172A CH.4 REVIEW
The offer price of an open-end fund is $18 and the fund is sold with a front-end load of 5%. What is the fund's NAV?
$17.10 ($18)(1 - .05) = $17.10
An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price?
$17.55 16.50/1-0.06= 17.55
Assume that you have recently purchased 100 shares in an investment company. Upon examining the balance sheet, you note that the firm is reporting $225 million in assets, $30 million in liabilities, and 10 million shares outstanding. What is the net asset value (NAV) of these shares?
$19.50 NAV = (225 - 30)/10 = 19.50
A mutual fund has $50 million in assets at the beginning of the year and 1 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund imposes a 12b-1 fee on all shares equal to 1%. The fee is imposed on year-end asset values. If there are no distributions, what is the end-of-year NAV for the fund?
$55.44 ($50 million)(1.12)(1 - .01)/1 million = $55.44
You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 2% back-end load, which decreases .5% per year. How much will you pay in fees on a $10,000 investment that does not grow if you cash out after 3 years of no gain?
$635 Total fees = 10,000 - (10,000 × .97) × (.99) × (.99) × (.99) × (.995) = 635
Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund?
15.64% 300,000,000*(1.18)=354,00,000 0.02*354,000,000= 7,080,000 354,000,000-7,080,000-300,000,000/300,000,000 =15.64%
According to the 2011 Mutual Fund Fact Book, _______ of total assets were in taxable money market funds and _______ were tax-exempt money market funds.
22%; 3.9%
Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year and with $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund?
23.75% Nav0= 200/10=20.00 Nav1=[250-(250*0.01)]/11= 22.50 Gross return: (22.50-20+2+0.25)/20= 23.75%
Measured by assets, about _____ of funds are money market funds.
25%
A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund's turnover rate was _____.
25% $17.25/$69 = 25%
As of 2011, approximately _____ of mutual fund assets were invested in money market funds.
26%
Low-load mutual funds have front-end loads of no more than _____.
3%
Rank the following fund categories from most risky to least risky: I. Equity growth fund II. Balanced fund III. Sector fund IV. Money market fund
3,1,2,4 Sector, equity growth, balanced, money mkt
As of 2011, approximately _____ of mutual fund assets were invested in equity funds.
54% As of 2011, approximately _____ of mutual fund assets were invested in bond funds. /14%
In his 1970 study, Malkiel found that mutual funds that do well in one period have an approximately ________ chance of doing well in the subsequent-year period.
65%
You are considering investing in a no-load mutual fund with an annual expense ratio of .6% and an annual 12b-1 fee of .75%. You could also invest in a bank CD paying 6.5% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD?
7.85% r > .065 + .006 + .0075 = .0785 = 7.85%
Most real estate investment trusts (REITs) have a debt ratio of around _________.
70%
In the United States in 2011, there were approximately _______ mutual funds offered by fewer than _______ fund families.
8,000; 700
The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV?
8.47% discount NAV = ($300,000,000 - $5,000,000)/9,000,000 = $32.78 Discount = $32.78 - $30 = $2.78 Discount as % of NAV = $2.78/$32.78 = .0847 = 8.47%
Mutual funds account for roughly ______ of investment company assets.
90%
__________ fund is defined as one in which the fund charges a sales commission to either buy into or exit from the fund.
A load
Higher portfolio turnover: I. Results in greater tax liability for investors II. Results in greater trading costs for the fund, which investors have to pay for III. Is a characteristic of asset allocation funds
All 3 of them -Results in greater tax liability for investors -Results in greater trading costs for the fund, which investors have to pay for -Is a characteristic of asset allocation funds
The SEC requires funds to disclose: I. After-tax returns for the past year II. After-tax returns for the last 5-year period III. The tax impact of portfolio turnover
All 3 of these
Mutual funds provide the following for their shareholders: -Diversification -Professional management -Record keeping and administration -All of these options
All of these options
Which of the following result in a taxable event for investors? I. Short-term capital gain distributions from the fund II. Dividend distributions from the fund III. Long-term capital gain distributions from the fund
All three of them -Short-term capital gain distributions from the fund -Dividend distributions from the fund -Long-term capital gain distributions from the fund
_____ is an example of an exchange-traded fund.
An SPDR or spider
Mutual fund returns may be granted pass-through status if _________________. -virtually all income is distributed to shareholders -the fund qualifies for pass-through status according to the U.S. tax code -the fund is sufficiently diversified -All of these options (All of the answers must be true for pass-through status to be granted.)
