fi 301 - chapter 23
___ loads often range between 5 & 6% for the first year, but then decline by a certain percentage each subsequent year
back-end
a withdrawal fee charged when money is withdrawn from a mutual fund
back-end load
some mutual funds have a ___ (also known as a rear load or reverse load), which is a withdrawal fee charged when the investor withdraws money from the mutual fund
back-end load
each mutual fund has a ___ that is supposed to represent the fund's shareholders
board of directors
common types of ___ mutual funds include income funds, tax-free funds and high-yield funds
bond
a given asset allocation fund will tend to concentrate more heavily on ___ if interest rates are expected to decline; it will focus on ___ if a strong stock market is expected
bonds, stocks
one disadvantage of ETFs is that each purchase of additional shares must be executed through the exchange where they are traded this incurs a ___ fee for each trade
brokerage
*interaction with mutual funds:* - Some money market mutual funds invest in commercial paper issued by finance companies. - Some stock and bond mutual funds invest in stocks and bonds issued by finance companies. *type of financial institution:* ___
finance companies
in some cases, ___ funds offer various discounts that reduce the percentage load for larger investments
front-end load
mutual funds that contain a combination of growth stocks, high-dividend stocks, and fixed-income bonds
growth & income fund
some investors are looking for potential capital appreciation along with some stability in income; for these investors a ___ may be most appropriate
growth & income fund
type of stock mutual funds: - large caps, mid-caps, small caps - hybrid
growth & income funds
for investors who desire a high return & are willing to accept a moderate degree of risk, ___ are appropriate
growth funds
mutual funds containing stocks of firms that are expected to grow at a higher than average rate they are appropriate for investors who are willing to accept a moderate degree of risk
growth funds
type of stock mutual funds: small & mid-caps stocks: - market capitalization, how big they are > Apple is the biggest market cap stock - mid cap worth less than 10 billion - small cap is smaller than 2 billion market cap
growth funds
___ differ from open-end mutual funds in that they: - require a much larger initial investment - they are "close ended"
hedge funds
___ invest in a variety of instruments to achieve high returns
hedge funds
___ sell shares to wealthy individuals & financial institutions & use the proceeds to invest in securities
hedge funds
___ sell shares to wealthy individuals and financial institutions and use the proceeds to invest in securities they are subject to minimal regulation and commonly pursue investments that can achieve high returns but are also exposed to a high degree of risk
hedge funds
type of bond mutual funds: - junk bonds - pay higher (8, 10, 12%) - good diversifier, take more risk
high-yield (junk) bond funds
mutual funds composed of bonds that offer high yields (junk bonds) and have a relatively high degree of credit risk
high-yield funds (or junk bond funds)
___ such as asset allocation funds and target date funds combine stock and bond investments
hybrid funds
hedge funds also charge an ___ fee that is based on the return of the fund; this is typically 20% of the return
incentive
for investors who are mainly concerned with stability of income rather than capital appreciation, ___ are appropriate
income funds
mutual funds composed of bonds that offer periodic coupon payment
income funds
type of bond mutual funds: typical funds, pay you income over time (coupon payments)
income funds
mutual funds distributions to shareholders: mutual fund share price appreciation; as the market value of a fund's security holding ___, the funds ___ increases, & the shareholders ultimately benefit when they sell their mutual fund shares
increases, NAV
mutual funds that are designed to match the performance of an existing stock index
index fund
___ are composed of stocks that, in aggregate, are expected to move in line with a specific index
index funds
type of stock mutual funds: - put at least 20% of your 401k - stocks built like an index - help you make or lose the market average
index funds
the majority of mutual fund assets are owned by ___ investors this is because they have a ___, meaning investors can invest in a diversified portfolio with just a ___ investment
individual, low buy-in, small
*interaction with mutual funds:* - Some stock mutual funds invest in stocks issued by insurance companies. - Some insurance companies have investment company subsidiaries that offer mutual funds. - Some insurance companies invest in mutual funds. *type of financial institution:* ___
insurance companies
___ ended: bond that can create shares or liquidate shares everyday ___ ended: not as liquid, don't always accept additional investments or accommodate redemption requests
open, close
mutual funds are sometimes referred to as ___ because they are open to investors, meaning that they will sell to investors at any time
open-end funds
mutual funds that are willing to repurchase the shares they sell from investors at any time
open-end funds
international & global bond funds: why might we place a % of our 401k here? - if we felt like we need to diversify ___ of the US
out
difference between dividends paid and dividends received? dividends paid: mutual funds ___ dividends to their shareholders dividends received: stock will ___ them dividends
pay, give
mutual funds pass their expenses to shareholders what are these expenses?
