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Series 65 Investment Companies and Alternatives Practice Questions

Official outline
NASAA Series 65 Test Specifications (June 2023)
Questions on this page
8
Updated
Nov 3, 2026

  1. Question 1, medium

    A client is considering a bank-issued 'principal-protected' market-linked note tied to an equity index, maturing in 7 years. Which statement about this product is most accurate?

    • A.The principal protection is guaranteed by FDIC insurance, just like a bank CD
    • B.Repayment of principal at maturity depends on the credit of the issuing bank, and the client bears that issuer credit risk
    • C.The note can be sold at any time prior to maturity at full face value with no liquidity discount
    • D.Returns are guaranteed to match the index's performance exactly, with no cap
    Show answer and explanationHide answer

    Correct answer: B. Repayment of principal at maturity depends on the credit of the issuing bank, and the client bears that issuer credit risk

    'Principal protected' notes are unsecured debt obligations of the issuing institution. The protection is only as good as the issuer's ability to pay, meaning the investor bears issuer credit risk, unlike an FDIC-insured CD. These notes are also typically illiquid before maturity and frequently include caps or participation rates rather than uncapped exact index tracking. A confuses a structured note with deposit insurance; C and D both overstate liquidity and upside features.

    • A. Structured notes are unsecured obligations of the issuing bank and are not FDIC-insured the way bank deposits or CDs are; this statement is incorrect.
    • B. 'Principal protection' on a structured note is only as good as the issuing bank's ability to pay. It's an unsecured promise, so the client bears the issuer's credit risk, making this the correct statement.
    • C. These notes are generally illiquid prior to maturity, and any secondary market sale would typically occur at a discount to face value, not at full face value.
    • D. Returns on market-linked notes are typically capped, subject to participation rates, or otherwise limited by the note's terms. They are not an uncapped guarantee of index performance.

  2. Question 2, easy

    Unlike shares of an open-end investment company, shares of a closed-end investment company:

    • A.Are always redeemable at NAV upon demand from the fund
    • B.Are sold in a continuous public offering at NAV plus a sales charge through the sponsor
    • C.Trade in the secondary market at prices that may be above or below their NAV
    • D.Cannot be purchased by individual retail investors
    Show answer and explanationHide answer

    Correct answer: C. Trade in the secondary market at prices that may be above or below their NAV

    Closed-end funds conduct a one-time IPO and then trade like stocks on an exchange or over-the-counter, with market prices driven by supply and demand. Meaning shares can trade at a premium or discount to NAV. Open-end funds (mutual funds), by contrast, continuously issue and redeem shares directly with the fund at NAV (plus any applicable sales charge).

    • A. Describes open-end funds; closed-end shares are typically not redeemed by the fund but sold on the secondary market.
    • B. Describes open-end (mutual fund) continuous offerings through a sponsor or distributor, not closed-end funds' one-time IPO structure.
    • C. Correct. Closed-end fund market prices can diverge from NAV since they trade on exchanges.
    • D. False. Closed-end funds are commonly purchased by retail investors through brokerage accounts.

  3. Question 3, medium

    Which of the following correctly distinguishes how ETF shares are bought and sold from how open-end mutual fund shares are bought and sold?

    • A.ETF shares are priced once daily and purchased at the next computed NAV, while mutual fund shares trade continuously at negotiated prices
    • B.ETF shares trade throughout the day on an exchange at negotiated market prices, while mutual fund shares are bought and sold at the next computed end-of-day NAV
    • C.ETF shares cannot be sold short, while mutual fund shares can be sold short at any time
    • D.Mutual fund shares trade intraday on an exchange, while ETF shares are only priced once per day
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    Correct answer: B. ETF shares trade throughout the day on an exchange at negotiated market prices, while mutual fund shares are bought and sold at the next computed end-of-day NAV

    ETFs are listed on an exchange and trade continuously during market hours at prices set by supply and demand (kept close to NAV through arbitrage); open-end mutual fund shares use forward pricing and are bought or sold only at that day's closing NAV. Choices A and D reverse this relationship, and ETF shares can, in fact, be sold short like other exchange-listed securities.

