Chapter 12

Compared to yields on general purpose money funds, the yields on tax-exempt money funds are ___

20 to 30 percent.

Which one of the following statements is correct concerning international funds?

A devaluation of the dollar causes returns on foreign investments to improve from a U.S. perspective.

Madison believes that the leisure industry (resorts, travel, restaurants, etc.) is about to experience extraordinary growth because baby boomers are entering their retirement years. She should invest in ___

A sector fund.

Risk-seeking investors seeking maximum capital appreciation with little, if any current income, should invest in ___

Aggresive growth funds.

Mutual funds often report returns as the growth of $10,000 over a period of time. These returns assume that ___

All dividends and capital gains are reinvested.

Which type of fund is always passively managed?

An index fund.

One drawback of investing in mutual funds is the ___

Annual management fee.

Automatic reinvestment plans ___

Are an excellent way to accumulate wealth through disciplined investing.

Back-end loads ___

Are charged if an investor sells his or her shares within the first few years.

One type of mutual fund spreads investors' money across equity markets, bond markets,and money markets. Moreover, as market conditions change, the amount of money invested in each market sector will change. This type of mutual fund is known as a(n) ___

Asset allocation fund.

The ability to automatically buy additional fund shares using the dividend income generated by the fund is called a(n) ___

Automatic reinvestment plan.

Which type of mutual fund consists of both stocks and bonds with a combined objective of current income and long-term capital gains?

Balanced

The conversion privilege provided by mutual fund families allows investors to ___

Be more aggressive since they can re-allocate their funds when market conditions change.

The primary objective of an equity-income fund is ___

Current income with capital preservation.

Government securities money funds are structured to eliminate ___

Default risk.

One advantage gained by investing in a bond fund rather than in individual bonds is the ___

Diversification among issuers.

One characteristic of 12(b)-1 charges is that they are payable ___

Each year regardless of the performance of the mutual fund.

T/F. Compared to stocks, mutual funds offer investors a relatively limited range of choices.

False

T/F. Index fund investors should purchase at least two funds with the same objective to assure proper diversification.

False

T/F. Mutual funds tend to outperform the market.

False

T/F. The mutual fund market is dominated by funds that invest in diversified bond portfolios.

False

T/F. The mutual fund, and not the investor, is responsible for all income taxes on capital gains and dividends earned by the fund.

False

T/F. A closed-end fund is selling at a premium when the NAV exceeds the market price.

False.

T/F. Closed-end funds and exchange-traded-funds (ETFs) are both liquidated by selling them on the open market.

False.

T/F. Dividends and capital gains earned by mutual fund investors are taxed when the shares are redeemed.

False.

T/F. Funds that charge higher sales commissions. consistently earn above average rates of return.

False.

T/F. Hedge funds are subject to the same regulations and disclosure requirements as mutual funds.

False.

T/F. In spite of lower fees, index funds underperform actively managed funds in most years.

False.

T/F. Investors who buy or sell exchange-traded funds will do so at a price based on the closing price for the day.

False.

T/F. Morningstar, a leading. mutual fund industry publication, classifies funds by the number of shareholders and the total amount of money invested in the fund.

False.

T/F. Mutual funds are popular instruments for speculation and short-term trading.

False.

T/F. Systematic withdrawal plans from mutual funds usually require a minimum investment of at least $100,000.

False.

T/F. The maximum average maturity of the holdings within a money market account must be 6 months or less.

False.

T/F. The primary objective of growth mutual funds is capital appreciation with a high level of current income.

False.

T/F. The purchase price of a closed-end mutual fund is equivalent to the net asset value of the fund.

False.

One characteristic of bond funds is the ___

Fluctuation in value in response to changing interest rates.

The commission charged when shares of an open-end mutual fund are purchased is called a ___

Front-end load.

Two mutual funds are quoted as follows. Fund A NAV 17.13 Offer Price 18.18 Fund B NAV 19.03 Offer Price 19.03 Given these quotes, which one of the following is true?

Fund B is a no-load fund.

