Deck 4: Investment Companies: Mutual Funds, Exchange-Traded Funds, Closed-End Funds, and Unit Investment Trusts

Question 1

Load funds, which charge a commission, generally perform no better than no-load funds.

Answer 1

True
Explanation: Studies indicate that there is no significant statistical difference in the investment performance of load and no-load funds.

Question 2

Good performance by a mutual fund in the past is highly indicative of good performance in the future.

Answer 2

False
Explanation: Past performance in no way guarantees future performance. A fund that did well in the past may do poorly in the future, and vice versa.

Question 3

At the end of 2009, approximately 43% of U.S. households owned shares in mutual funds.

Answer 3

True
Explanation: According to the Investment Company Institute (www.ici.org), at the end of 2009, mutual funds were owned by 87 million people, representing 50.4 million U.S. households, or 43% of all households.

Question 4

The prospectus is designed to provide a broad overview of the mutual fund, but is not required to disclose its investment focus or the investment style that it represents.

Question 5

The acceptable range for a mutual fund's total yearly expenses is from 2% to 3% of assets.

Question 6

The intent of dollar-cost averaging is to avoid buying high and selling low.

Question 7

Assuming no reinvestment, the total return on mutual fund shares is the total ending value of your shares, divided by the total beginning value of your shares.

Question 8

Most common stock mutual funds trade at a discount from the net asset value (NAV).

Question 9

Load mutual funds outperform no-load funds.

Question 10

Between 70% and 75% of all investment funds in the U.S. are open-ended.

Question 11

Exchange-traded funds (ETFs) are similar to index mutual funds, but they trade on stock exchanges like common stock.

Question 12

Shares of a closed-end fund trade on an exchange, just like stocks.

Question 13

The smart investor will compare the portfolio of a fund to its stated objectives.

Question 14

Money market funds are usually load funds.

Question 15

Morningstar Mutual Fund Survey is considered one of the leading authorities on mutual fund performance.

Question 16

On average, mutual funds tend to outperform the market over the long run.

Question 17

A closed-end fund stands ready to buy your shares back at all times.

Question 18

When you invest in a typical load fund with an 8.5% load, the fund must appreciate by over 10% in value for you to break even on your investment.

Question 19

Open-end funds often sell at a discount to net asset value.

Question 20

Closed-end funds have a fixed number of shares; open-end funds do not.

Question 21

A fund investing in T-bills, Eurodollar deposits, commercial paper, and repurchase agreements is probably a:

A)money market fund.
B)balanced fund.
C)sector fund.
D)growth funD.

Question 22

An important consideration with an open-end fund is whether it is a load fund or a no-load fund.

Question 23

A closed-end fund versus an open-end fund refers to:

A)whether there is a substantial penalty for early withdrawal.
B)the maturity date of the shares.
C)how the shares are distributed and redeemed.
D)the limitation of upside potential and downside risk.

Question 24

Money market fund rates do not closely track short-term market interest rates, because the maturities of assets held in money market portfolios generally range from one to six months.

Question 25

A closed-end fund might trade for less than net asset value if:

A)the fund has a poor record of prior performance.
B)it is a new fund trying to attract new investors.
C)it is heavily invested in an unpopular industry.
D)A and C

Question 26

Stocks in sector funds tend to be underpriced.

Question 27

An investor should expect a mutual fund to maintain its historical track record of returns.

Question 28

Closed-end funds are very commonly used for internationally emerging market investments.

Question 29

Bond mutual funds can be divided into corporate, government, and municipal funds.

Question 30

Index funds are created to imitate a popular stock index such as the S&P 500 Index.

Question 31

An investor in mutual funds must also be sensitive to the excessive performance claims that are sometimes made by mutual fund salespeople.

Question 32

Advantages of mutual funds include:

A)mutual funds outperform the market, on average.
B)efficient diversification.
C)exceptionally low level of risk.
D)All of the above

Question 33

The chief disadvantage of front-end load funds is that the investor has less money to invest after commissions.

Question 34

Net asset value

A)is the value of the securities minus the liabilities, divided by the number of shares outstanding.
B)is the price at which the shares of a closed-end fund trade.
C)is the value of the fund's year's earnings, divided by the total amount invested in the fund.
D)A and B

Question 35

Open-end common stock funds are much less common than closed-end funds.

