Investment Vehicles: Management Companies

In order to be regulated under Subchapter M of the IRS Code, at least how much of the Net Investment Income must be distributed to the mutual fund shareholders?

90%

A growth fund would likely invest in which of the following securities? Non-convertible corporate bonds Government bonds Convertible bonds Preferred stocks

Convertible bonds Growth funds would likely invest in common stocks for capital gains; they could also invest in convertible bonds, since they are an "equivalent" to the common stock; and if the common stock price rises substantially, their price will rise as well (because the market will force them to trade at parity with each other). Preferred stocks and non-convertible bonds give a higher rate of current income; but little in the way of capital gains potential (unless interest rates fall by a large amount). In this case, the fund manager is not attempting to profit from market interest rate moves - he or she is simply attempting to select stocks that have excellent growth potential.

An investor in a "Ginnie Mae" mutual fund assumes which of the risks? I Prepayment Risk II Extension Risk III Fluctuation of Net Asset Value IV Reinvestment Risk

I, II, III, IV

A mutual fund that is "no-load" is purchased at:

NAV Net Asset Value No-Load mutual funds do not have a sales charge. In this case, the NAV (Net Asset Value) and the POP (Public Offering Price) are the same. Any shares are purchased at NAV, with no additional commissions charged because each share is newly issued.

A retired investor seeks safety of principal and current income. All of the following funds would be suitable recommendations EXCEPT: Government Bond Fund Special Situations Fund Money Market Fund Insured Corporate Bond Fund

Special Situations Fund

Why do investors obtain the benefit of diversification with an investment in a mutual fund?

The investor owns an undivided interest in a portfolio of investment securities

A retired investor seeks monthly income along with preservation of capital and minimum risk. Which of the following funds would be a suitable recommendation?

U.S. Government securities fund To meet the objectives of minimum risk and income, a government securities fund is suitable, since these securities are considered to be risk free; and provide current interest income. Special situation funds invest in companies that are in bankruptcy or "in trouble," but that have created a turnaround plan. The gains are expected to be so large on the successful turnarounds that the shareholders will enjoy capital gains. Such funds have no or little income. Similarly, the principal objective of a growth fund is capital gains; not income. Specialty funds invest in one industry or geographic area; and the lack of diversification increases risk. Since this customer wants minimum risk, these are not suitable recommendations.

The sponsor of a mutual fund is also known as the:

Underwriter

The Value Line Index fund consists of:

all companies included in the Value Line Investment Survey

A mutual fund which invests in common stocks, preferred stocks, and bonds of companies in various industries is known as a(n):

balanced fund

A customer buys 100 shares of an investment company and pays a commission. The customer MUST have purchased a(n):

closed-end fund

Which of the following investment company securities is NOT redeemable? open-end fund shares closed-end fund shares fixed unit investment trusts non-fixed unit investment trusts

closed-end fund shares

A growth fund would likely invest in which of the following securities? common stocks preferred stocks corporate bonds government bonds

common stocks

A Special Situations Fund invests in:

companies undergoing a takeover or bankruptcy

The most important consideration in determining whether a mutual fund is suitable for a customer is the fund's:

investment objective

The primary function of the custodian bank is to:

safekeep the assets of the fund

All of the following statements concerning open-end management companies are correct EXCEPT their shares: are issued continually to investors; are redeemed continually from investors; are redeemed at net asset value; trade over-the-counter or on the stock exchanges;

trade over-the-counter or on the stock exchanges

A mutual fund has a beginning of year Net Asset Value (NAV) per share of $100. During the year, the fund has Net Investment Income (NII) of $3 per share. At the end of the year, the fund distributes $2 per share in dividends to its shareholders. The end of year NAV per share is:

$101 The Net Investment Income of $3 per share is added to year beginning NAV, bringing the NAV per share up to $103. When the fund distributes the dividend of $2, this comes out of NAV, so the year ending NAV is $103 - $2 = $101.

When comparing closed-end management companies to open-end management companies, which statement is TRUE?

A closed-end company's shares are publicly traded; an open-end company's shares are not

When comparing open-end and closed-end investment companies, which statement is TRUE?

A closed-end company's shares are publicly traded; an open-end company's shares are not

Which investment company issue is NOT redeemable?

