find 335 chapter 17

You have $10,000 to invest and you are considering investing in a fund. The fund charges a front-end load of 5.75 percent and an annual expense fee of 1.25 percent of the average asset value over the year. You believe the fund's gross rate of return will be 11 percent per year. If you make the investment, what should your investment be worth in one year?

$10,337.46

You have $12,500 to invest and you are considering investing in Fund X. The fund charges a front-end load of 3 percent and an annual expense fee of 2.25 percent of the ending asset value over the year. You believe the fund's gross rate of return will be 8 percent per year. If you make the investment, what should your investment be worth in one year?

$12,800.36 Explanation: Investment amount= 12,500 x (1-.03) = $12,125; FV1: $12,125 x 1.08 = $13,095 After expenses: $13,095 x (1-.0225) = $12,800.36

-cannot exceed 1% of average annual net assets for load funds -cannot exceed .25% of average annual net assets for no-load funds

12b-1 fees

-mutual funds generally require a small percentage of investable funds--as a fee--to meet distribution expenses and shareholder servicing costs. -fees relating to the distribution costs of mutual fund shares.

12b-1 fees

You wish to invest $17,445 in a mutual fund with a NAV of $26.03. The fund charges a front-end load of 4.50 percent. How many fund shares will you receive?

640 (1-.045) x 17,445/26.03

A fund has a NAV of $30 per share but the shares are currently selling for $32. This fund must be

A closed end fund

composed of fixed-income securities with a maturity of over one year

Bond fund

-Specialized investment companies that have a fixed supply of outstanding shares. -generally do not continuously offer their shares for sale -they sell a fixed number of shares at one time (IPO) -after which the shares typically trade on a secondary market

Closed-end investment companies

Effectively separated commercial banking from investment banking and created the Federal Deposit Insurance Corporation, among other things.

Glass-Steagall Act

composed of both stock and bond securities

Hybrid fund

Actively managed funds find it difficult to consistently earn higher risk-adjusted returns than a broad stock market index. The difference in return between actively managed funds and passively managed index funds can be explained by which of the following? I. Lower expense ratios at index funds II. Higher turnover ratios at index funds III. Differences in returns in sectors of the market and the overall market return

I and III only

ETFs have several advantages over index funds, including the ability to I. trade throughout the day at continuously updated prices. II. purchase ETF shares on margin. II. sell ETF shares short. IV. sell the shares back to the fund.

I, II, and III only

Rank the following in asset size from largest to smallest in 2013. I. Mutual funds II. Insurance companies III. Depository institutions

III, I, II

-Equity funds -bond funds -hybrid funds

Long term mutual funds

This means that the managers of the fund calculate the current value of each mutual fund share by computing the daily market value of the fund's total asset portfolio less any liabilities and then dividing this amount by the number of mutual shares outstanding.

Marked to market daily

These funds seek high returns using leverage, typically investing based on anticipated events.

Market directional (more risky)

these funds strive for moderate, consistent returns with low risk.

Market neutral (risk avoidance)

Provide an alternative investment opportunity to interest-bearing deposits at commercial banks, which may explain the increase in these in the 1980s and early 2000s

Money market mutual funds

Returns to _____ ______ investors can vary widely depending on the objective of the fund, fees charged on the fund, and general market conditions.

Mutual fund

Return for the investor in these funds reflects three aspects of the underlying portfolio and assets: First- If the portfolio earns income and dividends on those assets. Second- capital gains occur when the fund sells an asset at prices higher than the original purchase price of the asset. Third- the sale of additional fund shares and the profitable investment made with the funds from these shares can produce a capital appreciation that adds to the value of all shares in the fund.

Mutual fund return for an investor

Charge shareholders a price or fee for the services they provide (i.e., management of a diversified portfolio of financial securities)

Mutual funds cost

These are just published once a day, after markets are closed.

NAV

This is the price that the investor obtain when they sell shares back to the fund that day or the price they pya to buy back new shares in the fund on that day.

NAV

he market value of a mutual fund's assets divided by the number of fund shares outstanding is equal to the

NAV

Funds that have no up-front sales or commission charges are called

No-load funds

are attractive to investors because they provide anonymity and are not subject to U.S. taxes

Offshore hedge funds

a fund for which the supply of shares is not fixed but can increase or decrease daily with purchases and redemptions of shares

Open-end mutual fund

A closed-end investment company that specializes in investing in mortgages, property, or real estate company shares.

Real estate investment trust (REIT)

The primary regulator of mutual funds is the

SEC

Two types of fees are incurred by investors:

Sales loads and fund operating expenses

-taxable Money market mutual funds (MMMFs) -tax exempt MMMFs

Short term mutual fund

Hedge funds can short sell securities, whereas most mutual funds cannot.

True

-a fund that sells a fixed number of redeemable shares that are redeemed on a set termination date. -Have characteristics of both mutual and closed-end funds -they are generally fixed portfolios of securities.

Unit investment trust (UIT)

Occurs when brokers improperly influence investors on their fund recommendations

directed brokerage

composed of common and preferred stock securities

equity fund

Use more aggressive trading strategies than MFs such as short selling, leverage, program trading, arbitrage, and the use of derivatives.

hedge fund

-are investment pools that invest funds for (wealthy) individuals and other investors (e.g., commercial banks) -similar to mutual funds, but smaller funds under $100 million in assets are not required to register with the SEC -Subject to less regulatory oversight than mutual funds and generally can (and do) take significantly more risk than MFs -Do not have to publicly disclose their activities to third parties and thus offer a high degree of privacy

hedge funds

occur when brokers trick customers into thinking they are buying no-load funds or fail to provide discounts properly

improperly assessed fees

allegations have involved cases in which some investors were able to buy or sell mutual fund shares long after the price had been set at 4:00 PM ET each day.

late trading

-MF with an upfront sales or commission charge that the investor must pay -example: An investor who buys a mutual fund share ay be subject to a one-time sales or commission charge, sometimes as high as 5.75%

load fund

these funds have moderate exposure to market risk, typically favoring a longer-term investment strategy

market neutral or value orientation (moderate risk)

-short term trading of mutual funds that seeks to take advantage of short-term discrepancies between the price of a mutual fund's shares and out-of-date values on the securities in the fund's portfolio. -it is especially common in international funds, where traders can exploit differences in time zones

market timing

Open-end mutual funds guarantee

to redeem investor's shares upon demand at current NAV.

Hedge funds and REITS often employ significant amounts of leverage, but standard open-end mutual funds do not.

true