ExamworthyExamworthy
Open the appStart free

Series-7 - Provides Customers with Information About Investments, Makes Recommendations, Transfers Assets and Maintains Appropriate Records - Section 3.4

Compare packaged products - mutual funds, ETFs, UITs, variable annuities, REITs, and DPPs - and apply fundamental and technical analysis to inform recommendations and required disclosures.

Compare open-end and closed-end investment companies, ETFs, and UITs, including NAV and forward pricing, sales charges, breakpoints, 12b-1 fees, and the flow-through tax treatment of REITs and direct participation programs (DPPs). Apply fundamental analysis - reading financial statements and ratios such as the current ratio, EPS, and the P/E ratio - and technical analysis of chart patterns and support and resistance, and provide the required disclosures of costs, risks, and material events under FINRA rules.

Net asset valueBreakpoints12b-1 feeDirect participation programPrice-earnings ratio

Practice question for this objective

Free sampleProvides Customers with Information About Investments, Makes Recommendations, Transfers Assets and Maintains Appropriate Recordsmedium

How does an open-end investment company differ from a closed-end investment company in the way its shares are issued and priced?

  • ABoth continuously issue new redeemable shares that trade on an exchange at a price set purely by supply and demand throughout the day.
  • BAn open-end company issues a fixed number of shares redeemed at net asset value, while a closed-end company continuously issues new shares priced by supply and demand.
  • CBoth issue a fixed number of shares, but only the closed-end company allows redemption directly with the issuer at net asset value.
  • DAn open-end company continuously issues redeemable shares priced at net asset value plus any applicable sales charge, while a closed-end company issues a fixed number of shares that then trade in the secondary market at a market price. Correct
Distinguish open-end funds, which continuously issue redeemable shares at net asset value, from closed-end funds, which trade a fixed share count at market price. An open-end fund continuously creates and redeems shares transacted at net asset value, so its capitalisation floats. A closed-end fund raises capital once through a fixed number of shares that then trade in the secondary market at a price driven by supply and demand, often at a premium or discount to net asset value.

Why A is wrong: This is tempting because both are pooled investment companies, but it wrongly merges their features: only a closed-end company trades on an exchange by supply and demand, and its shares are not redeemable with the issuer.

Why B is wrong: This is the correct distinction reversed. The fixed share count belongs to the closed-end structure, and continuous issuance of redeemable shares belongs to the open-end structure, so the labels are swapped.

Why C is wrong: This is wrong on both counts: the open-end company does not have a fixed share count, and it is the open-end company, not the closed-end company, whose shares are redeemable with the issuer at net asset value.

Why D is correct: Correct: an open-end fund stands ready to issue and redeem shares at net asset value under the Investment Company Act of 1940, whereas a closed-end fund floats a fixed share count that afterwards trades at a market price independent of net asset value.

See more Series-7 practice questions with worked answers.

More in this domain

Back to all Provides Customers with Information About Investments, Makes Recommendations, Transfers Assets and Maintains Appropriate Records objectives, or the Series-7 cert hub.

Examworthy is not affiliated with or endorsed by FINRA. Original, blueprint-aligned practice material only.