Closed-end company shares Closed-end company shares are not redeemable. After the initial public offering, the books of the company are closed to new investment and the shares are listed on an exchange trade like any other security. In contrast, open-end fund (mutual fund) shares are redeemable. They do not trade.

The financial news media quote Goofy Fund with a bid price of $8.10 and an ask price of $8.75; and Chipmunk Fund at a net asset value per share of $11.05 and a market price of $10.20. Which of the following statements concerning these funds is most likely correct? Goofy Fund is a unit investment trust and Chipmunk Fund is a mutual fund Both funds are open-end investment companies but Chipmunk Fund is a no-load fund Goofy Fund is a closed-end investment company and Chipmunk Fund is a mutual fund Goofy Fund is an open-end investment company and Chipmunk Fund is a closed-end investment company

Goofy Fund is an open-end investment company and Chipmunk Fund is a closed-end investment company

Which of the following statements concerning closed-end management companies are TRUE? Closed-end management company shares: I are issued in a one-time offering II trade in the secondary market III are continuously issued IV are continuously redeemed

I and II only Closed-end management companies have a one-time stock issuance; the books of the company are closed to new investment; and then the shares are listed and trade like any other stock.

The investment adviser performs which of the following functions? I Sending dividend and capital gains distributions to shareholders II Selecting the securities to be purchased in the portfolio of investments III Selecting the securities to be sold from the portfolio of investments IV Selecting the brokers to sell the fund shares

II and III only The investment adviser manages the fund within its stated objective, deciding which securities to buy into the portfolio; and which securities to sell from the portfolio. The paying agent (usually the custodian bank) sends payments. The sponsor of the fund selects the brokers that will sell that fund's shares.

Which of the following statements are true regarding a Standard and Poor's 500 Index fund? I The portfolio manager can decide to invest in any stock as long as it is included in the Standard and Poor's 500 Index II The portfolio manager must change the composition of the fund if the stocks included in the index are changed III The fund must weight its investments in the same manner as the Standard and Poor's 500 index is weighted IV The management fee for such a fund is typically lower than for an actively managed fund

II, III, IV

Open-end investment companies may: I issue preferred stock II issue bonds III borrow against fund assets

III only

An advantage of a closed end fund is that the shares can trade at a price that is lower than the NAV of the securities held within the fund. This is referred to as the:

discount

The investment adviser in a mutual fund determines all of the following EXCEPT: purchases of securities into the portfolio; sales of the securities from the portfolio; percentage of cash or equivalents held in the portfolio; investment objective of the fund;

investment objective of the fund

Based on a client's investment objectives and needs, an IAR allocates the client's funds into Treasury bills, commercial paper, banker's acceptances, repos and swaps. If the IAR used a passive investment approach, a similar portfolio construction could be achieved by investing in a(n):

money market fund

An investor wishes to buy mutual fund shares with the primary objective of aggressive growth. Based on this information, the appropriate recommendation is a:

sector fund

Subchapter M

the IRS regulation governing the taxation of investment companies and REITs. If a mutual fund distributes 90% or more of its net investment income to shareholders, then it is considered to be a "regulated" investment company under Subchapter M and the fund is taxed only on the retained income. Thus, the shareholders' dividend distributions are only taxed at the shareholder level. If a Real Estate Investment Trust (REIT) distributes 90% or more of its net investment income, then it is "regulated" as well. If less than the percentages specified above is distributed, then the investment company is not "regulated" and would be taxed on the full amount of its net investment income. Because of this, all investment companies maintain "regulated" status.

All of the following statements are true regarding a Standard and Poor's 500 Index fund EXCEPT: the portfolio manager can decide to invest in any stock as long as it is included in the Standard and Poor's 500 Index; the portfolio manager must change the composition of the fund if the stocks included in the index are changed; the fund must weight its investments in the same manner as the Standard and Poor's 500 index is weighted; the management fee for such a fund is typically lower than for an actively managed fund;

the portfolio manager can decide to invest in any stock as long as it is included in the Standard and Poor's 500 Index

Which statement concerning closed-end investment companies is TRUE? Shares are: issued continually to investors; redeemed continually from investors; redeemed at net asset value; traded over-the-counter or on the stock exchanges;

traded over-the-counter or on the stock exchanges Closed-end management companies have a 1-time stock issuance; the books of the company are closed to new investment; and then the shares are listed and trade like any other stock.