What is Unit Investment Trust (UIT)?

B is correct. UITs purchase a fixed portfolio of securities at inception and hold them unchanged until the termination date, when the portfolio liquidates and proceeds are distributed to unitholders. This "buy and hold" structure aligns perfectly with Margaret's 10-year time horizon and preference for a passive approach with no ongoing management decisions.

A is incorrect because UITs do not actively manage or trade the portfolio after creation. There is no portfolio manager making buy/sell decisions; this is a defining characteristic that distinguishes UITs from mutual funds. C is incorrect because a traditional UIT like this bond trust issues redeemable units (like mutual funds) rather than exchange-traded shares like a closed-end fund. Unitholders redeem at NAV, typically through the sponsor or trustee. D is incorrect because a UIT passes its income, net of trust expenses, through to unitholders; the trust does not reinvest it in the portfolio to compound returns.

B is correct. The defining characteristic of UITs is that the portfolio is assembled at inception and held unchanged until termination. There is no portfolio manager making ongoing buy/sell decisions, no rebalancing, and no replacing underperforming securities. This passive, fixed structure contrasts sharply with mutual funds and closed-end funds, which have active portfolio managers who continuously adjust holdings.

A is incorrect because UITs do not have a board of directors. UITs use a trust structure (not a corporate structure), with a trustee overseeing administrative functions but making no investment decisions. Mutual funds and closed-end funds have boards of directors or trustees. C is incorrect because continuous share issuance/redemption describes open-end mutual funds, not UITs. UITs have redeemable units but do not continuously create new units like mutual funds. D is incorrect because a traditional UIT's units are redeemed at NAV through the sponsor or trustee rather than traded on an exchange. Exchange trading describes closed-end funds and ETFs (a few of the earliest ETFs are organized as UITs, but exchange trading is not what distinguishes a UIT).

B is correct. A UIT passes its dividend and interest income through to unitholders. The trustee may charge its fees and expenses against the trust's income, so what reaches unitholders is the income net of those trust expenses. With a fixed portfolio, the UIT cannot reinvest income in additional securities.

A is incorrect because the fixed portfolio structure means no new securities are purchased after creation. C is incorrect because a UIT has no portfolio manager making trading decisions; its expenses are trustee and administrative costs, not active management fees. D is incorrect because UITs do not rebalance or replace holdings based on performance; the "fixed portfolio" characteristic means no buying or selling of securities occurs after initial creation.

C is correct (the exception). UITs do not employ portfolio managers or engage in active trading. The portfolio is fixed at creation and held unchanged until termination. This is the fundamental characteristic that defines UITs and distinguishes them from mutual funds and closed-end funds, which have active portfolio management.

A is accurate: All UITs have a specified termination date (set at creation and varying with the underlying securities), at which point the portfolio is liquidated and proceeds distributed to unitholders. This differs from mutual funds and closed-end funds, which have perpetual existence. B is accurate: UITs issue redeemable units that investors can redeem at NAV, similar to mutual fund shares. This provides liquidity even though the UIT has a fixed portfolio. D is accurate: UITs use a trust structure (not a corporation), with a trustee handling administrative duties but making no investment decisions. Mutual funds and closed-end funds are management companies overseen by a board of directors or trustees, whether organized as a corporation or as a business trust.

B is correct. Statements 1, 2, and 3 are accurate characteristics of UITs.

Statement 1 is true: UITs typically have lower ongoing fees than actively managed mutual funds because there is no portfolio manager making investment decisions after the initial creation. While UITs have trustee fees and small operating expenses, the absence of active management (no advisory fees) significantly reduces costs compared to actively managed mutual funds.

Statement 2 is true: The UIT portfolio is fixed at creation and remains unchanged. The only exceptions are involuntary changes like security defaults, tender offers, mergers, or called bonds. The trustee cannot voluntarily sell underperforming holdings or add new securities based on market conditions or opportunities.

Statement 3 is true: UITs pass dividend and interest income, net of trust expenses, through to unitholders. With a fixed portfolio, a UIT cannot reinvest income to purchase additional securities. This structural characteristic differs from mutual funds, which may offer dividend reinvestment programs (DRIPs).

Statement 4 is false: UITs have a mandatory termination date established at creation. The UIT cannot extend this date, regardless of performance. At termination, the portfolio must be liquidated and all proceeds distributed to unitholders. This differs from mutual funds and closed-end funds, which have perpetual existence.