Investment Company

• Unit Investment Trusts (UITs)
• Face Amount Certificate Companies
• Management Investment Companies (mutual funds)

Unit Investment Trust (UIT)

Defined

Unit Investment Trusts (UITs)

Features

• Established as trust & operates as holding co. for portfolio
• Shares redeemable;Shares of beneficial interest (SBIs) & represent undivided interest in portfolio
• Usually feature fixed portfolio held for life of trust, no sub of securities w/out permission of SEC & shareholders must be notified in 5 days
• SEC request liquidation if UIT ineffective
• Shareholders can redeem unit prior to maturity & receive current market value
• Supervised rather than actively managed

Face Amount Certificates

Defined

Face Amount Certificate Companies

Features

purchased w/ periodic installments/lump sum and maturity of @ least 24 months. Redeemed for fixed amount on specified date.  Can be redeemed prior to maturity for stated surrender value which is guaranteed @ least 50% gross annual premium paid for 1st yr. If surrendered after 1st yr. must return current surrender value less any surrender charge.

A company can't issue certificates unless

• have outstanding capital of $250k
• maintains reserves @ all times that =  current surrender value of all outstanding certificates 

Management Investment Company

defined

Most prominent type of investment company

May be diversified/non-diversified

Management Investment Companies (Mutual Funds)

Features

-Employs fund manager to manage diversified portfolio of securities to achieve specified investment objective.

-Has specific investment policies which outlines securities & investment strategies to reach objective

-Organized as open/close end funds which differ in how shares are purchased & sold

-Behave like shares of common stock

-Maintain NAV/share but due to market supply & demand trade @ premium/discount; due to fact fund maybe more/less desirable

-Has following characteristics

• Usually capitalized through 1 time public offering
• After offering flucuates w/ market demand
• Trading shares may take place @ exchange/ in OTC market
• Investment co. doesn't continuously redeem shares held by investor

Open end Funds

(mutual funds)

-Management co. can be Nondiversified/diversified.

- Diversified portfolios must invest as 75-5-10 rule specifies

-Many funds choose to market as non diversified as companies find it more expedient to pursue stated goal

Open end portfolio to be considered diversified

-For portion total 75% of assets

• no more than 5% total assets invested in 1 company
• investment co. can't own more than 10% of a company's voting stock
• no restrictions on remaining 25% of assets

Diversification considered fundamental to successful portfolio and can be accomplished in different ways:

-Industries-Specialized funds may concentrate large % of portfolio in specific industries

-Types of Investment Instruments

-Variety of Security Issuers-Different types of securites can offer stability in volatile markets

-Geographic Area-Specialized funds concentrate assets in particular region, state, foreign country

-Nondiversified-when portfolio invested in 1 area

Advantages of Mutual Funds

-Professional Management-  as investors w/limited assets unable to pay professional management fees. Fees with mutual funds significantly less than those of indiv. porfolio manager

-Financial/Economic Research & Analysis - extensive research used on a company's financial condition, company earning's report, industry trends, & economic analysis to make decsions regarding securities

-Funds differentiated by investment objectives of portfolio. Funds w/similiar objective may employ different investment policies.

-Objectives & policies of fund must be clearly stated in prospectus.

Types of Funds

• Equity Funds
• Income
• Growth
• Growth/Income
• Aggressive Growth
• Value
• Blend vs. Balanced
• Fixed Income
• Government Fixed Income
• Tax-exempt
• High Yield fixed income
• Money Market Funds
• Specialized Funds

Income

Funds

• Objective of current income
• Funds hold securities w/ significant interest/dividend yield potential
• May achieve object for ex: holding debt securities, preferred/common stock w/high dividend
• Typically below avg. growth potential,exposed to credit and interest rate risk 

-Typically includes common stock of blue chips w/ history solid earning / smaller co. where fund manager judges to have significant growth potential

-Dividend income 2ndary

-Market risk prevalant risk factor

Growth/Income

Funds

-Combination of growth & income

-tends to hold well established co. that pay dividends but still retain earning for expansion

-less volitile than pure growth but usually under perform growth funds during market advances

