Deck 7: Investment Companies and Exchange Traded Funds

Question 1

Financial intermediaries can provide six economic functions. Which of the below is NOT one of these?

A) risk reduction via diversification
B) lower costs of contracting and processing information
C) a payments mechanism
D) illiquidity

Answer 1

D

Question 2

There are three types of investment companies: ________.

A) open-end funds, closed-end funds, unit funds
B) open-end trusts, closed-end trusts, unit trusts
C) open-end funds, closed-end funds, unit trusts
D) unit-end funds, closed-end funds, open-end trusts

Answer 2

C

Question 3

Stock funds differ by ________.

A) the minimum market capitalization, style, and sector
B) the average market capitalization, style, and sector
C) the maximum market capitalization, style, and sector
D) None of these

Answer 3

B

Question 4

________, commonly referred to simply as mutual funds, are portfolios of securities, mainly stocks, bonds, and money market instruments.

A) Open-end funds
B) Closed-end funds
C) Unit trusts
D) Unit-end funds

Question 5

A concept that revolutionized the fund industry and benefitted many investors is what the mutual fund industry calls a ________, a group of funds or a complex of funds provided by the same fund company.

A) group of funds
B) benefit funds
C) family of funds
D) complex funds

Question 6

Which of the below statements is FALSE?

A) The operating expense, also called the expense ratio, is debited annually from the investor's fund balance by the fund sponsor.
B) The management fee, also called the investment advisory fee, is the fee charged by the investment advisor for managing a fund's portfolio.
C) While covering the annual operating expenses, the fund prospectus does not provide the fees, which are imposed only at the time of a transaction.
D) In 1980, the SEC approved the imposition of a fixed annual fee, called the 12b-1 fee, which is, in general, intended to cover distribution costs, including continuing agent compensation and manufacturer marketing and advertising expenses.

Question 7

Mutual funds must distribute at least ________ of their investment income in order to avoid taxation at the fund level.

A) 60%
B) 70%
C) 80%
D) 90%

Question 8

There are two types of costs borne by investors in mutual funds: the first cost is the shareholder fee and the second cost is the annual fund operating expense. Which of the below descriptions relate to the second cost?

A) the expense ratio, which covers the fund's expenses and occurs on all funds
B) the "one-time" charge debited to the investor for a specific transaction
C) the charge based on the way the fund is sold or distributed
D) the charge that covers the purchase, redemption, or exchange

Question 9

The shares of a ________ are very similar to the shares of common stock of a corporation in that the new shares are initially issued by an underwriter for the fund and after the new issue, the number of shares remains constant.

A) closed-end funds
B) unit-end funds
C) open-end trusts
D) opened-end fund

Question 10

An investment company is a financial intermediary in that it pools the funds of ________ and uses these funds to buy ________.

A) institutional investors; portfolios of securities
B) individual investors; individual securities
C) institutional investors; individual securities
D) individual investors; portfolios of securities

Question 11

Many mutual fund families often offer their funds with three share classes: A, B, and C. Which of the below correctly describes these three classes?

A) A shares: closed-end loads; B shares: opened-end loads; C shares: level-end loads
B) A shares: front-end loads; B shares: back-end loads; C shares: level loads
C) A shares: back-end loads; B shares: front-end loads; C shares: level loads
D) A shares: front-end loads; B shares: middle-end loads; C shares: back-loads

Question 12

The ________ provides purchasers of new issues of securities with information regarding the issuer and, thus, helps prevent fraud.

A) Investment Company Act of 1940 ("the '40 Act")
B) Investment Advisors Act of 1940
C) Securities Act of 1934 ("the '34 Act")
D) Securities Act of 1933 ("the '33 Act")

Question 13

Suppose that a mutual fund with 10 million shares outstanding has a portfolio with a market value of $430 million and liabilities of $30 million.

A) $20
B) $40
C) $60
D) $80

Question 14

In order to meet investor needs, mutual funds offered in the market differ by a variety of measures. Which of the below is not ONE of these?

A) asset category
B) management style
C) management segment
D) market segment

Question 15

Two decades ago, sales charges on mutual funds were related to the manner of distribution. Which of the below types characterize the two types of distribution?

A) sales force and direct
B) sales force and wholesale
C) sales force and indirect
D) wholesale and indirect

Question 16

A decade ago, many observers speculated that load funds would become obsolete. But, the actual trend has been quite different. Which of the below is offered as a reason for load funds maintaining a costly fee?

A) Many investors have remained dependent on the investment counsel and service
B) Investors do not pay attention to fees and so do not care
C) Many investors have remained dependent on the initiative of the sales agent
D) Sales-force distributed funds have shown considerable ingenuity and flexibility in imposing sales charges

Question 17

A rule called " ________" or "Plain English Disclosure" was enacted on October 1, 1998, to improve the readability of the fund prospectus and other fund documents.

