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 UITs are redeemable securities (like mutual funds), not exchange-traded like closed-end funds. Unitholders redeem at NAV, typically through the sponsor or trustee. D is incorrect because UITs must distribute ALL dividend and interest income to unitholders - they cannot reinvest income to compound returns like some mutual funds can.

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. 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 UITs are redeemable at NAV through the sponsor, not traded on exchanges. Exchange trading describes closed-end funds and ETFs.

B is correct. UITs pass through all dividend and interest income to unitholders. As a pass-through entity with a fixed portfolio structure, the UIT cannot reinvest income to purchase additional securities. This pass-through treatment is a structural characteristic that distinguishes UITs from mutual funds, which may offer dividend reinvestment options.

A is incorrect because UITs cannot reinvest income. The fixed portfolio structure means no new securities can be purchased after creation. All income flows through to unitholders. C is incorrect because while UITs do have small operating expenses (trustee fees, custody fees), the pass-through structure requires income to flow to unitholders. Fees are typically deducted separately from unit value. D is incorrect because UITs cannot rebalance or change the portfolio composition. The "fixed portfolio" characteristic means no buying or selling of securities occurs after initial creation, regardless of performance.

C is correct (the EXCEPT answer). 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 (commonly 15 months to 30+ years depending on 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 organized as corporations with boards of directors.

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 through all dividend and interest income to unitholders. As pass-through entities with fixed portfolios, UITs 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.