-subject to market risk & possibly purchasing power risks if dividend payment & cap. apprec. fail to keep up w/ cost of living

Aggressive growth

Funds

-Volitile as heavily invested in co. w/cutting edge industries/start-ups w/unproven earnings

-Retain earnings for expansion

-Payoff is potential for substantial gains in advancing markets

- strongly susceptible to  market & timing risks

-Holds stock  deemed undervalued in price but have potential

-Buy hold strategy

-these funds tend to under perform during general market advance & out perform during decline

Blend

vs

Balanced

Funds

-Describe asset mix of mutual funds, differ in types of securities contained

-Blend contains mix of value & growth securities,  no fixed income securities, appreciates by means of capital gains

-Balanced is combo of fixed income & equities goal is growth in value & income

Fixed Income

Funds

-Securities w/specific yield debt securities & preferred stock

-provide fixed period payment know in advance (ie. gov. bonds)

-Return on investment lower than other forms of securities

Reduce volitility in overall portfolio

Government Fixed

Income Funds

Tax Exempt

Funds

• Hold only municipal bonds
• Offer advantages for those in high TAX BRACKETS
• State/municipal gov. fixed income generate federally tax exempt interest income

High-yield

Fixed

Income

- Hold corporate/municipal debt with low credit ratings "junk bonds"

-Carry default risk & more volitile

-Suitable for aggressive long term investors

securities include above avg. share price fluctuation in return for potential capital apprec.

-Invest in short term debt

-attempts to maintain stable $1/share value, not guaranteed

- invests in short term high quality debt ie. commercial paper, CDs, T-bills, repurchase agreements etc.

-high degree capital preservation

-risk may not produce sufficient returns to keep up w/inflation

-Fall into taxable & tax-exempt

-Concentrate on specific industries, market sectors,/geographic regions

- Usually not suitable for investor w/lower risk tolerance who needs wider diversification

- Have potential for substantial gains but vulnerable to changes in industry/economic trends

• International-Asset concentration in overseas markets
• Mortgage-backed Security-primarily invests in agencies ie ginnie mae/ corps. that issue CMOs/REMICS under Debt Securities
• Index Fund-goal to achieve same return as market index such as S&P.Invests only in co. in that index. Expenses typically lower than managed fund
• Fund of funds - holds funds in same fund family with similar objective

Invest in gold, silver,platnum

Usually chosen in time of economic decline

Principal Protected Funds

(Capital Preservation/Guaranteed Funds)

-MF guarantee,for set period of time, capital u invest is kept safe

-expense ratio>not protected funds

- Has 3 phases...

• Subscription & Offering-period when investor can purchase fund shares
• Guarantee phase - period of hold investments for 5-10yrs & reinvesting all dividends & distributions
• Post-guarantee phase-period where fund is liquidated/continues to operate w/out guarantees

Principal protected Funds

(Capital Preservation/Guaranteed Funds)

Characteristics

• Guaranteed Principal - intial investment - SC guaranteed often backed by insurance policy
• Lock-up period - period from 5-10yrs. offers guarantee on shares only if you don't sell shares to end of period
• Mixture stocks & bonds - a portion invested in 0 coupon bonds & other debt securites, other portion invested in stocks & equity during guarantee period

Periodic Payment

(Contractual Plans/Systematic Investment Plans)

-Accumulate shares indirectly by contributing fixed amount of $ over 10-15 yrs

-Allow investors to start plan w/small monthly contribution

-Plan trust owns MF shares and invests indiviual investor's payments in MF shares

-Plan and company must register w/ SEC

General Characteristics of Mutual Funds (MF)

Shares

• Full & fractional shares - purchases @ POP, composed of NAV + any SC.If dollar amount uneven #of shares MF issues fractional shares computed to 1/1000 of a share
• Continual Offering & Redemption of Shares - provided by open ended mutual funds
• Voting Rights - in direct proportion to #of shares owned vs total share currently issued by fund. Topic requiring voter approval management changes/changes in fund objective. Voting issues handled almost exclusively through proxies.