Which of the following statements best describes the legal organization of mutual funds?

Funds split their basic functions such as record keeping and investment decisions among two or more companies.

One characteristic of most index funds is that such funds typically ___

Have a very low-cost structure with respect to management fees and transaction fees.

Performance fees based on profits earned by the fund are typical of ___

Hedge funds.

Closed-end funds ___

Hold a portfolio whose size and content are fixed when the fund opens.

Mutual fund investors delegate all of the following decisions to the fund's managers EXCEPT ___

How to allocate investments among different classes of assets such as stocks, bonds, cash and real estate.

Advantages of index funds include which of the following? I. Low management fees. II. They outperform most actively managed funds. III. They have a balanced mix of stocks and bonds. IV. Securities in the portfolio are selected by professional analysts.

I and II.

Which of the following characteristics apply to exchange-traded funds (ETFs)? I. unlimited number of outstanding shares II. typically track the performance of some index III. market prices reflect demand for the fund rather than NAV. IV. shares are purchased from and redeemed by the investment company managing the fund.

I and II.

Which of the following statements is(are) correct concerning exchange-traded funds (ETFs)? I. You can buy and sell ETFs any time during trading hours. II. ETFs are actively managed. III. ETFs have high portfolio turnover rates. IV. ETFs rarely distribute any capital gains.

I and IV.

Open end mutual funds may charge which of the following fees? I. A front-end load at the time of purchase. II. A back-end load when shares are sold. III. Annual fees based on marketing and distribution costs. IV. Annual performance fees up to 20% of increases in net asset value.

I, II and III.

Reasons to invest in mutual fund include: I. a wide range of services such as automatic reinvestment and systematic withdrawal plans. II. minimizing the time and effort spent choosing securities. III. rates of return that consistently beat the market averages. IV. participation in a variety of tax sheltered and tax deferred retirement programs.

I, II and IV

Typical services offered by mutual funds include I. automatic reinvestment plans II. automatic investment plans III. automatic fund conversion as investment goals change IV. automatic withdrawal plans

I, II and IV

Which of the following are advantages offered by mutual funds? I. professional portfolio management II. dividend reinvestment III. consistent returns in excess of the overall market rate of return IV. modest capital outlay for investors

I, II and IV

Which of the following are advantages of international funds? I. greater diversification II. potentiallyhigherreturns III. income is taxed at a lower rate IV. ease of investing compared to buying individual foreign securities

I, II and IV.

Mutual funds can be used in which of the following tax exempt or tax deferred plans? I. self-directed retirement plans (SEPS) II. traditionalIRAs III. Roth IRAs IV. 401-K accounts

I, II, III and IV

Aggressive mutual funds often employ investing strategies such as I. short selling. II. margin trading. III. option trading. IV. hedging.

I, II, III and IV.

Investors use mutual funds for which of the following reasons? I. to accumulate wealth II. to minimize risk III. as a speculative vehicle IV. as a storehouse of value

I, II, III and IV.

Tax laws allow investors to hold mutual funds in which of the following types of retirement plans? I. ordinary IRAs II. RothIRAs III. 401-K plans IV. Keogh plans

I, II, III and IV.

Value funds seek stocks I. with low dividend yields. II. with potential for growth. III. with low P/E ratios. IV. of newly discovered firms.

II and III.

Which of the following accurately describe reasons for investing in mutual funds? I. to effectively control the timing of capital gains for tax purposes II. to achieve portfolio diversification at a reasonable cost III. to invest in unfamiliar sectors or geographic regions IV. to outperform the market

II and III.

Which of the following characteristics apply to closed-end mutual funds? I. unlimited number of outstanding shares II. transactions are between shareholders III. Market prices may be higher or lower than NAV. IV. Fund will repurchase shares at any time.

II and III.

Which of the following statements is(are) correct concerning hedge funds? I. They are highly regulated. II. They hedge all positions to limit risks. III. Management and other fees are extremely low compared to other types of funds. IV. Access is limited to institutions and high net worth or high income individuals.

IV.