payroll to investment managers, clerical people, advertisements
*interaction with mutual funds:* - Pension funds invest in mutual funds, and employer-administered pension funds allow employees to invest in specific mutual funds. *type of financial institution:* ___
pension funds
in some cases, mutual funds have used the proceeds from ___ to pay commissions to brokers whose clients invested in the fund
12b-1
some mutual funds charge shareholders a ___ as part of the fund's annual expenses to cover administrative or marketing expenses
12b-1 fee (named for SEC rule 12b-1)
hedge funds charge a management fee of between 1 & ___ of the investment per year
2%
why do most of us invest in mutual funds? - through our ___, the government requires us: they don't want us investing all of our stocks in our ___ funds & losing it all - you can do ___ of index funds, international funds, etc.
401k, retirement, percentages
a mutual fund must distribute at least ___ of its taxable income to shareholders if it is to be exempt from taxes on dividends, interest, & capital gains distributed to shareholders the ___ are then subject to taxation on these forms of income
90%, shareholders
regulatory reform of hedge funds: 1. the Financial Reform Act of 2010 ( ___ ) contained provisions to stabilize the financial system 2. mandates that hedge funds managing more than ___ million register with the SEC as investment ___ 3. must also disclose financial data that can be used by the Financial Stability Oversight Council (created by the Financial Reform Act) in order to asses systematic ___ in the financial system 4. prevents commercial banks from investing more than ___ of their capital in hedge funds, private equity funds, or real estate funds. why? - too ___ - hedge funds used to have very little ___
Dodd-Frank, $100, advisors, risk, 3%, risky, regulation
___ & ___ wouldn't be involved in federal funds; mutual funds wouldn't be involved in that process because that's when banks loan to each other
FFR, BA
___: - Bernard Madoff managed a large and well-respected hedge fund that included various institutions, charities, and wealthy individuals among its investors - Madoff admitted that he had been periodically using money from new investors to pay off investors who wanted to cash out of the fund - The potential losses to investors were estimated to be as high as $50 billion, making this possibly the biggest financial scandal in U.S. history
Madoff Fund Scandal
the ___ per share of a mutual fund represents the price at which investors can purchase shares or can sell shares back to the mutual fund
NAV (net asset value)
net asset value (NAV) formula
NAV = Market Value / # Shares Outstanding (Market Value = Total MV of Assets + I and D Received - Expenses and any D Paid)
mutual funds that do not have a sales charge, meaning that they are not promoted by brokerage firms
no-load funds
a mutual fund is usually run by ___ whose owners are ___ from the shareholders in the mutual fund
an investment company, different
___ contain a variety of investments (such as stocks, bonds, & money market securities); typical hybrid fund the portfolio managers adjust the compositions of these funds in response to expectations
asset allocation funds
mutual funds price changes once a day - because they take ___ & ___ shares each day - we find out after the market closes because they need the prices of all the stocks they own: ___
away, add, net asset value
also know as aggressive growth funds, ___ are composed of stocks that have potential for very high growth but may also be unproven
capital appreciation funds
funds suited to investors who are willing to risk a possible loss in value
capital appreciation funds
mutual funds composed of stocks of firms that have potential for very high growth but may be unproven
capital appreciation funds
type of stock mutual funds: - aggressive growth funds - small cap stocks: need room to grow & need prices to rise > exon
capital appreciation funds
mutual funds that do not repurchase the shares they sell
closed-end funds
securities designed to mimic particular stock indexes or sectors & traded on a stock exchange just like stocks
exchange-traded funds (ETFs)
