in companies that maintain ethical principles.

D. Life-cycle funds provide for an asset allocation that becomes more conservative over time.

3. Which of the following statements is correct regarding a closed-end investment company?

A. A prospectus must be delivered to a prospective investor when they consider a purchase.

B. The number of outstanding shares of a closed-end investment company remains constant.

C. Shares are sold to investors at a price equal to the net asset value of the company.

D. An investor wishing to reduce the number of shares owned must sell the shares back to the investment company.

4. Which one of the following statements is correct regarding index mutual funds?

A. Index fund shares can be purchased at any time during the day.

B. Index funds always trade at net asset value.

C. Index funds can be purchased on margin or shorted.

D. Index funds more readily track the underlying index as compared to an exchange-traded fund.

5. Which of the following statements is correct regarding limited partnerships?

A. A limited partnership is generally more flexible and provides better liability protection than a Limited Liability Company.

B. A limited partnership will be subject to federal income tax if the partnership has more than 100 limited partners.

C. To form a limited partnership, the partners must register the entity in the applicable state, typically through the office of the Secretary of State.

D. Limited partners are personally responsible for partnership debts if the partnership does not have a general partner.

6. Which of the following statements is correct regarding the characteristics of a sole proprietorship?

A. It can establish a retirement plan.

B. It has limited liability.

C. Its income is taxed to the proprietor at capital gains rates.

D. It can raise capital more easily than a corporation.

7. All of the following statements are correct regarding a limited partnership EXCEPT:

A. Some limited partnerships are formed with a corporation as the general partner.

B. Both general and limited partners will be required to report their share of the partnership income on their personal income taxes.

C. Limited partnerships require a state filing upon formation.

D. It is more difficult to raise capital with a limited partnership than with a general partnership.

8. Which one of the following entities never pays federal income tax?

A. C corporation.

B. Estate.

C. Trust.

D. General partnership.

9. All of the following statements regarding property owned as tenants in common are correct EXCEPT:

A. Tenants may have disproportional interests.

B. Each tenant must pay income tax on their own share of income from the property.

C. Each tenant can assign his or her interest to anyone desired.

D. The property will avoid probate upon the death of a tenant.

10. Which of the following statements is correct regarding property owned as tenants in common?

A. Ownership interests must be equal.

B. A deceased tenant’s interest will pass to the other tenants by operation of law.

C. Each ownership interest is an undivided portion of the whole property.

D. Tenants in common can only be used with personal property.

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11. Which of the following statements regarding real estate investment trusts (REITs) is correct?

A. REITs are a type of open-end investment company that redeems shares when investors sell their interests.

B. Equity REITs are in the business of originating mortgage loans and construction loans.

C. A REIT must distribute at least 75% of its income annually to be recognized as a conduit and thus avoid taxation.

D. Similar to a bond, the price of a mortgage REIT will rise when market interest rates decline.

12. An individual investing in an open-end mutual fund would potentially pay which of the following?

I. Redemption fee.
II. Commissions on secondary market trades.
III. Distribution fee.
IV. Front end load.

A. I and II.

B. III and IV.

C. I, III, and IV.

D. I, II, III, and IV.

13. Which one of the following investments is actively traded in the secondary market?

A. Bank certificates of deposit.

B. Unit investment trusts.

C. Closed end fund shares.

D. Open end fund shares.

14. Ophelia has the following assets in her brokerage account:
• ABC Company (large cap) stock (1,000 shares) - $50,000
• Large Cap Growth fund - $36,000
• MacroSoft (large cap) stock (1,500 shares) - $27,000
• Money Market fund - $23,000
Her goal is to continue saving $600 monthly in this account for the next 16 years and then begin using the proceeds for retirement. Ophelia has indicated she can tolerate 22% changes in account value on an annual basis and has a sufficient emergency fund in a checking account. Which would be the best recommendation to modify her portfolio based on her objectives?

A. Sell $15,000 of the Actively Managed Large Cap Growth fund and purchase $15,000 of a Large Cap Value fund.

B. Sell 500 shares of ABC Company stock and use the proceeds to purchase an International Blend fund.

C. Sell 500 shares of MacroSoft stock and purchase put options on the ABC Company stock.

D. Use the Money Market fund to purchase $18,000 of a Passively Managed Mid Cap Value fund.

15. Which one of the following statements is correct regarding closed-end investment companies?

A. They sell their shares directly to the public.

B. They have an active secondary market.

C. They must charge a front-end load of at least 3% of net asset value.

D. They always trade at their net asset value.

16. Which one of the following types of mutual funds invests exclusively in the stocks of companies located outside the United States?