    • A. This reverses the two products: mutual funds price once daily at NAV, while ETFs trade continuously. The statement describes each product backwards.
    • B. ETFs trade intraday on an exchange at market-negotiated prices, while open-end mutual funds transact only at the next computed end-of-day NAV, which is the accurate distinction.
    • C. ETFs can be sold short like other exchange-listed securities; open-end mutual fund shares generally cannot be sold short, the opposite of what's stated.
    • D. This also reverses the facts. Mutual funds don't trade intraday on an exchange, and ETFs are priced continuously, not once per day.

  4. Question 4, medium

    What is the key structural difference between an open-end investment company (mutual fund) and a closed-end investment company with respect to how shares are priced and traded?

    • A.Open-end fund shares are bought and sold at NAV; closed-end fund shares trade on an exchange at a market price that may differ from NAV
    • B.Closed-end fund shares are generally redeemed by the fund company at NAV, while open-end shares trade on an exchange at a market price set by the fund's board
    • C.Both fund types generally transact at NAV, because exchange arbitrage eliminates any premium or discount on closed-end fund shares
    • D.Open-end funds have a fixed number of shares outstanding, while closed-end funds continuously issue new shares
    Show answer and explanationHide answer

    Correct answer: A. Open-end fund shares are bought and sold at NAV; closed-end fund shares trade on an exchange at a market price that may differ from NAV

    Open-end funds continuously issue and redeem shares directly with the fund at the next-computed net asset value (NAV) per share. Closed-end funds issue a fixed number of shares in an IPO and thereafter trade on a secondary exchange at whatever price buyers and sellers agree upon, which can be a premium or discount to the fund's underlying NAV.

    • A. Correct. This correctly describes NAV-based open-end pricing versus market-based closed-end pricing.
    • B. Incorrect. This reverses the facts; closed-end shares are not redeemed by the fund at NAV, and open-end shares do not trade on an exchange at a board-set price.
    • C. Incorrect. Closed-end funds routinely trade at premiums or discounts to NAV with no mechanism that eliminates them; only open-end funds transact at NAV.
    • D. Incorrect. This reverses which fund type has a fixed share count; closed-end funds have a fixed number of shares, not open-end funds.

  5. Question 5, easy

    A money market mutual fund invests in high-quality, short-term debt instruments under Rule 2a-7 and seeks to maintain a stable $1.00 net asset value per share. Which statement is correct?

    • A.The $1.00 NAV is legally guaranteed and cannot decline under any circumstances
    • B.Money market funds may hold any maturity of debt security as long as credit quality is high
    • C.Money market funds are insured by the FDIC up to $250,000 per account
    • D.The fund seeks to maintain a stable NAV, but it is not guaranteed and the fund can 'break the buck' under stress
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    Correct answer: D. The fund seeks to maintain a stable NAV, but it is not guaranteed and the fund can 'break the buck' under stress

    A stable $1.00 NAV is a goal achieved through amortized cost accounting and strict portfolio quality/maturity limits under Rule 2a-7, but it has never been a legal guarantee. Funds can and occasionally have 'broken the buck.' They are not FDIC-insured, and Rule 2a-7 imposes maturity limits rather than unlimited flexibility.

    • A. The $1.00 NAV is a target the fund seeks to maintain, not a legal guarantee; money market funds can and occasionally have 'broken the buck.'
    • B. Rule 2a-7 imposes strict maturity, quality, and diversification limits on money market fund holdings; funds cannot hold any maturity regardless of credit quality.
    • C. Money market mutual funds are not FDIC-insured; that protection applies to bank deposit products, not registered investment funds.
    • D. Money market funds aim for a stable $1.00 NAV under Rule 2a-7 but this is not guaranteed, and in stressed conditions the fund can break the buck. The correct, accurate statement.

  6. Question 6, hard

    A hedge fund manager wants to raise capital from investors without registering the fund as an investment company under the Investment Company Act of 1940. Which approach is most consistent with achieving this outcome?

    • A.Sell shares in a public offering registered with the SEC to any investor who wants to participate, since Securities Act registration also exempts the fund from the Investment Company Act.
    • B.Rely on a private placement exemption under Regulation D, limiting sales to accredited investors and qualified purchasers, and rely on an exclusion such as Section 3(c)(1) or 3(c)(7).
    • C.Register the fund as a closed-end investment company and list its shares on a national exchange, relying on the listing to avoid Investment Company Act obligations.
    • D.Offer the fund to retail investors through a prospectus delivered at the time of sale, relying on prospectus delivery to avoid registration as an investment company.
    Show answer and explanationHide answer

    Correct answer: B. Rely on a private placement exemption under Regulation D, limiting sales to accredited investors and qualified purchasers, and rely on an exclusion such as Section 3(c)(1) or 3(c)(7).

