Compare Investment Companies - Securities Industry Essentials SIE

1. Which type of investment company has shares that trade intraday on an exchange like a stock?

   Closed-end fund. Closed-end fund shares are listed on stock exchanges, allowing intraday trading at market-determined prices similar to individual equities.

2. Identify the investment company type: fixed shares outstanding after IPO and exchange trading thereafter.

   Closed-end fund. Closed-end funds have a fixed capitalization post-IPO, with shares trading on exchanges thereafter, limiting new share issuance.

3. What is the key structural feature of a closed-end management investment company?

   Issues a fixed number of shares; trades on exchanges. Closed-end management companies issue a fixed number of shares during an initial public offering, which then trade on secondary markets like stocks based on supply and demand.

4. What is the pricing characteristic of closed-end fund shares during the trading day?

   Market price fluctuates intraday based on supply and demand. Closed-end fund shares are subject to real-time market pricing on exchanges, reflecting investor supply and demand rather than underlying asset values.

5. Which type of investment company typically trades at a discount or premium to NAV?

   Closed-end fund. Closed-end funds trade on exchanges where market prices can deviate from NAV due to investor sentiment, supply, and demand dynamics.

6. If a closed-end fund has NAV $20 and market price $22, what is it trading at?

   A premium to NAV. A market price above NAV indicates a premium, which can occur in closed-end funds due to high demand or specialized strategies.

7. What is the primary regulatory reason open-end funds must redeem shares on demand?

   They are required to stand ready to redeem at NAV. The Investment Company Act of 1940 mandates that open-end funds provide redemption rights at NAV to protect investors and ensure liquidity.

8. Which option best describes how closed-end fund shares are purchased by investors?

   Bought from other investors in the secondary market. After the initial offering, closed-end fund shares are acquired through secondary market transactions between investors, not directly from the fund.

9. What is the SIE definition of an investment company under the Investment Company Act of 1940?

   Issuer primarily engaged in investing/trading securities. The Investment Company Act of 1940 defines investment companies as entities whose primary business involves investing, reinvesting, or trading in securities to pool and manage investor funds.

10. Which type of investment company sells and redeems shares directly with the fund at NAV?

    Open-end mutual fund. Open-end mutual funds handle direct transactions with investors, issuing new shares upon purchase and redeeming them at the current NAV to maintain liquidity.

11. What is the key structural feature of an open-end management investment company?

    Continuously issues and redeems shares at NAV. Open-end management companies, or mutual funds, offer continuous issuance and redemption of shares at net asset value to provide liquidity and flexibility to investors.

12. What is the key structural feature of a unit investment trust (UIT)?

    Fixed portfolio; no active management; has a termination date. UITs maintain a static portfolio of securities without active management and are designed to terminate after a specified period, often when underlying assets mature.

13. Which type of investment company is actively managed by an investment adviser?

    Management company (open-end or closed-end). Management companies employ investment advisers to actively select and adjust portfolio holdings to meet stated objectives and respond to market conditions.

14. Which investment company is most associated with a fixed portfolio of bonds held to maturity?

    Unit investment trust (UIT). UITs are structured with a predetermined portfolio, often of bonds, that remains unchanged until maturity, providing predictable income streams.

15. Which type of investment company generally does not have a board making portfolio decisions?

    Unit investment trust (UIT). UITs operate without ongoing management or a board, as they hold a fixed portfolio assembled at inception and do not make discretionary investment decisions.

16. Which two broad categories of investment companies are tested on the SIE?

    Management companies and unit investment trusts (UITs). The SIE exam focuses on management companies, which include open-end and closed-end funds, and UITs as the primary categories of investment companies under the 1940 Act.

17. Identify the investment company type: issues new shares continuously and redeems shares daily at NAV.

    Open-end mutual fund. Open-end mutual funds continuously create and redeem shares at NAV to accommodate investor flows and maintain portfolio management flexibility.

18. What is the common term for a management company that issues redeemable securities?

    Open-end investment company (mutual fund). Mutual funds are classified as open-end under the 1940 Act because they issue redeemable securities, allowing continuous investor entry and exit at NAV.

19. Which investment company structure can use leverage by issuing preferred shares or debt?

    Closed-end fund. Closed-end funds are permitted to issue senior securities like preferred stock or debt to leverage their common equity, unlike open-end funds which face restrictions.

20. Identify the investment company type: fixed portfolio, redeemable units, and a set termination date.

    Unit investment trust (UIT). UITs feature a static portfolio, redeemable units for investor liquidity, and a predetermined end date aligned with asset maturities.

21. What is the formula for public offering price (POP) given NAV and sales charge rate?

    $\text{POP} = \frac{\text{NAV}}{1 - \text{Sales charge rate}}$. POP adjusts the NAV upward to incorporate the sales charge, ensuring the fund receives the full NAV while compensating distributors.

22. Which option best describes how open-end fund shares are purchased by investors?

    Purchased from the fund or through an underwriter at POP. Open-end funds sell shares directly to investors at the public offering price, which includes NAV plus any applicable sales load, often through underwriters.

23. If a closed-end fund has NAV $20 and market price $18, what is it trading at?

    A discount to NAV. When market price falls below NAV, closed-end funds trade at a discount, often due to factors like illiquidity or negative investor sentiment.

24. What is the pricing characteristic of open-end fund shares during the trading day?

    Priced once daily at the next computed NAV. Open-end fund transactions are processed at the end-of-day NAV to ensure fair pricing and compliance with forward pricing rules under SEC regulations.

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