A. Sector funds.

B. Global funds.

C. International funds.

D. Sovereign wealth funds.

17. The turnover rate of a mutual fund represents the:

A. Frequency in which the underlying assets in the fund are bought and sold.

B. Annual marketing, promotion, and service expenses associated with the fund.

C. Number of shares of the fund that are outstanding, multiplied by the market price of one share.

D. Fee charged to an investor upon purchase of shares of the fund.

18. Which one of the following mutual fund share classes would be best for investors who can afford a high initial investment and have a long-term time horizon?

A. Class A.

B. Class B.

C. Class C.

D. Class D.

19. Which one of the following statements is correct regarding 12b-1 fees charged by a mutual fund?

A. They are used to cover fund management expenses.

B. They are typically higher with Class C shares than Class A shares.

C. They are excluded from the fund’s expense ratio.

D. They are limited to 3% annually.

20. Which one of the following Acts regulates mutual funds?

A. Investment Company Act of 1940.

B. Sarbanes-Oxley Act of 2002

C. Jumpstart Our Business Startups Act of 2012.

D. Securities Act of 1933.

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21. Doris recently received an inheritance of $100,000. She would like to invest the inheritance in an investment that provides her both diversification and a large exposure to the technology industry. Which one of the following mutual funds would be the best investment for Doris based on her objectives?

A. Money market fund.

B. Sector fund.

C. Long-term bond index fund.

D. S&P 500 index fund.

22. Which one of the following best represents the typical asset allocation of a capital preservation fund?

A. 40% equities, 50% fixed income, 10% cash.

B. 60% equities, 40% fixed income.

C. 70% equities, 20% fixed income, 10% cash.

D. 10% equities, 85% fixed income, 5% cash.

23. Which one of the following statements is correct regarding partners of limited partnerships?

A. Limited partners may lose their personal assets if the partnership is found legally liable in a lawsuit.

B. Limited partners have ownership rights to specific partnership properties.

C. Limited partners have no ability to manage or control the business.

D. Limited partners are subject to self-employment tax on the income received from the partnership.

24. Which one of the following statements is correct regarding an S corporation?

A. Shareholders of an S corporation are subject to unlimited liability.

B. Shareholders of an S corporation will receive a Schedule K-1 each year reporting their share of taxable income.

C. An S corporation can be established by a business with 300 owners.

D. Shareholders must pay both income tax and self-employment tax on S corporation income.

25. Scott purchased a 15% interest in a storage facility for $50,000. He is not permitted to participate in the management of the storage facility, and his maximum loss potential is $50,000, the amount of his investment. A real estate development company oversees the day-to-day operations of the storage facility. The company provides Scott with a Schedule K-1 annually so he can report his 15% share of the storage facility’s earnings or losses on his personal income tax return. The storage facility was established as which one of the following types of business entities?

A. C corporation.

B. Limited partnership.

C. Sole proprietorship.

D. General partnership.

26. Jake is starting a new business. He wants to establish a business entity that provides him with liability protection and allows him to manage the business. Jake is projecting business losses for the first few years, and he would like to deduct these losses on his personal income tax return. To satisfy these objectives, Jake should form a:

A. Sole proprietorship.

B. C corporation.

C. Limited liability company.

D. Limited partnership.

27. Which one of the following types of property ownership has rights of survivorship upon the property owner’s death?

A. Tenants in common.

B. Community property.

C. Tenancy by the entirety.

D. Fee simple.

28. Which one of the following types of property ownership is only available to spouses?

A. Tenants in common.

B. Joint tenancy with rights of survivorship.

C. Fee simple.

D. Community property.

29. An equity real estate investment trust (REIT) would most likely invest in:

A. Office buildings.

B. Single-family homes.

C. Mortgage loans.

D. Raw land.

30. Which one of the following statements is correct regarding real estate investment trusts (REITs)?

A. REITs must invest at least 75% of their total assets in real estate.

B. REITs are a type of open-end investment company that redeems shares when investors sell their interests.

C. Retail REITs invest in the real estate of hospitals, medical centers, nursing facilities, and retirement homes.

D. Unlike bonds, the price of mortgage REITs will decrease when market interest rates decline.

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31. Which one of the following statements is correct regarding open-end mutual funds?

A. They trade at a premium or discount to their net asset value.

B. The formula to determine net asset value is: (Value of Assets + Dividends) / Market Capitalization.

C. A limited number of shares are made available to investors by the fund.

D. Their value is determined and the end of each day, after the markets are closed.

32. Extreme Mutual Fund is a closed-end mutual fund. A review of pricing for the fund indicated the following:
• Per share closing price today - $55
• Per share closing price yesterday - $52
• Per share market value of assets today - $54
• Per share market value of assets yesterday - $53
Which one of the following statements is correct regarding Extreme Mutual Fund?