Functions

of

Board of Directors

(BOD)

• establish & implement mf investment policy
• elected by fund's shareholders
• Invest Co. Act 1940 requires min. 40% must be outside directors unaffiliated w/mf
• Appoint officers (investment advisor, transfer agent, custodian) to carry out mf operations
• Establish dividend and cap. gain policy, don't manage portfolio

-Elected by BOD to manage fund's portfolio

-paid fee for services based on NAV under management

-Majority shareholders, BOD,/both must approve investment advisory contracts

• Supervise fund portfolio obtaining appropriate diversification of securities
• Provide investment advice
• Research & analyze financial & economic trends
• Conform to investment objective & policy decision of BOD

-the MF sponor/distributor

-Fund allows underwriter to purchase shares @ current NAV

-Shares then sold to public @ full offering price

• Wholesale Marketing Fund to Security Dealers 
• Direct Sales to Public - dealer purchases shares from underwriter @ discount from POP and resells them to investors
• Prep of Sales Literature - Underwriter usually bear all costs
• Compensation to dealers - underwriters provide compensation to dealers

•  performs as funds transfer agent
• safegards mf physical assets, performs securities transactions, register receipt of interest & dividends
• MF required to have a national bank, trust co., / other qualified institution as custodian

Contracted by mf to perform basic clerical functions:

• issuance of physical share/book entry
• cancellation of redeemed shares
• disbursment of dividend & capital gains distributions to shareholders

• Voting rights/proxies
• Approving changes in investment objectives & policies
• Approving investment advisory agreement
• Approving changes in fees
• Electing directors
• Ratifying selection of independant auditors

• Automatic Reinvestment of Dividend Income and Capital Gains Distribution - @ NAV w/out SC
• Ease of Diversification
• Dollar Cost Averaging (DCA) - systematic investments @ fixed intervals as result avg. cost/share<avg.price/share, usually quarterly/monthly. Min. investment required
• Systematic w/drawal plan - payments recieved @ specified intervals @ fixed/flexible amounts, help investors accumulate $ in account
• Minimum Investmest - Require min. NAV payments made 1st from dividends & then cap. gains. If not sufficient fund shares liquidated
• Potential Exhaustion of Principal
• Types of Withdrawal Payouts - *

• Fixed Dollar Period Payments - investor request specific dollar amount be received in each payment
• Fixed Percentage Period Payments - investor requests fixed %age of shares be liquidated @ fixed intervals
• Fixed Shares Period Payments - investor requests fixed # shares be liquidated @ specified intervals

Common Characteristics

(continued)

• Liquidation Over Fixed Time- Investor requests liquidation equally over fixed time
• Exchange Privileges w/in Families of Funds - done @ NAV. IRS defines exchanges as a sale
• Safekeeping of Porfolio Securities - own through book entry form
• Ease of Account Inquiry
• Simplified Tax Info - 1099 forms document to IRS & investor all taxable events
• Ease of Purchase & Redemption of Shares

Basis of Comparison

of

Funds

• Investment Objective
• Investment Policies
• Quality of Management
• Risk Factors - compared by funds calculated risk coefficient, beta, Sharpe ratio, & risk/return factors
• Portfolio Turnover-can effect cost to investor. fund w high turn over has higher expenses and higher short term cap. gains distributions

MF most appropriate for long term investment objective comparisons should focus on long term results.

• Total Return - for given holding period include effect of reinvested distributions & share price appreciation, net of SC & expenses
• Standardized Yield -bond fund's net yield over previous 30 day period to current cost/share doesn't include cap. gains distribution
• Current Distribution Rate -annualized amount of distribution to current cost of share
• Expense Ratio - higher expenses reduce current yields & total returns

Section 12b-1

of

Investment Company

Act of 1940

-12b-1 fee is fee to cover expenses associated w/ promotion & distribution of fund shares. Cover cost such as printing prospectus, sales materials, certain sales commissions. Asset based fee charged quarterly w/ NAV

-annual limit .75% of assets, reviewed quarterly, marketed as no load, max fee .25% of assets

-to approve and annually reapprove fee requires 3 votes majority BOD,Majority non interest board members, majority outstanding shares

Sharholders and BOD approve all expenses for operation of MF detailed info in prospectus.