    Hedge funds typically avoid registration as investment companies by conducting a private placement under Regulation D of the Securities Act (limiting the offering to accredited investors, and often further limiting to qualified purchasers) and relying on an exclusion from the Investment Company Act's definition of 'investment company,' most commonly Section 3(c)(1) (up to 100 beneficial owners) or Section 3(c)(7) (unlimited qualified purchasers). This keeps the fund out of '40 Act registration and its accompanying requirements, in exchange for restricting the investor base and marketing method. A public offering or exchange listing would defeat this purpose.

    • A. Wrong: registering a public offering under the Securities Act does not exempt the fund from the Investment Company Act, and an unrestricted offering is the opposite of what the manager is trying to avoid.
    • B. Correct: this is the standard structure hedge funds use, private placement to accredited/qualified investors combined with a '40 Act exclusion.
    • C. Wrong: registering as a closed-end fund and listing on an exchange means registering under the '40 Act, and a listing does not avoid its obligations.
    • D. Wrong: delivering a prospectus to retail investors is inconsistent with the private, exempt structure hedge funds rely on, and does not avoid '40 Act registration.

  7. Question 7, easy

    An investor wants to redeem shares in a fund and receive proceeds based on the fund's next-computed net asset value per share, rather than trading at whatever price a buyer will pay on an exchange. This describes:

    • A.A closed-end fund
    • B.An open-end investment company (mutual fund)
    • C.A publicly traded REIT
    • D.A unit investment trust that trades only in the secondary market
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    Correct answer: B. An open-end investment company (mutual fund)

    Open-end funds (mutual funds) continuously issue and redeem shares directly with the fund at forward-priced NAV. There is no secondary-market trading price to diverge from NAV. Closed-end funds trade on an exchange at a market price that can be above (premium) or below (discount) NAV. C and D both describe exchange-traded structures where market price, not NAV redemption, governs.

    • A. Closed-end funds trade on an exchange at a market-determined price, which may differ from NAV, rather than redeeming at next-computed NAV.
    • B. Open-end mutual funds continuously issue and redeem shares at the fund's next-computed net asset value per share, exactly matching this description.
    • C. A publicly traded REIT trades on an exchange at whatever price the market sets, similar to a stock, not at next-computed NAV.
    • D. A UIT trading only in the secondary market is priced by market transactions there, not through direct redemption at next NAV from the fund.

  8. Question 8, medium

    A client holds an exchange-traded note (ETN) linked to a commodity index. The index rises 12% over the year, but the issuing bank is sharply downgraded and the note's price lags the index. Which feature of an ETN best explains this result?

    • A.An ETN holds the index's futures contracts in a segregated trust, so lagging performance reflects the costs of rolling contracts
    • B.An ETN is an open-end fund whose shares trade below NAV whenever redemptions exceed new creations
    • C.An ETN is an unsecured debt obligation of its issuer, so its value reflects the issuer's credit risk as well as the index return
    • D.An ETN is a derivative on the index sponsor, so the sponsor's license fees reduce the note's price when the index rises
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    Correct answer: C. An ETN is an unsecured debt obligation of its issuer, so its value reflects the issuer's credit risk as well as the index return

    An exchange-traded note is an unsecured debt security of the issuing institution that promises a return linked to an index. Unlike an ETF, it holds no underlying assets for investors, so a deterioration in the issuer's creditworthiness can reduce its price even when the index rises.

    • A. This describes a commodity pool or futures-based ETF; an ETN does not hold assets in trust for investors.
    • B. An ETN is a debt note, not a fund, and it has no pool of assets whose creations and redemptions drive a NAV.
    • C. Correct: the note's repayment depends on the issuer's ability to pay, so issuer credit risk affects its price.
    • D. The ETN is the issuer's debt, not a derivative on the index sponsor, and license fees do not explain a credit-driven lag.

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