A. The fund is currently trading at a $1 discount to its net asset value.

B. The fund is currently trading at a $3 premium to its net asset value.

C. The fund is currently trading at a $1 premium to its net asset value.

D. The fund is currently trading at a $2 discount to its net asset value.

33. Which one of the following represents a common element of both a mutual fund and a unit investment trust?

A. Sales charge.

B. Trustees.

C. Ongoing management fees.

D. Board of directors.

34. XYZ Mutual Fund has a net asset value of $40 per share. The fund has a 5% front-end load. If a new investor would like to purchase shares of XYZ Mutual Fund, what would be their purchase price per share?

A. $38.10.

B. $40.00.

C. $42.00.

D. $42.11.

35. The maximum permitted 12b-1 fee allowed for marketing and distribution expenses of a mutual fund is:

A. 0.25% of the fund’s net assets per year.

B. 0.75% of the fund’s net assets per year.

C. 1.00% of the fund’s net assets per year.

D. 3.00% of the fund’s net assets per year.

36. Assuming a long investment time horizon, which one of the following classes of mutual fund shares would have the largest cumulative sales charge?

A. Class A.

B. Class B.

C. Class C.

D. Class T.

37. Which one of the following items of information would be provided in both the long-form statutory prospectus and the summary prospectus for a mutual fund?

A. Morningstar rating.

B. Past performance of the fund.

C. List of the fund’s investment managers.

D. Details of how to initiate purchase transactions.

38. Which one of the following statements is correct regarding breakpoints offered by mutual funds?

A. Only lump sum purchases are eligible for breakpoints.

B. Breakpoints are determined and regulated by the Securities and Exchange Commission.

C. Mutual funds must provide a description of breakpoints in their prospectuses.

D. Breakpoints serve to increase the front-end load on mutual funds once purchases exceed a certain level.

39. ABC Mutual Fund offers a discounted sales charge for purchases of $25,000 or more. Ronnie just made an initial purchase of $1,000 of the fund; however, he was charged the discounted sales charge rather than the full sales charge. The probable reason for this is because:

A. The mutual fund company is offering a promotion for new investors.

B. The 12b-1 fees of the fund were recently increased.

C. The fund suffered a loss during the previous quarter.

D. Ronnie signed a letter of intent.

40. Which one of the following best represents the difference between rights of accumulation and a letter of intent for a mutual fund?

A. Under rights of accumulation rules, the mutual fund company agrees to waive all future 12b-1 fees as the overall investment reaches certain dollar thresholds, while a letter of intent entitles the investor to an immediate termination of the contingent deferred sales charge.

B. Under rights of accumulation rules, the front-end sales charge gradually decreases as the overall investment reaches certain dollar thresholds, while a letter of intent entitles the investor to an immediate discount on the front-end sales charge.

C. Under letter of intent rules, the front-end sales charge gradually decreases as the overall investment reaches certain dollar thresholds, while rights of accumulation entitle the investor to an immediate discount on the front-end sales charge.

D. Under letter of intent rules, the mutual fund company agrees to waive all future 12b-1 fees as the overall investment reaches certain dollar thresholds, while rights of accumulation entitle the investor to an immediate termination of the contingent deferred sales charge.

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41. Stacy is considering the purchase of a mutual fund. She is unfamiliar with mutual funds and would like to invest a small amount for a short time period. If the investment works out, she is open to holding the mutual fund for a longer time period. Which one of the following mutual fund share classes would be most appropriate to satisfy Stacy’s objectives?

A. Class A.

B. Class B.

C. Class C.

D. Class T.

42. Which one of the following is a tax benefit associated with direct participation programs?

A. Increased amortization deductions.

B. Elimination of net investment income tax.

C. Extended tax due date.

D. Avoidance of double taxation.

43. For a real estate investment trust (REIT) to avoid double taxation of dividends, it must distribute, at a minimum, what percentage of its ordinary income to investors annually?

A. 75%.

B. 80%.

C. 90%.

D. 95%.

44. Which one of the following statements is correct regarding real estate investment trusts (REITs)?

A. Mortgage REITs are particularly sensitive to interest rate increases.

B. REITs are not a permitted investment in a defined benefit plan.

C. Public non-traded REITs are listed on a national securities exchange.

D. An advantage of REITs is that they avoid market risk.

45. A difference between publicly traded REITs and public non-traded REITs is that only publicly traded REITs:

A. Are registered with the SEC.

B. Are listed on a national securities exchange.

C. Pay dividends that are subject to income taxation.

D. Can be sold to retail investors.

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