Deck 16: Investing in Mutual Funds

Question 1

When you invest in Class A shares, you pay a sales commission when you sell your mutual fund shares.

Answer 1

False

Question 2

Class C shares, because of their ongoing, higher 12b-1 fees, are often more expensive than Class A or Class B shares over a long period of time.

Answer 2

True

Question 3

Mutual funds that apportion their investments among common stocks and bonds are referred to as small-cap funds.

Answer 3

False

Question 4

Mutual funds that invest in a variety of smaller, lesser-known companies that offer higher growth potential are referred to as sector funds.

Question 5

Mutual funds charge the 12b-1 fee to offset advertising and marketing costs.

Question 6

For a mutual fund, the typical yearly management fee ranges from 2.5 to 5 percent of the total dollar amount invested.

Question 7

An exchange-traded fund, commonly referred to as an ETF is a fund that invests in the stocks contained in a specific stock or securities index.

Question 8

A contingent deferred sales load is a 1 to 5 percent charge that shareholders pay when they withdraw their investment from a mutual fund.

Question 9

A load fund is a mutual fund in which investors pay a commission either when they purchase or when they redeem shares.

Question 10

Because of professional management, there is no need for the individual investor to evaluate a mutual fund investment.

Question 11

For a load fund, the average commission usually ranges between 3 and 5 percent of the purchase price.

Question 12

Shares in an open-end fund are redeemed by the investment company at the request of the investor.

Question 13

The net asset value for a mutual fund share is calculated by dividing the value of the fund's portfolio by the fund's liabilities.

Question 14

All information related to management fees, contingent deferred sales fees, 12b-1 fees, and other expenses are contained in a mutual fund's fee table.

Question 15

A no-load fund is a mutual fund in which no sales charge is paid by the individual investor to buy or sell shares.

Question 16

The major reasons why investors purchase mutual funds are professional management and diversification.

Question 17

In late 2011, there were almost 13,000 mutual funds, and the number continues to increase each year.

Question 18

Today, there are more closed-end funds than there are open-end funds.

Question 19

There are more exchange-traded funds than there are open-end mutual funds.

Question 20

A closed-end fund is a fund in which shares are issued only when the fund is organized.

Question 21

Asset allocation funds invest in various asset classes including stocks, bonds, fixed-income securities, and money market instruments.

Question 22

Capital gain distributions result when you decide to sell shares in a mutual fund at a price higher than you paid.

Question 23

Because an index fund is a mirror image of a specific index, the dollar value of a share in an index fund increases when the index increases.

Question 24

Although mutual funds are popular among individual investors, most people do not use them as part of an IRA or retirement account.

Question 25

When you decide to redeem shares in an open-end mutual fund, the only option is to sell a specific number of shares.

Question 26

Over many years, the majority of managed mutual funds outperform the Standard & Poor's stock index.

Question 27

The fund manager is ultimately responsible for a fund's success.

Question 28

While advisory services provide detailed information on common and preferred stocks, there are no advisory services that provide information on mutual funds.

Question 29

Which one of the following statements is false?

A) Investors purchase mutual funds for diversification.
B) Investors purchase mutual funds because of their professional management.
C) Investors who purchase mutual funds are guaranteed a higher rate of return than if they were to purchase comparable stocks and bonds directly.
D) Professional mutual fund managers work for an investment company.
E) Even the best portfolio managers sometimes make mistakes.

Question 30

An investment company sponsoring a mutual fund must furnish shareholders a prospectus each year.

Question 31

Which one of the following statements is false?

A) An exchange-traded fund invests in the stocks or securities contained in a stock or securities index.
B) With an exchange-traded fund, an investor can purchase as little as one share.
C) The return on shares in an exchange-traded fund tend to mirror the performance of the index.
D) A passively-managed exchange-traded fund manager needs to make more decisions than an actively-managed mutual fund manager.
E) Exchange-traded funds are increasing in popularity.

Question 32

To purchase shares in an open-end fund, you may use four options: regular accounts, voluntary savings plans, contractual savings plans, and reinvestment plans.

Question 33

Investors in closed-end, exchange-traded funds, and open-end funds can make money by purchasing shares at a low price and then selling them at a higher price.

Question 34

Tax information for mutual funds is reported as part of the year-end statement or IRS Form 1099-DIV.

Question 35

High-yield bond funds are sometimes referred to as junk bond funds.

Question 36

The family of funds concept makes it convenient for shareholders to switch their investments among funds as different funds offer more potential.

Question 37

While mutual fund income dividends are subject to taxation, capital gain distributions are not subject to taxation.

Question 38

Income dividends are the earnings a fund pays to shareholders from its dividend and interest income.

Question 39

A mutual fund that provides tax-exempt interest income is referred to as a long-term U.S. bond fund.