Question 36

A load is:

A)a commission paid to a selling agent.
B)paid directly from investors' capital.
C)typically 3% to 4% on a stock fund.
D)A and B

Question 37

The sale of mutual fund shares is a taxable event.

Question 38

As of 2009, no-load funds made up close to 65% of all mutual fund assets.

Question 39

A prospectus contains information, deemed essential by the SEC, in providing some disclosure to potential investors regarding the fund's investment objectives and policies, risks, management, expenses, and current portfolio.

Question 40

Actually, the term mutual fund applies specifically to open-end investment companies, although closed-end funds are sometimes loosely labeled as mutual funds as well.

Question 41

Funds that invest in specific industries, such as energy, leisure, or defense, are called:

A)balanced funds.
B)industry funds.
C)sector funds.
D)specialty funds.

Question 42

A mutual fund in which the portfolio is weighted exactly like the Standard and Poor's 500 Index, or any other market measure is called:

A)a stock fund.
B)a balanced fund.
C)an index fund.
D)a market funD.

Question 43

Yields on money market funds are closely associated with:

A)short-term interest rates.
B)the prime rate.
C)long-term interest rates.
D)None of the above

Question 44

Mutual funds which provide tax-free income are ________ and certain types of ________________.

A)stock funds; bond funds
B)money market funds; balanced funds
C)municipal bond funds; money market funds
D)none of the above

Question 45

The mutual fund prospectus provides information about

A)the fund's investment objectives.
B)shareholder services.
C)the current portfolio.
D)All of the above

Question 46

Sector funds offer

A)good diversification.
B)high loss/reward potential.
C)stable returns.
D)None of the above

Question 47

Which of the following shareholder services is a taxable event?

A)Safekeeping
B)Automatic reinvestment
C)Pre-authorized check plan
D)Exchange privilege

Question 48

________ have a fixed supply of shares, which often trade at a discount from the market value of assets held.

A)Stock funds
B)Bond funds
C)Closed-end funds
D)Open-end funds

Question 49

Reliable sources of information about mutual funds include all of the following, except:

A)Forbes.
B)Lipper.
C)Morningstar.
D)All of the above are good sources

Question 50

Federal income tax on investment income and capital gains of a mutual fund:

A)must always be paid by both the fund and the shareholder.
B)must be paid only by the shareholder.
C)is not required of the fund if it distributes at least 90% of its net investment income and capital gains.
D)is not required either of the fund or of its shareholders.

Question 51

In a closed-end mutual fund, shares are traded:

A)through brokers.
B)on an exchange.
C)between shareholders.
D)B and C

Question 52

A back-end load fund has:

A)no charge upon purchase, but a fixed charge upon sale.
B)a smaller charge on purchase, and another small charge again on sale.
C)no charge upon purchase, and a declining charge, based on time owned, on sale.
D)Two of the above

Question 53

One can purchase shares in a closed-end mutual fund

A)from shareholders.
B)directly from the fund at all times.
C)directly from the fund at inception.
D)A and C

Question 54

___________ invest entirely in short-term securities, and are particularly popular during periods of high short-term interest rates.

A)Index funds
B)Balanced funds
C)Mutual stock funds
D)Money market funds

Question 55

Which is not an advantage of exchange-traded funds (ETFs)?

A)Their expense ratios are lower than mutual funds
B)Because they imitate an index, there are no real research costs
C)They can be bought and sold all day long at a price that is almost exactly the net asset value of the stocks in the index
D)The assets in the portfolio are marked to market continuously
E)They are open-ended funds that have reasonably low sales expenses

Question 56

Investment company shares that trade on stock exchanges just like common stock and are essentially funds that mimic some index are:

A)open-end mutual funds.
B)exchange-traded funds.
C)money market funds.
D)load funds traded on stock exchanges.
E)index mutual funds.

Question 57

A closed-end fund might trade at a premium due to:

A)the quality of fund management.
B)an upcoming dividend payable to the portfolio.
C)an impending stock split in the portfolio.
D)a closed-end fund would never trade at a premium.

Question 58

Exchange-Traded Funds (ETFs):

A)are predominantly traded on the New York Stock Exchange.
B)create an opportunity for investors to own foreign stock.
C)are open-end mutual funds.
D)are load funds traded on stock exchanges.

