Series 6 > Disclosures, Risks, and Fees > Flashcards

Disclosures, Risks, and Fees Flashcards

Communicate investment risks, returns, disclosures, and applicable fees to clients. (37 cards)

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1
Q

What is the primary purpose of the prospectus in mutual fund investments?

A

To provide detailed information about the fund’s objectives, risks, and costs.

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2
Q

List three key risks that must be disclosed for mutual fund investments.

A
  • Market Risk
  • Interest Rate Risk
  • Credit Risk
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3
Q

Fill in the blank:

______ fees are charged by mutual funds for marketing and distribution expenses.

A

12b-1

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4
Q

What are some common fees associated with mutual funds?

A
  • sales charges (loads)
  • management fees
  • ongoing expense ratios
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5
Q

What document must be provided to investors before they purchase a variable annuity?

A

Prospectus

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6
Q

What is the significance of the Statement of Additional Information (SAI) in mutual fund disclosures?

A

It provides more detailed information not included in the prospectus.

Firms and registered representatives must disclose material risks, fees, and conflicts of interest.

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7
Q

Fill in the blank:

Mutual funds must disclose their ______ ratio, which represents the fund’s annual operating expenses as a percentage of average net assets.

A

expense

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8
Q

What is the primary risk associated with investing in equity securities?

A

Market risk

Market risk, also known as systematic risk, involves the possibility of an investor experiencing losses due to factors that affect the overall performance of the financial markets.

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9
Q

Fill in the blank:

______ risk is the potential for loss due to a bond issuer’s inability to meet interest or principal payments.

A

Credit

This type of risk is particularly relevant for fixed-income securities like bonds. It reflects the issuer’s financial health and ability to repay debts.

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10
Q

List three types of investment risks.

A
  • Market risk
  • Credit risk
  • Inflation risk

Different types of risks can affect investments in various ways. Understanding these helps investors make informed decisions based on their risk tolerance.

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11
Q

How does inflation risk affect investment returns?

A

Reduces purchasing power.

Inflation risk means that rising prices can erode the real value of investment returns, especially in fixed-income securities that offer fixed interest payments.

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12
Q

Fill in the blanks:

The risk that an investment’s value will decrease due to changes in interest rates is known as ______ ______ ______.

A

interest rate risk

Interest rate risk is particularly relevant for bond investments, where increases in interest rates can lead to a decrease in bond prices.

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13
Q

What is diversification, and how does it help manage investment risk?

A

Spreading investments across various assets to reduce risk

Diversification helps mitigate unsystematic risk by not relying on a single investment’s performance. It does not eliminate market risk.

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14
Q

List two factors that can influence a mutual fund’s returns.

A
  • Market conditions
  • Management fees

While market conditions affect the underlying assets’ performance, management fees directly reduce the net returns to investors.

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15
Q

What does the term ‘volatility’ refer to in the context of investment risks?

A

The degree of variation in investment returns.

Higher volatility means greater uncertainty and potential for significant price changes, which can impact both risk and return.

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16
Q

Fill in the blank:

The potential for an investor to lose money due to poor asset allocation is called ______ ______ ______.

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A

asset allocation risk

This risk arises when investments are not adequately diversified across different asset classes, potentially leading to suboptimal returns.

17
Q

How can investors mitigate liquidity risk?

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A

Invest in liquid assets.

Liquidity risk involves the difficulty of selling an investment quickly without significant price impact. Holding assets like stocks or money market instruments can help manage this risk.

18
Q

What is a sales load in mutual funds?

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A

A fee charged when purchasing or selling mutual fund shares.

19
Q

Fill in the blank:

A ______ charge is a fee imposed on investors who withdraw their investment before a specified period.

20
Q

What are 12b-1 fees used for in mutual funds?

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A

Marketing and distribution expenses.

21
Q

List three types of sales loads associated with mutual funds.

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A
  • Front-end load
  • Back-end load
  • Level load
22
Q

True or False:

12b-1 fees can be used to pay for fund management expenses.

23
Q

Fill in the blank:

A fund with a ______ load structure typically has no front-end or back-end sales charges but may have higher annual expenses.

24
Q

What is the primary purpose of a back-end load?

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A

To discourage early redemption of mutual fund shares.

25
Name one advantage and one disadvantage of **front-end loads**.
* **Advantage**: Can reduce annual expenses. * **Disadvantage**: Reduces the initial investment amount.
26
# Fill in the blanks: Mutual funds with \_\_\_\_\_\_ \_\_\_\_\_\_ charges may be suitable for investors with a long-term investment horizon.
back-end load
27
What is a common feature of **Class C** mutual fund shares?
**Higher annual expenses** with no front-end or back-end load.
28
# True or False: Surrender charges are permanent and do not decrease over time.
False
29
What is the **primary tax consideration** for mutual fund dividends?
Dividends are **generally taxed** as ordinary income. ## Footnote Qualified dividends, however, may be taxed at the lower capital gains rate if specific criteria are met, such as holding period requirements.
30
# Fill in the blank: Capital gains distributions from a mutual fund are taxed as \_\_\_\_\_\_ \_\_\_\_\_\_ \_\_\_\_\_\_.
long-term capital gains ## Footnote Regardless of how long the investor has held the mutual fund shares, capital gains distributions are taxed as long-term gains.
31
List **two tax benefits** of investing in a municipal bond fund.
* Interest income is generally exempt from federal taxes. * May also be exempt from state and local taxes if the investor resides in the issuing state. ## Footnote Municipal bonds are often used by investors in higher tax brackets to reduce taxable income.
32
What is a **key estate planning** consideration for mutual fund investors?
Beneficiary designations ## Footnote Designating beneficiaries can help avoid probate and ensure that assets are transferred according to the investor’s wishes.
33
# Fill in the blank: \_\_\_\_\_\_ \_\_\_\_\_\_ is the tax applied to the transfer of assets upon death, often impacting estate planning.
Estate tax ## Footnote The estate tax is levied on the net value of the estate before distribution to the heirs and may vary based on federal and state laws.
34
What is the impact of the '**step-up in basis**' on inherited mutual fund shares?
Reduces capital gains tax liability. ## Footnote The 'step-up in basis' adjusts the cost basis of inherited assets to their market value at the date of the original owner's death, potentially reducing taxable gains upon sale.
35
List **two risks** associated with mutual fund investments.
* Market risk * Interest rate risk ## Footnote Market risk involves the potential for investment losses due to market fluctuations, while interest rate risk affects bond funds as interest rates change.
36
# Fill in the blank: The \_\_\_\_\_\_ fee is a mutual fund fee charged annually for marketing and distribution expenses.
12b-1 ## Footnote This fee is included in the fund's expense ratio and can affect the overall return on investment.
37
What is a **potential tax consequence** of frequent trading within a mutual fund?
Increased capital gains taxes. ## Footnote Frequent trading can lead to higher turnover rates, resulting in more taxable events and potentially higher taxes for investors.
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