• Expense Ratio = total expenses/total net assets
• Management Fee
• Other Expenses - Include cost of service of Custodian, transfer agent, BOD. Other administrative & distribution expenses can be charged to fund. noload funds sell direct to investors @ NAV. They don't outsource sales effort  sales related costs are charged against fund as expense

Net Asset Value

 per

Share

-When Determined - calculated @ least once a day @ COB of NYSE. Buy & sell orders based on next price to be computed (forward pricing).

-How Determined - NAV per share= total net assets/total of outstanding shares

Redemption

Fee

-fee charged when shares liquidated; occurs when shares held for < 90 days/perhaps up to 1yr.

-discourage short term trading

-not sales charge computed based on value of shares receieved 

• Class A- shares purchased POP & no deffered SC
• Class B - shares purchased NAV potential back end load charge (contingent deferred SC)declines each yr. reaching 0% converting Class B to Class A
• Class C - shares purchased NAV back end SC runs for only 1yr., Class C doesn't become Class A

Class B&C status has higher expenses than A

Contingent Deffered

Sales Charge

(CDSC)

Sales Charge

(SC)

-Expressed as % of public offering

-FINRA limits charge to 8.5% max

-if fund doesn't offer dividend reinvestment @ NAV, breakpts, & rights of accumulation than limit max. SC is 7.25%

-all fund expenses  reduce NAV

-SC not included in expense ratio b/cuz added to NAV/share to for sales price (NAV+SC=POP)

Newspaper quotes

• Column 1 - name of fund & share class
• Column 2 - NAV (bid price) on that day. Value received if investor redeemed shares that day
• Column 3 - shows POP (offering/ask price) which is NAV+SC. NL indicates no load fund or if offering price = NAV, 12b-1 & Deffered SC in excess of .25% can't be described as NL.
• Column 4 - shows change in NAV from previous day. p indicates 12b-1 fees apply, r indicates redemption, t indicates both apply

Ask/Offering

Price

• MF quoted by NAV (bid price) & POP (ask price)
• SC= bid price - ask price
• Ask price (POP) will be bigger # and Bid (NAV) is smaller #

Sales

Breakpts.

-Dollar level @ which SC is discounted/reduced

-Allowable if certain conditions met

• Breakpts. uniformly apply to all recipients
• Info concerning breakpts given to shareholders & prospective investors
• Prospectus revised if schedule revised
• Investment co. advises existing shareholders of any schedule change w/in 1 yr.

Letter of Intent

(LOI)

Backdating

90 Days

Letter of Intent (LOI) back dated 90 days

Less than 13 months remaining to complete investment if backdated

Effect of

Incomplete Investment

-LOI not binding on investor.

-Fund charges investor an amount that = higher SC applied to original investment if investor fails to deposit amount required by time LOI expires

-fund ensure this by holding a sufficient # of shares in escrow to cover expenses

Rights of Accumulation

-Allow investor right to receivecumulative quantity discounts when purchasing shares

-permitted to combine assets from accounts & accounts from immediate family

- SC not retroactive to previous purchases

-investment clubs & co-ops not eligble

-made available for @ least 10 yrs calculated from original purchase date

Combining

Accounts

Redemption Methods

of Mutual Fund (MF)

Shares 

• Written Request
• Telephonic
• Check Writing
• Through a Dealer

-MF pay redemption proceeds w/in 7 calendar days

-receiving price @close of next business day if your order received after closing of next business day

-Separate account in variable contract is securities related product & must be sold by means of prospectus

-Must include securities held in account, policies for transferring b/twn investment selections

-SC & other expenses

-mainly has growth oriented objectives & invest in common stocks

-objectives not guaranteed

• Company bears investment risk
• Vulnerable to inflation
• fixed returns & payments
• invested in long term debt instruments primary objective stable return

-contract with insurance co.providing payment to annuity owner for life of contract terms