___ are similar to mutual funds, except that they are closed to new investors and to redemptions and their shares are traded on a stock exchange ___ are designed to mimic particular stock indexes or sectors and are traded on a stock exchange ___ are closed-end funds that invest in real estate or mortgages
closed-end funds, exchange-traded funds (ETFs), real estate investment trusts (REITs)
some mutual funds are owned by ___, in which case bank customers can switch their savings between bank deposits & mutual funds
commercial banks
*interaction with mutual funds:* - Money market mutual funds invest in certificates of deposit at banks and SIs, and in commercial paper issued by bank holding companies. - Some commercial banks (such as Citigroup) have investment company subsidiaries that offer mutual funds. - Some stock and bond mutual funds invest in securities issued by banks and SIs. *type of financial institution:* ___
commercial banks & savings institutions (SIs)
___, CDS, & repurchase agreements are the most widely held components of ___
commercial paper, money market funds
mutual funds pass on their expenses to their shareholders; these expenses include: - ___ to the portfolio managers & other employees - ___ support - record-keeping & ___ fees - ___ fees
compensation, research, clerical, marketing
mutual funds also have a ___ who is supposed to ensure that the fund's operations are in line with its objective and guidelines for trading
compliance officer
regardless, mutual funds can become activist investors what does that mean and why can they? they can ___ companies & give them ___ mutual funds are some of the ___ shareholders in stock
criticize, advice, largest
the higher the ___ ratio, the lower the ___ for a given level of portfolio performance
expense, return
mutual funds distributions to shareholders: pass on any earned income (from ___ or ___) as dividend payments to the shareholders
dividends, coupon payments
funds can generate returns to their shareholders in three ways how is this different from a stock or bond? 1. earned income passed on - ___ on stock & coupon on bond ( ___ ) 2. capital gains - sales of those other investments & make ___ on the sales 3. price appreciation - ___ in value of the mutual fund shares ( ___ )
dividends, same, profits, increase, same
asset allocation funds: typical hybrid fund; why call it hybrid? - invest in stocks & bonds & money markets - a little of ___
each
mutual funds can generate returns to their shareholders in three ways: 1. ___ passed on 2. ___ gains 3. price ___
earned income, capital, appreciation
real estate investment trusts (REITs) can be classified as: - ___ REITs: invest in physical properties - ___ REITs: invest in mortgages & MBS - ___ REITs: invest in both (very few of these)
equity, mortgage, hybrid
portfolio managers may maintain a small amount of cash for liquidity purchases if the number of redemptions ___ the sales of shares at a given point in time, the managers can use this cash to cover the ___ if the cash is not sufficient to cover the ___, they sell some of their holdings of ___ to obtain the cash they need
exceeds, redemptions, redemptions, securities
international & global stock funds: international & global mutual funds have historically included stocks from several different countries to ___ the portfolio's exposure to economic conditions in any single foreign economy although the potential return from such a strategy is ___, so is the ___, because the entire portfolio is sensitive to a single economy
limit, greater, risk
___ are promoted by registered representatives of brokerage firms, who earn a sales charge upon the investment in the fund (commonly referred to as a front-end load) ranging between 3 and 8.5%
load funds
mutual funds that have a sales charge imposed by brokerage firms that sell the funds
load funds
mutual funds may be either ___ funds or ___ funds
load, no-load
what do money market funds mean for investors with regards to risk & return?
low risk & low return
management of ETFs: - not actively ___ - not trying to outperform an existing ___ why are they less diverse than open-ended mutual funds? - they only hold say 25 stocks rather than 75 stocks in a mutual fund - make ___ returns at a ___ price
managed, index, higher, cheaper
what is a 12b-1 fee?
