CFP Exam 3 Questions And Answers
1. investment companies: financial services companies that sell shares of stock to
the public and use the proceeds to buy portfolios of securities.
-Non Taxable entities ( flow through income)
-Regulated by the SEC and Investments company act 1940
2. Distinguish between a UIT, ETF, Open and closed-end investment company-
: UIT-is an investment company that offers a fixed portfolio, generally of stocks and
bonds, as redeemable units to investors for a specific period of time. It is designed
to provide capital appreciation and/or dividend income.
ETF- (Mix of open and closed)- large transactions, freely traded, sells on open
market, (think buy in bulk and sells in singles),(most aren't actively managed)Lower
fees
Open end- No limit on shares, do not trade on the open market, safer (building legos),
buying a share= adds a share etc, trade at end of day
Closed end- trade in the market like a stock, limited amount of shares, higher returns
(Building a lego set) can only buy an open slot share.
3. What is Net Asset Value (NAV) equal to?: [(total fund assets - total liabilities)] /
shares outstanding
total assets minus total liabilities
• Investment company with $100 million of assets and liabilities of $10 million = NAV
of $90 million
4. NAV of a single share ( per share nav): =NAV/ # of shares outstanding
• NAV = $90 MILLION
• Shares outstanding = 10 million
• Per share NAV = $9
5. How are earnings (appreciation and dividends) taxed?How is the taxation
of earnings different if theMF is in a qualified/tax advantaged retirement plan
vs. a non qualified individual (taxable) brokerage account? How do underlying
investments impact taxability (e.g. municipal bond interest is tax free vs.
,corporate bond interest is taxable)? Can taxation of dividends be avoided
by not selling shares (no) - could only be avoided if held in a qualified/tax
advantaged retirement plan.:
, 6. Types & characteristics of Investment Companies: Open end Investment
companies
Closed End
Exchange traded funds
Unit Investment Trusts
7. Understand Mutual Funds - benefits/characteristics/why do we use them:
8. Mutual Fund Fees Loads: Loads or sales charges
• This is how commission based advisors receive the majority of their compensation.
• Front-end load (initial investment)
• Back-end load on the lessor of the redemption value or the initial purchase value
(contingent deferred sales charge or CDSC)
• Ex: 5% in year 1, 4% in year 2, 3% in year 3, etc.
9. Difference between Class A, B, C shares.: A- front-end + small 12b-1
B- back-end (CDSC) + max. 12b-1 & often convert to Class A shares after CDSC
period, lowers 12b-1 fee
C- Level back-end load (typically around 1% but may vanish after 1 year) + max.
12b-1
• Lower expense ratios than B shares but higher than A shares
10. No-load funds—Criteria for fund to be no-load? Is there a sales charge?: -
Max 12b-1 of 25 bp or less (RIA "fee-only" world)
11. 12b-1 fees: for marketing & distribution expenses): these have significantly
dropped in recent years (less than 1%)
12. Expense Ratio: management fee, 12b-1 fee, + other operating fees. Does NOT
include loads/sales charge or transaction cost. Stated as % of total assets.
-As expense ratio increases, returns decrease
13. Mutual fund Management fee: Mutual Fund Manager fee (For manager)
14. Which types of mutual funds tend to have higher management fees (i.e.
actively managed vs.passively managed, ETFs, etc...)?: Active mutual funds
tend to have higher fees, such as an open end, while ETF (passively managed funds)
tend to have lower fees. This is because in active, someone is managing the fund
and buying or selling securities while passive tend to just buy the market (S&P 500)
15. Be able to identify advantages & disadvantages of mutual funds: ADV-
Diversification, professional management, Higher than average investor returns,
Low cost method of investing
1. investment companies: financial services companies that sell shares of stock to
the public and use the proceeds to buy portfolios of securities.
-Non Taxable entities ( flow through income)
-Regulated by the SEC and Investments company act 1940
2. Distinguish between a UIT, ETF, Open and closed-end investment company-
: UIT-is an investment company that offers a fixed portfolio, generally of stocks and
bonds, as redeemable units to investors for a specific period of time. It is designed
to provide capital appreciation and/or dividend income.
ETF- (Mix of open and closed)- large transactions, freely traded, sells on open
market, (think buy in bulk and sells in singles),(most aren't actively managed)Lower
fees
Open end- No limit on shares, do not trade on the open market, safer (building legos),
buying a share= adds a share etc, trade at end of day
Closed end- trade in the market like a stock, limited amount of shares, higher returns
(Building a lego set) can only buy an open slot share.
3. What is Net Asset Value (NAV) equal to?: [(total fund assets - total liabilities)] /
shares outstanding
total assets minus total liabilities
• Investment company with $100 million of assets and liabilities of $10 million = NAV
of $90 million
4. NAV of a single share ( per share nav): =NAV/ # of shares outstanding
• NAV = $90 MILLION
• Shares outstanding = 10 million
• Per share NAV = $9
5. How are earnings (appreciation and dividends) taxed?How is the taxation
of earnings different if theMF is in a qualified/tax advantaged retirement plan
vs. a non qualified individual (taxable) brokerage account? How do underlying
investments impact taxability (e.g. municipal bond interest is tax free vs.
,corporate bond interest is taxable)? Can taxation of dividends be avoided
by not selling shares (no) - could only be avoided if held in a qualified/tax
advantaged retirement plan.:
, 6. Types & characteristics of Investment Companies: Open end Investment
companies
Closed End
Exchange traded funds
Unit Investment Trusts
7. Understand Mutual Funds - benefits/characteristics/why do we use them:
8. Mutual Fund Fees Loads: Loads or sales charges
• This is how commission based advisors receive the majority of their compensation.
• Front-end load (initial investment)
• Back-end load on the lessor of the redemption value or the initial purchase value
(contingent deferred sales charge or CDSC)
• Ex: 5% in year 1, 4% in year 2, 3% in year 3, etc.
9. Difference between Class A, B, C shares.: A- front-end + small 12b-1
B- back-end (CDSC) + max. 12b-1 & often convert to Class A shares after CDSC
period, lowers 12b-1 fee
C- Level back-end load (typically around 1% but may vanish after 1 year) + max.
12b-1
• Lower expense ratios than B shares but higher than A shares
10. No-load funds—Criteria for fund to be no-load? Is there a sales charge?: -
Max 12b-1 of 25 bp or less (RIA "fee-only" world)
11. 12b-1 fees: for marketing & distribution expenses): these have significantly
dropped in recent years (less than 1%)
12. Expense Ratio: management fee, 12b-1 fee, + other operating fees. Does NOT
include loads/sales charge or transaction cost. Stated as % of total assets.
-As expense ratio increases, returns decrease
13. Mutual fund Management fee: Mutual Fund Manager fee (For manager)
14. Which types of mutual funds tend to have higher management fees (i.e.
actively managed vs.passively managed, ETFs, etc...)?: Active mutual funds
tend to have higher fees, such as an open end, while ETF (passively managed funds)
tend to have lower fees. This is because in active, someone is managing the fund
and buying or selling securities while passive tend to just buy the market (S&P 500)
15. Be able to identify advantages & disadvantages of mutual funds: ADV-
Diversification, professional management, Higher than average investor returns,
Low cost method of investing
