Class B Shares

Class B mutual fund shares typically carry:

1. A.An exchange-listed market priceTrading at a price set by supply and demand describes a closed-end fund or an ETF, not an open-end share class. Every class of an open-end fund is bought and redeemed with the fund itself at a price derived from net asset value, which is why share classes differ by fee structure rather than by where they trade.
2. B.A contingent deferred sales charge that declines over timeCorrect - a declining back-end load.
3. C.A front-end sales chargeThat is the Class A structure: pay the load at purchase and get breakpoints for larger investments. Class B was designed for the investor who wants the entire deposit working immediately, which is why the charge is deferred to redemption instead.
4. D.No fees of any kindBecause nothing is deducted at purchase, Class B can look free, and that impression is the reason the class is often sold where it does not belong. The cost is simply relocated: a higher annual 12b-1 fee runs the whole time the shares are held, plus the deferred charge if they are sold early.

Why: Class B shares have a contingent deferred sales charge (back-end load) that declines the longer shares are held.

Class B mutual fund shares often:

1. A.Convert to Class A shares after several yearsCorrect - B-to-A conversion lowers fees.
2. B.Trade on an exchangeShare classes are a pricing device within an open-end fund, and none of them has a secondary market. A Class B holder who wants out redeems with the fund at the next computed value; there is no listing on which the shares could change hands.
3. C.Have no fees everIf this were true there would be nothing for the conversion to accomplish. The whole reason B shares roll into A shares after a period of years is that their annual 12b-1 charge is higher, and dropping it is the benefit the holder waits for.
4. D.Charge a front-end loadA front-end load is what the investor gets after the conversion, not before it. Class B collects nothing at purchase and instead recovers the distribution cost over time, which is what the deferred in contingent deferred sales charge refers to.

Why: Class B shares typically convert to Class A shares after several years, lowering ongoing 12b-1 fees.

An investor holding Class B shares that still carry a 4% contingent deferred sales charge dies. Her estate redeems the shares. The CDSC is:

1. A.Charged at 4% but refundable to the estate after probateThere is no charge-then-refund mechanism; the waiver applies at redemption.
2. B.Charged at 4% of the redemption proceedsThis ignores the standard death waiver disclosed in the prospectus.
3. C.Waived - death of the shareholder is a standard CDSC waiver eventCorrect - redemptions occasioned by the shareholder death are typically CDSC-free under the prospectus waiver list.
4. D.Reduced by half for redemptions by estatesNo partial-rate rule exists for estates; the charge is simply waived.

Why: Fund prospectuses routinely waive the CDSC on redemptions following the death (or qualifying disability) of the shareholder. The clue is that the redemption is by the estate after death - a classic waiver trigger. Review: CDSC waivers.

A client redeems Class B shares worth 12,000 dollars while a 1% contingent deferred sales charge still applies. The charge is:

1. A.12 dollarsDecimal error - this is 0.1% of the redemption, one tenth of the stated 1% charge.
2. B.600 dollarsThis applies a 5% rate, which is front-end-load territory. The question specifies a 1% contingent deferred sales charge.
3. C.1,200 dollarsThis is 10% of the redemption - the decimal moved the wrong way. One percent of 12,000 is 120.
4. D.120 dollarsCorrect - 1% CDSC on 12,000.

Why: 0.01 x 12,000 = 120 dollars.