-Fixed annuity- fixed payments @ specified amount, guaranteed min. rate of return, insurance co. assumes investment risk

-Variable annuity - payments vary in dollars amount in accordance with performance of separate account, no guaranteed  rate of return,  annuitant assumes all investment risk

Types of

Variable Annuities

• Immediate - funded in single lump sum as payments begin on 1st interval after deposit received 
• Deferred - purchased w/ single lump sum/periodic payments. Payout delayed until contract annuitized in future, tax deffered growth, owner receives current /guaranteed interest whichever is higher

Tax Deffered

Accumulations

Settlement Options

for Annuity

• Straight life annuity - highest periodic payment  carries most risk. Payments cease after annuitant dies
• Life annuity w/period certain - periodic payments made for specific # yrs, beneficiary receives payments in lump sum/installments if annuitiant dies during specified period
• Unit refund life annuity
• Joint & last survivor - payments made to 2 people if 1 dies survivor receives remaining payments, payments stop when remaining person dies
• Installments for designated amount
• Combine fixed & variable annuity payout
• Fixed amount option - annuitant selects specific payment amount which continues until principal exhausted

Exchange

 Privilege

• Loan provisions, partial redemptions, exchange provisions outlined in contract when applicable
• 1035 exchange allows tax sheltered exchange from 1 annuity contract to another

Sales Charge

 for

Annuities

-SC made up of several elements designated in prospectus max allowed 8.5%

-Expenses not SC but deducted from assets/ income

• Investment management fee
• Morality fee
• Expense risk
• Premium taxes
• Administrative expenses

Can be sold on level/deferred SC

Valuation of Variable

Annuity Contract

Expressed in units w/ unit value determined by performance of separate account. During time owner deposits $ in account valuation expressed in increasing # accumulation units. When payout begins expressed in  fixed # of annuity units.

-deposited $ in annuity expressed in these units.

- accumulation period begins on date annuity contract becomes effctive value related to performance of separate account

-Units purchased @ account NAV

-payments from annuity expressed in these units

-begins @ conclusion of accumulation period

-value w/drawn in lump sum/periodic payments

-Date of annuitization is date where accumulation units exchanged for annuity units

Assumed Interest Rate

(AIR)

• Assumption of reasonable rate of return on investments in separate account
• not guaranteed just a reference, used to calculate amount of each annuity payment over time
• Comparing the AIR to actual performance of separate account causes monthly adjustments to value of annuity units

• Death Benefit - Must provide fixed min. benefit
• Cash Value - Guaranteed cash value
• Loans - Allows loans against entire current cash value
• Premium payments - Generally paid in fixed amounts @ fixed intervals
• Investment account - Assets kept in general account of insurance company
• Risk - Insurer assumes risk that investment returns won't exceed guaranteed cash value

• Death Benefit - may/ may not provide fixed benefit
• Cash Value - guaranteed min. interest rate for cash value
• Loans - allows loan against current entire cash value
• Premium payments - Flexible in amount & timing
• Investment account - assets kept in general account of insurance co.
• Risk - Insurer assumes risk investment returns won't exceed guaranteed cash value

• Death Benifit - Must provide fixed min. benefit
• Cash Value - No guaranteed cash value
• Loans - Allows loans against % of cash value
• Premium payments - generally pays in fixed amounts @ fixed intervals
• Investment accounts - Policy owners select separate accounts that meet investment objectives
• Risk - policy owner assumes risk that investment returns will be lower than anticipated

Settlement

Options

for Life contracts

• Interest option - beneficiary receives interest earned until another settlement option selected
• Fixed period option - beneficiary receives equal installments @ regular intervals for specified time
• Fixed amount option - beneficiary receives periodic installments of = dollar amount until funds exhausted
• Life Income Option - provides guaranteed income for life of beneficiary

• Straight life - provides payments for life of beneficiary only
• Cash Refund - pays out @ least amount of original proceeds to beneficiary
• Life income w/period certain - provides lifetime income to beneficiary for min. specified time goes to 2nd beneficiary if 1st one dies
• Joint last survivor income - 2 beneficiaries receive lifetime income