Answer is all of these, all must be true
If a mutual fund has multiple-class shares, which class typically has a front-end load?
Class A
______ are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis.
Commingled funds
Which of the following is not a type of real estate investment trust? I. Equity trust II. Debt trust III. Mortgage trust IV. Unit trust
II and IV only Debt trust & Unit trust
The NAV of which funds is fixed at $1 per share?
Money market funds
______________________ are often called mutual funds.
Open-end investment companies
Which of the following ETFs tracks the S&P 500 Index?
Spiders
A fund that invests in securities worldwide, including the United States, is called ______.
a global fund
The type of mutual fund that primarily engages in market timing is called _______.
an asset allocation fund
______ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager's forecast of the performance of that market sector.
asset allocation funds
A contingent deferred sales charge is commonly called a ____.
back-end load
Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ____________________.
balanced funds
The difference between balanced funds and asset allocation funds is that _____.
balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds
The greatest percentage of mutual fund assets are invested in ________.
equity funds
You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and
or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal. / front-end load; 12b-1 fee
The ratio of trading activity of a portfolio to the assets of the portfolio is called the ____________.
portfolio turnover
An official description of a particular mutual fund's planned investment policy can be found in the fund's _____________.
prospectus
Investors who want to liquidate their holdings in a unit investment trust may ___________________.
sell their shares back to the trustee at net asset value
Investors who want to liquidate their holdings in a closed-end fund may ___________________.
sell their shares on the open market
Sponsors of unit investment trusts earn a profit by ___________________.
selling shares in the trust at a premium to the cost of acquiring the underlying assets
If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at _____.
the NAV calculated at the market close at 4 pm New York time
In a recent study, Malkiel found that evidence of persistence in the performance of mutual funds ________________ in the 1980s.
virtually disappeared
You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class B investment of $20,000 if you redeem shares with no growth in value?
$596 Total fees after 1 year = 20,000 - (20,000 × .98 × .99) = 596
You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class A investment of $20,000 with no growth in value?
$794 First-year fees = 20,000 - (20,000 × .97 × .99) = 794
Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares?
$9 NAV = ($500 - $50)/50 = $9
Advantages of ETFs over mutual funds include all but which one of the following? -ETFs trade continuously, so investors can trade throughout the day. -ETFs can be sold short or purchased on margin, unlike fund shares. -ETF providers do not have to sell holdings to fund redemptions. -ETF values can diverge from NAV.
-ETF values can diverge from NAV- NOT true
From 1971 to 2010 the average return on the Wilshire 5000 Index was _________ the return of the average mutual fund.
.8% higher than
Management fees for open-end and closed-end funds typically range between _____ and _____.
0.2%; 1.5%
The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield?
10% Price per share = (25 million - 4 million)/700,000 = 30 per share Dividend yield = 3/30 = 10%
Consider a no-load mutual fund with $400 million in assets, 50 million in debt, and 15 million shares at the start of the year and with $500 million in assets, 40 million in debt, and 18 million shares at the end of the year. During the year investors have received income distributions of $.50 per share and capital gain distributions of $.30 per share. If the total expense ratio is .75%, what is the rate of return on the fund?
12.09% Since this is a no-load fund, all charges are already embedded in gross return. Thus, gross return and net return are the same. NAV0 = (400 - 50)/15 = 23.33 NAV1 = [500 - 500(.0075) - 40]/18 = 25.35 Gross return = (25.35 - 23.33 + .80)/23.33 = 12.09%
Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as ____________.