Question 40

Typically, you must invest at least $15,000 to open a mutual fund account.

Question 41

The Capitalist Mutual Fund's portfolio is valued at $45 million. The fund has liabilities of $3 million, and the investment company sponsoring the fund has issued 1,600,000 shares. What is the fund's net asset value?

A) $100.00
B) $26.25
C) $52.50
D) $3.75
E) $1.00

Question 42

A mutual fund in which new shares are issued and existing shares redeemed by the investment company at the request of investors is called a(n) ____________ fund.

A) closed-end
B) open-end
C) load
D) no-load
E) convertible

Question 43

A 1 to 5 percent fee that investors pay when they withdraw their investment from a mutual fund is called a:

A) withdrawal fee.
B) 12b-1 fee.
C) contingent deferred sales load.
D) front-end load.
E) management fee.

Question 44

Bob Newsome purchased 250 shares of the Northern Lights Growth Fund. The purchase cost was $30 per share. If this fund charges a 3 percent load, what is the commission amount he will pay the investment company?

A) $3
B) $30
C) $300
D) $225
E) $250

Question 45

When an investor purchases shares in a load fund, the average sales charge is usually between ____________ percent.

A) 0.5 to 2
B) 1 and 3
C) 3 and 5
D) 5 and 7
E) 4 and 6

Question 46

The value of a mutual fund's portfolio minus the mutual fund's liabilities, divided by the number of shares outstanding is called the:

A) book value.
B) outstanding balance.
C) LIBOR rate.
D) net asset value.
E) accounting value.

Question 47

The New American Enterprise Mutual Fund's portfolio is valued at $120 million. The fund has liabilities of $4 million, and the investment company sponsoring the fund has issued 5,800,000 shares. What is the fund's net asset value?

A) $120
B) $58
C) $40
D) $30
E) $20

Question 48

A mutual fund in which no sales charge is paid by the individual investor is called a(n) ____________ fund.

A) closed-end
B) open-end
C) load
D) no-load
E) convertible

Question 49

A mutual fund in which shares are issued only when the fund is organized is called a(n) ____________ fund.

A) closed-end
B) open-end
C) load
D) no-load
E) convertible

Question 50

Mary Cooper just purchased 100 shares in the All-American Fund. The purchase cost for each share was $20. If this fund charges a 5 percent load, what is the total amount of commission she will pay the investment company?

A) $100
B) $1,000
C) $2,000
D) $200
E) $1

Question 51

The commission charge for purchasing fund shares that impose an up-front commission charge ____________ percent.

A) averages 0.50 to 1
B) averages 1 to 2
C) averages 2 to 4
D) averages 5 to 6 1/2
E) may be as high as 8 1/2

Question 52

A mutual fund in which investors pay a commission every time they purchase shares is called a(n) ____________ fund.

A) closed-end
B) open-end
C) load
D) no-load
E) convertible

Question 53

There are about _____ exchange-traded funds.

A) 25
B) 50
C) 150
D) 775
E) 1,000

Question 54

When Pete Mills went to withdraw $5,000 from the Nationwide Fidelity Mutual fund, he was informed that the fund would charge 5 percent of the amount withdrawn. What is the dollar amount of the withdrawal charge?

A) $2,500
B) $500
C) $250
D) $25
E) $50

Question 55

A fee that some investment companies charge for advertising and marketing a mutual fund is called a:

A) 14A-1 fee.
B) 12b-1 fee.
C) 18-2 fee.
D) 403(b) fee.
E) 401(k) fee.

Question 56

The All-Star Basic Value Fund's portfolio is valued at $210 million. The fund has liabilities of $5 million, and the investment company sponsoring the fund has issued 16,400,000 shares. What is the fund's net asset value?

A) $25.00
B) $21.00
C) $16.40
D) $12.50
E) $5.00

Question 57

The average management fee for all mutual funds is:

A) less than 0.25 percent.
B) 0.25 percent to 0.50 percent.
C) 0.50 to 1 percent.
D) 1.25 to 2.50 percent.
E) 2.50 to 5.00 percent.

Question 58

For most mutual funds, the net asset value is calculated:

A) yearly.
B) quarterly.
C) weekly.
D) daily.
E) hourly.

Question 59

The management fee for most mutual funds ranges between ______ percent.

A) 0.25 to 1.5
B) 1.5 to 3
C) 3 to 4
D) 5 to 6 1/2
E) 7 to 8 1/2

Question 60

Approximately ____________ percent of all mutual funds are open-end funds.

A) 5
B) 6
C) 30
D) 72
E) 92

Question 61

Many financial planners recommend that investors pick a mutual fund with an expense ratio that is:

A) 1 percent or less.
B) between 1 and 2 percent.
C) between 2 and 3 percent.
D) between 3 and 4 percent.
E) over 4 percent.

