Don’t forget that while the Series 7 exam asks many questions about options and debt securities, it also asks many questions about other topics. And, often these other topics can yield some pretty challenging and tough series 7 exam questions. Like this one:

A summary prospectus for a mutual fund states that the public offering price (POP) is $10.50 with the net asset value (NAV) at $10.00. The document also states that the sales charge is less than 5%. Which of the following could explain this?
a.Sales charges are expressed as a percentage of the net amount invested.
b.The summary prospectus is unaudited and frequently includes estimated figures.
c.Sales charges are expressed as a percentage of the gross amount invested.
d.Some investors may have purchased shares at lower sales loads through quantity discounts.

Explanation: the exam is expert at asking questions in ways you weren’t quite expecting. Maybe you’ve done dozens of questions that simply asked you what the formula for calculating the sales charge percentage is, or maybe you’ve been running the calculations so many times you forgot to learn what it was you were calculating and why. As always, ask yourself what the question is telling you that allows you to eliminate at least one of the four answer choices. Unfortunately, this question gives you nothing that is obviously wrong at first glance. Maybe the document IS unaudited? Investors DO often purchase shares at a lower sales charge through breakpoints/quantity discounts. And, if you’ve never encountered the phrase “expressed as a percentage of the net/gross amount invested,” you can easily panic and convince yourself there is just NO WAY TO GET A QUESTION LIKE THIS RIGHT.
Sure there is. Look at each answer choice more closely. The fact that SOME investors might have bought at lower sales charge percentages would hardly be a good reason for the mutual fund to quote their a-typical experience, right? Shouldn’t this document use the maximum sales charge? Yes, and, even if we thought this might be the explanation, we have to keep thinking until we recall that some investors have all sales charges waived–usually at about $1 million–so Choice D wouldn’t work even if we went down that path. Choice B bugs me, too–how about you? I mean, the American Balanced Fund, for example, had assets of around $50 billion last time they reported–would it be so hard for a fund that size to break out a calculator and tell us exactly what the sales charge is? Estimated figures? I think you can eliminate that one. Now, if you’re not comfortable with the language used in Choice A and Choice C, you just have to interpret–the gross amount is the total amount one pays–the net amount is what’s left after the distributors take out the sales charge. So, even if you weren’t sure before the question, you can crunch a few numbers and prove what the answer is. If we take 50 cents divided by the net amount invested, the NAV, the % would be 5%. But, if we–properly–divided the 50 cents by the gross amount invested, the POP, we would get a figure of under 5%. Making Choice ______ the correct answer.
Right?

Answer: c  Need Help with your Series 7?

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