Chapter 4

a. $17.10 b. $15.39 c. A fund may trade at a discount because of a poor record of prior performance or because of heavy investments in an unpopular industry.

1. The Twenty-First Century closed-end fund has $350 million in securities, $8 million in liabilities, and 20 million shares outstanding. It trades at a 10 percent discount from net asset value (NAV). a. What is the net asset value of the fund? b. What is the current price of the fund? c. Suggest two reasons why the fund may be trading at a discount from net asset value.

a. $51.50 b. %54.08 c. A fund may trade at a premium because of the quality of management, the nature of its investments, or the fact that it has holdings in unlisted securities or securities of private companies that are believed to be undervalued on its books.

2. The New Pioneer closed-end fund has $520 million in securities, $5 million in liabilities, and 10 million shares outstanding. It trades at a 5 percent premium above its net asset value (NAV). a. What is the net asset value of the fund? b. What is the current price of the fund? c. Why might a fund trade at a premium above its net asset value?

$54.59

3. In problem 2, if New Pioneer converted to an open-end fund trading at its net asset value with a 6 percent load (commission), what would its purchase price be?

Since the fund is trading at its net asset value of $51.50, it is a no-load fund.

4. In problem 2, if New Pioneer converted to an open-end fund and traded at $51.50, would it be a load or no-load fund?

a. $0.53 b. 5.73% c. 6.08% d. There is no evidence of superior performance. e) Through a management fee (plus expenses) that normally equals about .75 to 1.25 percent of the assets managed. Load funds have similar fee structures.

5. An open-end fund is set up to charge a load. Its net asset value is $8.72, and its offer price is $9.25. a. What is the dollar value of the load (commission)? b. What percentage of the offer price does the load represent? c. What percentage of the net asset value does the load represent? d. Do load funds necessarily outperform no-load funds? e. How do no-load funds earn a return if they do not charge a commission?

a. ($69) b. 6.08%

6. In problem 5, assume the fund increased in value by $0.30 the first month after you purchased 300 shares. a. What is your total dollar gain or loss? (Compare the total current value with the total purchase amount.) b. By what percentage would the net asset value of the shares have to increase for you to break even?

a. 2.91% b. $13.37 c. $3.07 d. 29.81%

7. a. If you purchased a low-load fund at $10.30 and it had a net asset value of $10.00, what is the percent load? b. If the fund's net asset value went up by 33.72 percent, what would its new net asset value be? c. What is your dollar profit or loss per share based on your purchase price? d. What is your percentage return on your purchase price?

23.82%

8. An investor buys Go-Go Mutual Fund on January 1 at a net asset value of $21.20. At the end of the year, the price is $25.40. Also, the investor receives $0.50 in dividends and $0.35 in capital gains distributions. What is the total percent return on the beginning net asset value?

2.58%

9. Dan Herman purchases the Ivy Tower New Horizon Fund at a net asset value of $11.25. During the year, he receives $0.50 in dividends and $0.14 in capital gains distributions. At the end of the year, the fund's price is $10.90. What is the total percentage return or loss on the beginning net asset value?

no charge upon purchase, and a declining charge, based on time owned, on sale.

A back-end load fund has: A. no charge upon purchase, but a fixed charge upon sale. B. a smaller charge on purchase, and another small charge again on sale. C. no charge upon purchase, and a declining charge, based on time owned, on sale. D. Two of the above

the quality of fund management

A closed-end fund might trade at a premium due to: A. the quality of fund management. B. an upcoming dividend payable to the portfolio. C. an impending stock split in the portfolio. D. a closed-end fund would never trade at a premium.

A and C

A closed-end fund might trade for less than net asset value if: A. the fund has a poor record of prior performance. B. it is a new fund trying to attract new investors. C. it is heavily invested in an unpopular industry. D. A and C

False

A closed-end fund stands ready to buy your shares back at all times.

how the shares are distributed and redeemed.

A closed-end fund versus an open-end fund refers to: A. whether there is a substantial penalty for early withdrawal. B. the maturity date of the shares. C. how the shares are distributed and redeemed. D. the limitation of upside potential and downside risk.

A and B

A load is: A. a commission paid to a selling agent. B. paid directly from investors' capital. C. typically 3% to 4% on a stock fund. D. A and B

an index fund.

A mutual fund in which the portfolio is weighted exactly like the Standard and Poor's 500 Index, or any other market measure is called: A. a stock fund. B. a balanced fund. C. an index fund. D. a market fund.

efficient diversification.

Advantages of mutual funds include: A. mutual funds outperform the market, on average. B. efficient diversification. C. exceptionally low level of risk. D. All of the above

True

An important consideration with an open-end fund is whether it is a load fund or a no-load fund.

False

Assuming no reinvestment, the total return on mutual fund shares is the total ending value of your shares, divided by the total beginning value of your shares.

True

Closed-end funds have a fixed number of shares; open-end funds do not.

NAV-discount or NAV+premium

Current price of a fund equation

True

Exchange-traded funds (ETFs) are similar to index mutual funds, but they trade on stock exchanges like common stock.

B and C

In a closed-end mutual fund, shares are traded: A. through brokers. B. on an exchange. C. between shareholders. D. B and C

True

Index funds are created to imitate a popular stock index such as the S&P 500 Index.

False

Load mutual funds outperform no-load funds.

(Total market value of securities-Liabilities)/Shares outstanding

Net Asset Value (NAV) equation

is the value of the securities minus the liabilities, divided by the number of shares outstanding.

Net asset value A. is the value of the securities minus the liabilities, divided by the number of shares outstanding B. is the price at which the shares of a closed-end fund trade. C. is the value of the fund's year's earnings, divided by the total amount invested in the fund. D. A and B

A and C

One can purchase shares in a closed-end mutual fund A. from shareholders. B. directly from the fund at all times. C. directly from the fund at inception. D. A and C

False

Open-end funds often sell at a discount to net asset value.

True

Shares of a closed-end fund trade on an exchange, just like stocks.

True

The chief disadvantage of front-end load funds is that the investor has less money to invest after commissions.

no-load funds do not charge commissions, and are sold directly by the investment company.

The difference between a load fund and a no-load fund is that: A. no-load funds do not charge commissions, and are sold directly by the investment company. B. load funds do not charge commissions, and are sold directly by the investment company. C. no-load funds charge higher commissions than load funds. D. no-load funds charge lower commissions than load funds.

All of the above

The mutual fund prospectus provides information about A. the fund's investment objectives. B. shareholder services. C. the current portfolio. D. All of the above

False

The prospectus is designed to provide a broad overview of the mutual fund, but is not required to disclose its investment focus or the investment style that it represents.

True

The smart investor will compare the portfolio of a fund to its stated objectives.

They are open-ended funds that have reasonably low sales expenses

Which is not an advantage of exchange-traded funds (ETFs)? A. Their expense ratios are lower than mutual funds B. Because they imitate an index, there are no real research costs C. They can be bought and sold all day long at a price that is almost exactly the net asset value of the stocks in the index D. The assets in the portfolio are marked to market continuously E. They are open-ended funds that have reasonably low sales expenses

Mutual funds provide more diversification than investing in individual securities.

Which of the following is not a disadvantage of investing in mutual funds? A. They do not outperform the market as a group B. Some mutual funds may be expensive to purchase C. Mutual funds provide more diversification than investing in individual securities. D. With 5,000 funds to choose from, the selection of a fund is just as difficult as selecting an individual stock

Closed-end funds

________ have a fixed supply of shares, which often trade at a discount from the market value of assets held. A. Stock funds B. Bond funds C. Closed-end funds D. Open-end funds