Packaged Securities and the Series 7 Exam - dummies

By Steven M. Rice

Packaged securities include investment companies (mutual funds and closed-end funds), real estate investment trusts, annuities, and so on. The idea is to provide investors a way to diversify their portfolios with a relatively small outlay of cash. For the Series 7 exam, you need to understand the different types of funds and how to make appropriate investment recommendations.

Practice questions

  1. Which of the following types of investment companies invests in a fixed portfolio of securities and charges no management fees?

    A. UIT

    B. REIT

    C. face amount certificate company

    D. mutual fund

    Answer: A. UIT

    UITs (unit investment trusts) invest in a fixed portfolio of securities. Because the trust is a fixed portfolio, the trust wouldn’t need a manager to supervise the money invested. Therefore, UITs don’t charge a management fee.

  2. While reading a newspaper, an investor notices that the NAV of a fund increased by $0.80 while the POP decreased by $0.20. What type of fund does this have to be?

    A. open-end

    B. closed-end

    C. no-load

    D. balanced

    Answer: B. closed-end

    In both open- and closed-end funds, the NAV indicates the performance of the fund’s portfolio. If the NAV (net asset value) and POP (public offering price) move in opposite directions, the fund must be a closed-end fund.

    The price of a closed-end fund depends not only on the performance of the securities held but also on supply and demand. In an open-end fund, the NAV and POP must move in the same direction because the price depends solely on the performance of the securities held by the fund.

  3. All of the following are TRUE about money market funds EXCEPT

    A. They offer a check-writing feature as a way of redeeming shares.

    B. Investors are prohibited from redeeming the money market fund for a year.

    C. They are no-load.

    D. They compute dividends daily and credit them monthly.

    Answer: B. Investors are prohibited from redeeming the money market fund for a year.

    Money market funds are types of mutual funds that hold short-term debt securities. The NAV of the fund is set at $1. They do offer a check-writing feature, they’re no-load (no sales charge), and they compute dividends daily and credit them monthly. However, investors aren’t prohibited from redeeming their funds for a year; they can redeem at any time.