Unit Investment Trust

Which investment company structure holds a fixed portfolio that is not actively traded and terminates on a specified date?

1. A.A closed-end management companyA closed-end fund is managed and perpetual. Only its share count is fixed, not its portfolio.
2. B.A hedge fundA hedge fund is a privately offered pool with active, often aggressive management, not a fixed portfolio.
3. C.A unit investment trustCorrect. A UIT holds a fixed, unmanaged portfolio and has a stated termination date.
4. D.An open-end management companyAn open-end fund is actively managed by an adviser and has no termination date.

Why: A unit investment trust assembles a fixed portfolio, holds it without active management, and dissolves at a stated termination date.

A unit investment trust differs from an open-end management company in that a UIT:

1. A.Trades on an exchange throughout the day at a price set by supply and demandThat describes a closed-end fund or an exchange-traded product, not a UIT structure generally.
2. B.Holds a fixed portfolio that is not actively managed and has a stated termination dateCorrect. Fixed, unmanaged, and finite in life - the three defining UIT traits.
3. C.May charge a performance fee based on the portfolio's appreciationThere is no manager to compensate. A UIT has no ongoing portfolio management to pay for.
4. D.Has a board of directors that hires and fires an investment adviserThis is the open-end management company structure. A UIT has trustees but no managing adviser to supervise.

Why: A UIT buys a fixed portfolio at inception, holds it, and terminates on a stated date. There is no investment adviser making ongoing decisions and no board of directors, which is why UIT expenses are typically low. An open-end fund, by contrast, is actively supervised by an adviser overseen by a board and has no termination date.

Under the Investment Company Act of 1940, investment companies are divided into three classifications. Which of the following is one of them?

1. A.Open-end management companyOpen-end is a subdivision of the management company classification, not one of the three top-level classes.
2. B.Hedge fundHedge funds rely on exclusions from the Act and are not registered investment companies.
3. C.Face-amount certificate companyCorrect. Face-amount certificate companies, unit investment trusts and management companies are the three classifications.
4. D.Real estate investment trustA REIT is a tax classification under the Internal Revenue Code, not an Investment Company Act classification.

Why: The Investment Company Act of 1940 classifies investment companies as face-amount certificate companies, unit investment trusts, and management companies. Management companies are then subdivided into open-end and closed-end, and separately into diversified and non-diversified. A face-amount certificate company issues debt-like certificates promising a stated amount at a future date, and a unit investment trust holds a fixed portfolio and has no board of directors or investment adviser.

A Unit Investment Trust (UIT) differs from a mutual fund in that a UIT:

1. A.Guarantees returnsNo registered investment company guarantees a return, and a fixed portfolio is no exception. If the securities in the trust decline, unit holders bear that loss just as fund shareholders would.
2. B.Has a fixed portfolio and a termination dateCorrect - fixed and unmanaged.
3. C.Is actively traded by a managerThis describes the mutual fund side of the comparison. A UIT assembles its holdings at the outset and leaves them alone, which is why it charges no management fee for ongoing portfolio decisions.
4. D.Trades on an exchange like a closed-end fundExchange trading at a market price that can diverge from NAV is the closed-end characteristic, not the UIT one. Traditional trust units are redeemed with the sponsor, and the distinction the stem is testing is the fixed portfolio with a stated termination date.

Why: A UIT holds a fixed, unmanaged portfolio with a set termination date, unlike an actively managed mutual fund.