FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProcessing Customer Orders and TransactionsMedium
A registered representative receives a verbal order from a client to purchase $10,000 worth of shares in an open-end management company. The representative executes the order, and the fund's NAV is $20.00 per share with a 5% front-end sales charge. How many shares will the client purchase?
- A525 shares
- B500 shares
- C475 shares
- D487.5 shares
Show answer & explanationAnswer & explanation
Correct answer: C. 475 shares
First, calculate the Public Offering Price (POP) per share: NAV / (1 - sales charge percentage) = $20.00 / (1 - 0.05) = $20.00 / 0.95 = $21.0526 (rounded). Then, divide the total investment amount by the POP: $10,000 / $21.0526 = 474.98 shares, which is approximately 475 shares.
Why the other options are wrong
- A. This calculation is incorrect and does not reflect proper application of a front-end load.
- B. This would be if there was no sales charge, or if the sales charge was applied to NAV directly, which is incorrect.
- D. This would be if the sales charge was applied to the $10,000 first, then divided by NAV, which is incorrect for front-end loads.
Public Offering Price (POP) Calculation
The price at which mutual fund shares with a front-end load are offered to the public, calculated as NAV divided by (1 minus the sales charge percentage).
- POP = NAV / (1 - Sales Charge %)
- The sales charge is a percentage of the POP, not the NAV.
- Used for mutual fund purchases with a front-end load.
Memory trick: Shares Sold: POP's Price, Not Just NAV's Nice.