A) prospectus simplification
B) prospectus generalization
C) prospectus modification
D) prospectus overview

Question 18

A ________ is not active in trading of the bonds in the portfolio, have a fixed termination date, and are common in Europe.

A) closed-end fund
B) opened-end fund
C) whole fund
D) unit trust

Question 19

The Investment Company Institute (ICI) has developed a measure that combines a fund's annual expense ratio and the annualized sales charge investors pay for one-time sales loads. From 1980 to 2006, this measure declined. There were three reasons for this decline. Which of the below is NOT one of these?

A) Loads in general declined and investors have shifted to lower load funds.
B) The growth in no-load mutual funds have contributed to this decline.
C) Mutual fund expenses have declined due to economies of scale and intense competition in the mutual fund industry.
D) Investors have gotten wiser and avoided companies by understanding all costs even those hidden.

Question 20

Mutual funds may be included in several different investment vehicles. One vehicle is often referred to as a nonqualified vehicle because it ________.

A) does not qualify for auto taxes.
B) does not qualify for reduced management fees.
C) does not qualify for investment fees.
D) does not qualify for tax advantages.

Question 21

The major alternatives to mutual funds are ________.

A) exchange-traded funds.
B) segregated accounts.
C) "folios."
D) All of these

Question 22

The open-end aspect of mutual funds is ________; that is, investors invest funds directly in or withdraw funds from the mutual fund. The open-end aspect of ETFs is ________ in that the investors buy the ETF in a closed-end manner like closed-end funds and then the authorized participant ________ between the ETF and the underlying portfolio, providing the indirect open-end aspect of the ETF.

A) direct; straight; trades
B) direct; straight; arbitrages
C) indirect; direct; trades
D) direct; indirect; arbitrages

Question 23

The role of the ________ is to represent the fund shareholders by jointly overseeing the activities of a company.

A) transfer agent
B) distributor or broker-dealer
C) investment advisor
D) board of directors

Question 24

The price of a share in a closed-end fund is not determined by supply and demand, so the price can fall below or rise above the net asset value per share.

Question 25

Recent SEC priorities directly affect mutual funds. Which of the below is NOT one of these?

A) Reporting after-tax fund returns
B) More complete reporting of fees, including fees in dollars-and-cents terms as well as in percentage terms.
C) Disclosing portfolio practices such as "portfolio dressing"
D) More accurate and consistent reporting of investment performance.

Question 26

The reasons U.S. and international asset managers have aggressively acquired U.S. funds include ________.

A) the rapidly declining U.S. mutual fund business.
B) the general regulatory framework in Asian countries.
C) the general regulatory framework in European countries.
D) the continuing deregulation of the U.S. asset management business.

Question 27

There is often a difference between the NAV of a ________ underlying portfolios and the price of its funds that are bought and sold. This difference is called a ________ when the price is greater than the NAV.

A) opened-end fund's; discount
B) mutual fund's; premium
C) closed-end fund's; premium
D) mutual fund's; discount

Question 28

Mutual funds have become very popular with individual investors since the 1980s. However, they are often criticized for two reasons. Which of the below is ONE of these reasons.

A) Purchases and sales cannot be made at intraday prices, but only at the end-of-the-day closing prices.
B) Transactions can be made at intraday prices.
C) Withdrawals by some fund shareholders cannot cause taxable realized capital gains (or losses) for shareholders even though they maintain their positions.
D) None of these

Question 29

Overall, the NAV of a mutual fund will increase or decrease due to an increase or decrease in the prices of the securities in the portfolio.

Question 30

Many high-net-worth individuals object to using mutual funds because of the individual investor's lack of control over taxes, their lack of any input into investment decisions, and the absence of "high-touch" service. The use of ________ respond to all these limitations of mutual funds.

A) SMAs
B) ETFs
C) RICs
D) None of these

Question 31

An investment that embodied a combination of the desirable aspects of mutual funds and closed-end funds would require portfolios to be traded like stocks throughout the day at a price equal to the continuously known ________ and would be, in effect, an ________.

A) premium; exchange-traded fund.
B) NAV; exchange-traded fund.
C) NAV; open-end fund.
D) price; mutual fund.

Question 32

________ are managed accounts, typically mutual funds or ETFs "wrapped" in a service package, and provide investors with advice and assistance for an asset-based fee rather than the traditional front-end load.