Question 62

When one investment company manages a group of mutual funds, it is called a(n):

A) family of funds.
B) exchange fund.
C) diversification fund.
D) versatility fund.
E) asset allocation fund.

Question 63

A municipal bond fund:

A) is too risky for most investors.
B) provides investors with federally tax-free interest income.
C) invests in bonds that are backed by the federal government.
D) is a risk-free investment.
E) invests solely in Treasury bonds.

Question 64

A mutual fund that invests in common stocks and bonds with the primary objectives of conserving capital, providing income, and long-term growth is called a(n) ____________ fund.

A) balanced
B) growth
C) industry
D) income
E) money market

Question 65

A mutual fund that invests in the common stocks of companies in the same industry is called a(n) ____________ fund.

A) growth-income
B) income
C) sector
D) small-cap
E) money market

Question 66

A mutual fund that invests in common stocks of rapidly growing corporations with higher-than-average revenue and earnings growth is called a(n) ____________ fund.

A) balanced
B) growth
C) industry
D) income
E) money market

Question 67

Which one of the following funds would be considered the safest investment?

A) Growth fund
B) Money market fund
C) Sector fund
D) Asset allocation fund
E) High-yield bond fund

Question 68

The typical expense ratio for an index fund is:

A) 0.50 percent or less.
B) between 0.50 and 1 percent.
C) between 1 and 2 percent.
D) between 2 and 3 percent.
E) over 5 percent.

Question 69

Another name for a mutual fund that charges a contingent deferred sales load is a class ____________ fund.

A) A
B) B
C) C
D) D
E) E

Question 70

Martin Campbell wants to invest in mutual funds, but is also worried about diversification. Which fund would you recommend to him?

A) Income fund
B) Long-term corporate bond fund
C) U.S. government bond fund
D) Midcap fund
E) A fund of funds

Question 71

Which one of the following statements is false?

A) As an investor, you should be concerned with how long a fund manager has been managing a mutual fund.
B) Often, a fund's success is tied to the manager's ability to buy and sell securities in the fund.
C) If a manager has been managing a fund for 5 or 10 years, it is time to change managers and get someone with new ideas.
D) Ultimately, the fund manager is responsible for a fund's success.
E) Managed funds may be open-end funds or closed-end funds.

Question 72

A mutual fund that invests in stocks issued by companies with a long history of paying dividends is called a(n) ____________ fund.

A) balanced
B) equity income
C) industry
D) sector
E) money market

Question 73

Which one of the following statements is false?

A) The responsibility for choosing the right mutual fund rests with the individual investor.
B) Professional fund managers do make mistakes.
C) Although investing in mutual funds provides professional management, individual investors should continually evaluate their mutual fund investments.
D) There is no need to evaluate mutual fund investments because investment companies hire the best professional managers they can to manage their funds.
E) Individual investors should be involved in choosing a mutual fund because they know how the objectives of a mutual fund match their own investment objectives.

Question 74

A mutual fund that only invests in companies outside the United States is called a(n) ____________ fund.

A) growth-income
B) income
C) international
D) industry
E) global

Question 75

Henrietta Marston plans to retire in the year 2050. She is considering a fund that will be more aggressive now and become more conservative as she approaches retirement. Which of the following funds would you recommend to her?

A) Equity income fund
B) Regional fund
C) Sector fund
D) Lifecycle fund
E) Fund of funds

Question 76

All the different fees and fund operating costs are often referred to as a(n):

A) investment ratio.
B) expense ratio.
C) financial ratio.
D) expense turnover.
E) management ratio.

Question 77

Which one of the following statements is true?

A) Most mutual funds are managed funds.
B) The role of a fund manager is not important because the investment company is always changing managers.
C) You should ignore fees when comparing mutual funds.
D) Managed funds are usually index funds.
E) A team of managers is always better than a single fund manager.

Question 78

Last month Nellie Jacobson's divorce became final. As part of the settlement, she received $150,000. She would like to invest in mutual funds, but since she is 62 years old, she is concerned with the safety of her "nest egg." Which of the following mutual funds would you recommend?

A) Growth fund
B) Small cap fund
C) High-yield bond fund
D) International fund
E) Short-term U.S. bond fund

Question 79

A mutual fund that invests in investment-grade corporate debt with maturities between 5 and 10 years is called a(n) ____________ fund.

A) long-term bond
B) growth
C) sector
D) income
E) intermediate corporate bond

Question 80

Another name for a mutual fund that doesn't charge a load, but does charge an ongoing higher 12b-1 fee is a class ____________ fund.

A) A
B) B
C) C
D) D
E) E