12b-1 charges
You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year?
4.23% {[(21,600)*(0.96)*(1.10)*(1-0.013)]/21,600}-1 = 4.23%
The commission, or front-end load, paid when you purchase shares in mutual funds may not exceed __________.
8.5%
Which one of the following statements about returns reported by mutual funds is not correct? -Reported returns are net of management expenses. -Reported returns are net of 12b-1 fees. -Reported returns are net of brokerage fees paid on the fund's trading activity. -None of these options. (All of the items are included in reported returns.)
None
__________ funds stand ready to redeem or issue shares at their net asset value.
Open-end
Which of the following funds is most likely to have a debt ratio of 70% or higher? -Bond fund -Commingled fund -Mortgage-backed securities -REIT
REIT
Which of the following is a false statement regarding open-end mutual funds? -They offer investors a guaranteed rate of return. -They offer investors a well-diversified portfolio. -They redeem shares at their net asset value. -They offer low-cost diversification.
They offer investors a guaranteed rate of return.
Which one of the following invests in a portfolio that is fixed for the life of the fund? -Mutual fund -Money market fund -Managed investment company -Unit investment trust
Unit investment trust
Which of the following is not a type of managed investment company? -Unit investment trusts -Closed-end funds -Open-end funds -Hedge funds
Unit investment trusts
The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________.
net asset value
Specialized-sector funds concentrate their investments in _________________.
securities issued by firms in a particular industry
The average maturity of fund investments in a money market mutual fund is _______.
slightly more than 1 month
Which of the following funds are usually most tax-efficient?
ETFs
_______ have become the main way for investors to speculate in precious metals.
Exchange-traded funds
Which of the following funds invest specifically in stocks of fast-growing companies? -Balanced funds -Growth equity funds -REITs -Equity income funds
Growth equity funds
Advantages of investment companies to investors include all but which one of the following? -Record keeping and administration -Low-cost diversification -Professional management -Guaranteed rates of return
Guaranteed rates of return
Which type of investment fund is commonly known to invest in options and futures in large scale?
Hedge funds
Which of the following typically employ significant amounts of leverage? I. Hedge funds II. REITs III. Money market funds IV. Equity mutual funds
I and II only Hedge funds & REITs
The top Morningstar mutual fund performance rating is ________.
five stars
Revenue sharing with respect to mutual funds refers to _________.
fund companies paying brokers if the broker recommends the fund to investors
A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.
hedge fund
The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company __________.
in proportion to the market value weight of the firm's equity in the S&P 500
The two principal types of REITs are equity trusts, which _______________, and mortgage trusts, which _______________.
invest directly in real estate; invest in mortgage and construction loans
Net asset value is defined as ________________________.
market value of assets minus liabilities divided by shares outstanding
SEC Rule 12b-1 allows managers of certain funds to deduct __________ expenses from fund assets; however, these expenses may not exceed __________ of the fund's average net assets per year.
marketing; 1%
The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee is applied. -Class A. -Class B. -There is no difference. -The answer cannot be determined from the information given.
Class B. Assume $100 is invested. Class A: Investment after load = $100 - .05($100) = $95 After four years = $95(1.104) = $95 × 1.4641 = $139.09 Class B: Rate of return after 12b-1 fee = 10% - 1% = 9% After four years = $100(1.094) = $100 × 1.4116 = $141.16 Class B is the better choice.
Harold has just taken his company public and owns a large quantity of restricted stock. For purposes of diversification, what fund might he help create in order to diversify his holdings?
Commingled funds
Part B of a mutual fund prospectus contains information about: I. Fund holdings by directors and officers II. Front-end and back-end loads III. Securities held by the fund at the end of the fiscal year
I and III only Fund holdings by directors and officers Securities held by the fund at the end of the fiscal year