A) Wrap channels
B) Supermarkets
C) Fee-based financial advisors
D) Wrap programs

Question 33

For both equity and bond funds, the lowering of front-end loads along with the growth of alternatives to front-end loads together with more funds adopting ________ fees resulted in them becoming a much larger portion of distribution costs.

A) mix and match
B) contingent deferred sales load
C) 12b-1
D) management

Question 34

A mutual fund can reduce a variety of costs related to investment and management of portfolios.

Question 35

Organizations such as Morningstar and Lipper provide key performance data on mutual funds in ways that prevent meaningful comparisons among them.

Question 36

________ allow investors to purchase funds from participating companies without investors having to contact each fund company.

A) Distribution channels
B) Supermarkets
C) Malls
D) Wrap programs

Question 37

Fund companies and distribution companies have developed new outlets for selling mutual funds and expanded their traditional sales channels. The changes that occurred are evident in the rising share of sales through ________.

A) direct sales to investors and intermediaries.
B) third parties and sales through brokers.
C) direct sales to investors and sales through brokers.
D) third parties and intermediaries.

Question 38

All the cost information on a fund, including selling charges and annual expenses, are included in the annual report.

Question 39

Which of the below statements is FALSE?

A) ETFs do not have ticker symbols.
B) ETFs can be sold short or bought on margin (i.e., with borrowed money), and it is even possible to trade options on many ETFs.
C) To assure that the price of the ETF would be very close to the continuously known NAV of the portfolio, an agent could be commissioned to arbitrage between the ETF and the underlying portfolio and keep their values equal.
D) Rather than dealing directly with the fund company, investors buy ETF shares from another individual investor via an exchange at a price determined by supply and demand for the ETF, not the ETF's underlying NAV as is the case for mutual funds.

Question 40

The amount of investment needed to obtain a reduction in the sales charge is called a breakpoint.

Question 41

What is a family of funds? In your answer specify two advantages of an investor belonging to a family of funds.

Question 42

An important feature of the '40 Act exempts any company that qualifies as a "regulated investment company" (RIC) from taxation on its gains, either from income or capital appreciation, as previously indicated. How does a fund qualify as a RIC?

Question 43

What are variable annuities?

Question 44

The total shareholder costs of owning a mutual fund have decreased in recent years due to a reduction in distribution costs, and due to economies of scale in other fund expenses.

Question 45

Mutual funds be included in different investment vehicles. Given an example and in your example discuss a nonqualified vehicle and the inclusion of a retirement plan and an education plan.

Question 46

Mutual fund investors can control the size of the capital gains distributions and, as a result, the timing and amount of the taxes paid on their fund holdings is controlled.

Question 47

Financial intermediaries provide some or all of the following six economic functions: (1) risk reduction via diversification, (2) lower costs of contracting and processing information, (3) professional portfolio management, (4) liquidity, (5) variety, and (6) a payments mechanism. Describe three of these functions, as provided by mutual funds.

Question 48

There are important aspects of open-end funds, commonly referred to simply as mutual funds. Describe three of these aspects.

Question 49

ETFs are priced only once a day by being redeemed or offered by the fund company at NAV. On the other hand, open-ended funds are traded on an exchange and so are priced continuously throughout the day.

Question 50

Mutual funds may be included in several different investment vehicles.

Question 51

Due to the success of mutual funds, investment companies have had no need to develop alternatives to mutual funds.

Question 52

Explain what is meant by an index fund. In your answer contrast it with an active fund.

Question 53

The Investment Company Institute (ICI) provides data that permit the assessment of investors to the annual expense sales including the sales charge or load.

Question 54

Some fund families use external managers to manage all or a portion of their internal funds. These external advisers are called subadvisors. Describe two of the reasons why a family of funds would use subadvisors.

Question 55

The Investment Company Institute (ICI) provides data that permit the assessment of investors to the annual expense sales, that is, not including the sales charge or load. Describe how this is done.

Question 56

Large fund families offer economic benefits and usually include a variety of fund types such as money market funds, U.S. bond funds, global stock and bond funds, and broadly diversified and specialized U.S. stock funds.

Question 57

Fees charged by mutual funds are subject to regulation.

Question 58

New investors in a mutual fund may assume a tax liability even though they have no gains. Explain how this is accomplished.

Question 59

The mutual fund enters into a contract with a distributor or broker-dealer to manage the fund's portfolios. The distributor can be an affiliate of a brokerage firm, an insurance company, a bank, an investment management firm, or an unrelated company.

Question 60

Describe the differences in a front-end load, a back-end load, and a level load fund.

Question 61

Name three alternatives to mutual funds.

Question 62

ETFs have grown very rapidly since their introduction in 1993 proving to be very attractive to investors. What are the relative advantages and disadvantages of ETFs?