Chapter 4: mutual funds and other investment companies

___ of assets in an investment company allows small investors to obtain the benefits of large-scale investing

Pooling

Real Estate Investment Trusts (REITs) are best described as?

REITs are similar to a closed-end mutual funds, and invest in real estate or loans secured by real estate.

Which country would be considered a part of a global fund but not an international fund?

USA

A ____ -end load fee is paid when an investor redeems its shares of a mutual fund.

back

Asset allocation and flexible funds are similar to ___ mutual funds in that they hold both stocks and bonds.

balanced

Which of the following are common money market securities?

commercial paper treasury bills repurchase agreements

A partnership of investors that pool funds and are not formally organized as investment companies is called what type of fund?

commingled fund

12b-1 fees can be used on

commission to brokers who sell the fund to investors promotional literature advertising

With respect to taxes, mutual fund investors are treated as if they earned any income or gains _________.

directly

Mutual funds are marketed __________ by fund underwriters and ___________ by brokers.

directly indirectly

Developing nations are considered part of the ___ market

emerging

Mutual fund managers pass operating fees directly (i.e. a formal billing procedure) to mutual fund investors.

false

True or false: Active fund managers generally outperform passive fund managers (i.e. index funds).

false fail to outperform

True or false: A mutual fund is the common name of a closed-end investment company.

false should be open-end

Bond funds specialize in the ___ sector

fixed income

A ___ invests in shares of other mutual funds.

funds of funds

What are some financial intermediaries that are not formally organized or regulated as investment companies but serve similar functions?

hedge funds real estate investment trusts commingled funds

Investment companies are financial ____ that collect funds from individual investors and invest these funds in a potentially wide range of securities or other assets.

intermediaries

___-cycle funds are balanced funds in which the asset mix can range from aggressive (early on) to conservative (during the later years)

life

Because they trade large blocks of securities, investment companies can achieve _____

lower transaction costs

An index fund matches the performance of a broad ___ index

market

Asset allocation funds, actively managed, rely on ____ as the asset mix may vary significantly according to the portfolio manager's forecast.

market timing

Suppose an investment company's assets have a market value of $500 million but hold liabilities of $50 million. If there are 2.5 million shares outstanding, then the NAV equals

market value - liabilities / shares outstanding 500 - 50 / 2.5

Mutual fund 12b-1 charges cover the costs of ________ the mutual fund.

marketing

Which of the following are common hedge fund types?

merger arbitrage currency speculation

Bond funds focus on investing in which of the following securities:

mortgage-backed securities treasury bonds corporate bonds municipal bonds

For investment companies, the value of each share is called ___

net asset value

For investment companies, the value of each share is called _____

net asset value

___ expenses are the costs incurred by mutual fund administrators while managing the fund.

operating

The status of mutual fund taxation can best be described as ____ status.

pass-through

To form a unit investment trust, a brokerage firm buys a portfolio of securities which are deposited into a trust. The brokerage firm then sells to the public shares, or "units" in the trust, called ____

redeemable trust certificates

Units sold from a unit investment trust are typically referred to as

redeemable trust certificates

Which of the following are examples of balanced funds?

targeted-date funds life-cycle funds

True or false: Brokers that have revenue sharing agreements with mutual fund managers have a potentially perverse incentive to favor the funds of those fund managers.

true

True or false: Money pooled from many investors that is invested in a fixed portfolio of securities for the life of the fund is called a unit investment trust.

true

Assets under management in the U.S. mutual funds industry were almost __ in early 2019.

$18 trillion

The rate of return of a mutual fund is

Ending NAV minus beginning NAV plus any income and capital gains distributions all divided by beginning NAV

If a mutual fund that manages a portfolio of securities is worth $150 million, and the fund owes $9 million to its investment advisers and owes another $1 million for rent, wages due and miscellaneous expenses, and has 5 million shares, what is the net asset value (or cost per share)?

$28

What is the net asset value equal to?

It equals assets minus liabilities expressed on a per-share basis.

Which of the following statements does NOT describe a hedge fund.

NOT: Hedge funds in the common name for an open-end investment company. CORRECT: Hedge funds by design are empowered to invest in a wide range of investments.Hedge funds are typically open only to wealthy or institutional investors. Hedge funds are vehicles that allow private investors to pool assets to be invested by a fund manager.

Which of the following does NOT describe a "closed-end" fund.

NOT: When investors wish to "cash out" their shares, they sell them back to the fund at net asset value. CORRECT: The fund's board of directors hires a management company to manage the portfolio for an annual fee. Shares are traded on organized exchanges and can be purchased through brokers. Investors who wish to cash out must sell their shares to other investors.

Which of the following functions is NOT performed by Investment Companies.

NOT: higher transaction costs correct: record keeping and administration, professional management, diversification and divisibility, lowers transaction costs

Some intermediaries lack formal organization or regulation (i.e. unregulated) as investment companies but nevertheless serve similar functions. Which of the following is NOT an example of an unregulated intermediary?

NOT: mutual funds CORRECT: commingled funds, real estate investment trusts, hedge funds

Which of the following does NOT describe an "open-end" fund.

NOT: share may not be redeemed, but are instead traded at prices that can differ from net asset value correct: When investors want to "cash out" their shares, they sell them back to the fund at net asset value, Stands ready to redeem or issue shares at their net asset value The fund's board of directors hires a management company to manage the portfolio.

Which of the following statements is NOT true about Equity Funds.

NOT:Equity funds usually offer check-writing features and net asset value is fixed at $1 per share. CORRECT: Equity funds commonly will hold about 5% of total assets in money market securities. Equity funds are typically riskier than income funds. Equity funds invest primarily in stock.

Which of the following statements is NOT true about a money market fund.

NOT:Mutual funds commonly hold only about 5% of total assets in money market securities. CORRECT: The average maturity of mutual funds tend to be a bit more than one month. These funds invest in money market securities such as commercial paper, repurchase agreements or certificate of deposit. Money market funds usually offer check-writing features and net asset value is fixed at $1 per share.

Which of the following components are necessary to determine the rate of return of holding a mutual fund?

ending net asset value capital gains distributions from the fund income distributions from the fund beginning net asset value

Balanced funds of funds invest in __ and ___ funds in proportions suited to their investment goals

equity/stock bond/debt

A ___ fund can be traded throughout a trading session, while a(n) ___ fund can only be traded at the end of the day.

exchange trade mutual

Poorly performing mutual fund managers are _______ likely to repeat their performance the next year compared to fund managers that outperform repeating their performance.

high

An index fund that buys shares of securities

in proportion to the security's representation in the market.

Stocks funds are traditionally classified by their emphasis on capital appreciation versus current income. ____ funds tend to hold shares with high dividend yields. ____ funds focus on prospects for capital gains.

income growth

A ___fee is a sales commission associated with mutual fund investments.

load

Exchange-traded funds are offshoots of ____that allow investors to trade index portfolios just as they do shares of stock.

mutual fund

In a unit investment trust all income and payments of principal from the portfolio are paid out by the fund's ___ to the ____

trustees shareholders