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a withdrawal fee charged when money is withdrawn from a mutual fund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