marketing fee
the main difference between money market funds and mutual funds is that ___ funds focus their investment in money market securities
money market
___ invest in short-term securities, such as commercial paper, repos, CDs, and Treasury bills the expected returns on these are relatively low, but so are the risk levels
money market funds (MMFs)
___ sells shares to individuals and use the proceeds to invest in money market (short-term) instruments for their investors
money market mutual funds (MMFs)
a mutual fund composed of different mutual funds
multi-fund mutual fund
type of stock mutual funds: - fund that owns other mutual funds > excess fees
multifund funds
investors in high tax brackets have historically purchased ___ as a way to avoid taxes mutual funds containing these allow investors in high tax brackets to avoid taxes while maintaining a low degree of credit risk
municipal bonds
an investment company that sells shares representing an interest in a portfolio of securities
mutual fund
an investment fund that diversifies our portfolio (generally need $2500 to buy into)
mutual fund
___ accommodate financing needs of corporations, the Treasury, and municipal governments by purchasing newly issued stocks and bonds in the primary market they also frequently purchase securities in the secondary market they enable individual investors to diversify their investments with a limited amount of funds
mutual funds
___ serve as a key financial intermediary
mutual funds
financial characteristic used to describe a mutual fund's value per share; estimated as the market value of the securities composing the mutual fund, plus any accrued interest or dividends, minus any expenses this value is divided by the number of shares outstanding
net asset value (NAV)
the price per share of a mutual fund is equal to the ___ per share, which represents the value of the portfolio (per share) after accounting for expenses incurred from managing the fund
net asset value (NAV)
___ are promoted strictly by the mutual fund of concern, thereby avoiding an intermediary
no-load funds
a closed-end fund that invests in real estate or mortgages
real estate investment trust (REIT)
___: mutual funds may be referred to as either a load fund or a no-load fund
sales charge
How are exchange-traded funds different than specialty funds and index funds? - ___: area (tech, financial, industrial, energy, medical) - making a fund that is picking an area or an index & then ___ - it is less ___ (only about 20 stocks) - you cannot buy ___ from them everyday - you trade them in between ___ - not actively ___ (change their holdings very infrequently) - ___ expensive
sector, trading, diversified, stocks, investors, managed, less
mutual funds distributions to shareholders: can distribute the capital gains resulting from the sale of ___ within the fund
securities
*interaction with mutual funds:* - Mutual funds hire securities firms to execute security transactions for them. - Some mutual funds own a discount brokerage subsidiary that competes with other securities firms for brokerage services. *type of financial institution:* ___
securities firms
mutual funds pass on their expenses to their ___
shareholders
what does the term "open end" mean? - can create ___ & ___ shares on any day - you trade with the mutual fund ___: they use money to buy their investments & diversify - you can have ___ shares
shares, liquidate, itself, partial
what types of investing do hedge funds do? 1. exotic types of investments: gamestop, short sale stock, investing on margin - ___ : you hope the price goes down - tend to make ___ 2. you have to pay the ___ first 3. ___ leverage: borrowing money to invest 4. trade ___: speculate on oil, price of gold 5. when you overprice trade you are trying to find a price ___ in the market (like a merger) - big ___: they can lose it all
short sale, big returns, loan, financial, derivatives, inefficiency, risk
ETFs can be sold ___ what does this mean? - you can bet ___ that sector
short, against
mutual funds that focus on a group of companies sharing a particular characteristic
specialty funds
type of stock mutual funds: - invest in a sector - sector: specialty like tech, financials, health care, etc.
specialty funds
based on the market value of assets, ___ mutual funds are dominant
stock
the more common types of ___ include capital appreciation funds, growth and income funds, international and global funds, specialty funds, index funds, and multi-fund funds common types of ___ include income funds, tax-free funds, high-yield funds, and international and global funds
stock mutual funds, bond mutual funds
mutual funds are typically classified as: -___ (or ___) mutual funds: they own stocks - ___ mutual funds: own bonds - ___ funds: money market investments (repos, treasuries)
stock, equity, bond, money market
mutual funds sometimes purchase ___ or ___ newly issued by financial institutions in this way they partially finance the expansion of those institutions
stocks, bonds
international & global stock funds: as a foreign currency's value ___ against the US dollar, the value of the foreign stock as measured in US dollars increases thus, US investors can benefit not only from ___ stock prices but also from a ___ foreign currency (against the dollar)
strengthens, higher, strengthened
funds that are designed to automatically change the proportions of stocks and bonds as the investor ages
target date funds
for ___: the idea is that younger investors should have a higher proportion of ___, whereas older investors need income as they retire and therefore should hold a higher proportion of ___
target date funds, stocks, bonds
type of bond mutual funds: municipal bonds
tax-free funds
international & global bond funds: when the foreign currency dominating the bonds ___, the translated dollar value of these bonds will decrease
weakens
target date funds: - based on your age, aggressive growth when your ___ & income funds when your ___ - typically, people's ___ preferences change over time
young, old, risk