A fund that is designed to match the performance of a measure such as the S & P 500 or the Russell 2000 is called a(n) ___

Index fund.

Target date funds ___

Invest in more conservative assets as the target date approaches.

Socially responsible funds are distinguished from other mutual funds because they ___

Invest only in companies that meet specified moral, ethical, or environmental standards.

The net asset value of a mutual fund increased from $12.03 to $13.53, but its price per share increased by only $1.26. This information indicates that the fund ___

Is a closed-end fund.

Automatic reinvestment of dividends and interest income ___

Is a default option for most mutual funds.

An open-end investment company ___

Is involved in all trades of its shares.

Investors in hedge funds have the legal status of ___

Limited partners.

A mutual fund is generally more tax efficient when it has a ________ turnover rate and a ________ dividend yield.

Low ; low.

An investor who wants to use mutual funds as a storehouse of value should invest in ___

Money funds and short-term bonds.

Investors seeking tax-exempt income should invest in ___

Municipal bond funds.

During the 75-year market cycle of 2009-2014, in which category of funds did a majority of funds outperform the market average?

None of the above.

A type of fund that invests in real estate and/or mortgages is known as a ___

REIT.

Funds that invest in a portfolio of companies from the same or closely related industries are known as ___

Sector funds.

Investors who seek triple (federal, state, and local) tax-free income should invest in ___

Single-state municipal.

A REIT or real estate investment trust may invest in all of the following EXCEPT ___

Stocks of companies engaged in construction and building materials.

A majority of funds managed by certain financial services companies appears to outperform their benchmarks because of ___

Survivorship bias.

Investors interested in predictable cash flow from their investments should consider funds that offer ___

Systematic withdrawal plans.

Which one of the following statements concerning mutual funds is correct?

The mutual fund industry is the largest financial intermediary in the United States.

Nearly all mutual funds operate as regulated investment companies. This means that ___

They do not pay taxes on their income.

T/F. Mutual funds provide an affordable way to diversify a portfolio.

True

T/F. When an investor buys shares in a mutual fund, he or she becomes a part-owner of a portfolio of securities.

True

T/F. A closed-end fund with an NAV of $9.60 and a market price of $10.25 is selling at a premium of 6.8%

True.

T/F. Automatic investment plans makes it easier for investors to save money.

True.

T/F. Index funds merely attempt to match the performance of some benchmark, not to outperform it.

True.

T/F. Investors purchase shares in an open end mutual fund directly from the fund.

True.

T/F. Investors should select mutual funds that match their personal investment goals and provide the services they desire.

True.

T/F. Investors using the conversion privilege to move money from one mutual fund to another within the same family may incur a tax liability.

True.

T/F. Like ordinary stocks, exchange -traded funds (ETFs) can be sold short.

True.

T/F. Most exchange-traded funds are index funds.

True.

T/F. Mutual fund fees are disclosed in the fund prospectus.

True.

T/F. Mutual funds and exchanged-traded funds are available to meet the goals of both aggressive and conservative investors.

True.

T/F. Mutual funds are used extensively as retirement investments.

True.

T/F. Socially responsible funds only hold stocks of companies that meet the fund's ethical guidelines.

True.

T/F. The conversion privilege allows investors to switch from one fund to another without fees if and only if the funds are managed by the same company such as Fidelity or Vanguard.

True.

T/F. The discount or premium on a closed-end mutual fund can be as much as 25 percent.

True.

T/F. The net asset value is the price per share an investor will pay to acquire shares in a no-load, open-end fund.

True.

T/F. The number of shares available in an exchange-traded fund (ETF) can be increased or decreased according to demand for the shares.

True.

T/F. To participate in an automatic investment plan, investors must allow the investment company to have access to a bank account or their paycheck.

True.

T/F. Trading in closed-end investment companies takes place between investors in the open market.

True.

T/F. When investors liquidate an exchange-traded fund (ETF) they have held for less than 6 months, they will not pay a redemption fee, but they will pay a commission.

True.

An aggressive growth mutual fund is least likely to purchase a stock ___

With a high dividend yield.