Question

A customer in the 20% tax bracket with a 15-year investment time horizon is considering investing $250,000 with an objective of current income and safety of principal. The registered representative is considering making the recommendation of either a managed investment grade bond mutual fund or an investment grade bond fixed unit investment trust. When presenting the 2 choices to the customer, the registered representative should mention that:

I) breakpoints are available on mutual funds, but not on unit investment trusts
II) breakpoints are available on both mutual funds and unit investment trusts
III) expense ratios for mutual funds tend to be higher than expense ratios for fixed unit investment trusts
IV) expense ratios for fixed unit investment trusts tend to be higher than expense ratios for mutual funds
A) I and III
B) II and III
C) I and IV
D) II and IV

Answer 1

Breakpoints are discounts on mutual fund sales charges based on investment amount and are available for mutual funds but not for UITs. Expense ratios are often higher for mutual funds due to active management, while UITs tend to have lower expense ratios as they are not actively managed.

Step-by-step explanation:

When considering investment options like a managed investment grade bond mutual fund or an investment grade bond fixed unit investment trust (UIT), there are key differences to addresses. First, breakpoints, which are discounts on the sales charge of mutual funds based on the amount invested, are available for mutual funds but not for UITs. This is because UITs are typically offered at an upfront fixed cost and are not designed to accommodate incremental investments that would allow for breakpoints.

Second, the expense ratios, which represent the annual operating expenses of an investment as a percentage of its assets, tend to be higher for mutual funds than for those of fixed UITs because mutual funds are actively managed, incurring additional costs associated with making investment decisions and other management services.