SIE Understanding Products and Their Risks Question 51: Answer and Explanation

Question: 51

Which share class would be most suitable to an investor with a short-term to medium-term time horizon and may be open to eventually changing to a long-term investment?

• A. Class A shares which convert to Class C shares
• B. Class B shares which convert to Class A shares
• C. Class C shares which convert to Class T shares
• D. Class T shares which convert to Class B shares

Correct Answer: B

Explanation:

B: Choice B is correct because Class B shares charge no up-front sales charge, incur 12b-1 fees, and charge a CDSC if sold within eight years or so. If the investor holds the shares longer than intended (for as many as eight years), Class B shares that convert to Class A shares after that time will no longer have 12b-1 fees or CDSC, resulting in lower sales-related fees over the time horizon. Choice A is incorrect because Class A shares are typically appropriate for an investor who has a long-term time horizon at the time of purchases. Choice C is incorrect because Class C shares typically have a higher combination of up-front sales load and permanent 12b-1 fees, because of the permanent 12b-1 fees. Choice D is incorrect because Class T shares, typically with an up-front sales charge of 2.5% and a 0.25% 12b-1 fee, do not convert to Class B shares, which typically have higher 12b-1 fees for up to eight years, and a CDSC unless held for eight years or so.