Question 59

Direct sources of return on a mutual fund investment include:

A)dividends distributed.
B)interest accumulated.
C)stock market appreciation.
D)Two of the above

Question 60

By using dollar-cost averaging,

A)the investor is attempting to beat the market.
B)the investor buys when prices are favorable only.
C)the investor invests a fixed amount at regular intervals, at current market prices.
D)None of the above

Question 61

The Hirt & Block mutual fund has assets of $147 million, liabilities of $7 million and 7 million shares outstanding. What is the net asset value per share?

A)$20 per share
B)$21 per share
C)$22 per share
D)None of the above

Question 62

Characteristics of mutual funds include everything except:

A)different investors can pool their money.
B)the money is invested in stable companies, with an objective of strong dividend income.
C)funds not included in the mutual fund are placed in short-term T-bills to earn interest.
D)the money is invested in stable companies' common stock.

Question 63

Under dollar-cost averaging, the investor buys a:

A)fixed dollar's worth of a given security's price or the current market outlook.
B)floating dollar's worth of a given security's price or the current market outlook.
C)fixed dollar's worth of any security.
D)None of the above

Question 64

The following are all characteristics of money market funds, except:

A)they invest in short-term securities.
B)they are no-load.
C)they have check writing privileges.
D)they do not require minimum deposits.

Question 65

A fund is set up to charge a load. Its net asset value is $17.70 and its offer price is $18.60. What percentage of the net asset value does the load represent?

A)4.84%
B)5.08%
C)16.74%
D)15.93%
E)20.67%

Question 66

When a mutual fund you own buys and sells securities in its portfolio,

A)you are responsible for paying taxes on the net gains and losses incurred.
B)the mutual fund is responsible for paying the taxes before distributing your share of the net gains.
C)the IRS does not levy taxes on mutual funds.
D)you have a choice on whether to pay taxes on the gains during the current year, or to pay the taxes over a five-year perioD.

Question 67

Which of the following is not a disadvantage of investing in mutual funds?

A)They do not outperform the market as a group
B)Some mutual funds may be expensive to purchase
C)Sector funds are riskier than diversified funds
D)With 5,000 funds to choose from, the selection of a fund is just as difficult as selecting an individual stock

Question 68

Mutual funds have several disadvantages. Which of the following would apply?

A)Diversification of assets reduces risk
B)Mutual funds allow an investor to choose an international portfolio with high risk
C)Mutual funds, on average, do not outperform the market
D)No-load funds minimize transaction costs

Question 69

Exchange-Traded Funds offer the investor many advantages over open-end and closed-end mutual funds. Which of the following are comparative advantages?

A)There are global and international funds to choose
B)There are over 80 broad-based domestic equity index funds
C)They are bought and sold like common stocks
D)All of the above are comparative advantages

Question 70

A fund is set up to charge a load. Its net asset value is $17.70 and its offer price is $18.60. What is the dollar value of the load (commission)?

A)$18.60
B)$17.70
C)$.95
D)$.90
E)$.50

Question 71

A fund is set up to charge a load. Its net asset value is $17.70 and its offer price is $18.60. What percentage of the offer price does the load represent?

A)4.84%
B)5.08%
C)16.74%
D)15.93%
E)20.67%

Question 72

When you buy a mutual fund, you:

A)may be purchasing a fund that has unrealized capital gains on stocks held in the portfolio. You could be liable for the taxes if the fund sells those shares.
B)may be purchasing a fund that has unrealized capital losses on stocks held in the portfolio. You could be liable for the taxes if the fund sells those shares.
C)will not have any tax consequences on assets owned by the fund before you purchased the mutual fund.
D)Two of the above are correct

Question 73

The growth fund category of funds would include:

A)equity growth funds and aggressive growth.
B)dividend paying equities with growing dividends.
C)convertible securities that are convertible into growth stocks.
D)funds that specialize in a high growth industry, such as technology.

Question 74

A characteristic of a closed-end fund is that:

A)it stands ready at all times to sell the investor new shares or buy back the old ones.
B)the method of purchase is the stock exchange or over-the-counter market.
C)the closed-end fund does not deal with shareholders.
D)it trades shares at the Net Asset Value.

Question 75

One disadvantage of investing through mutual funds is

A)that they provide time savings.
B)that there are more than 8,100 to choose from.
C)the professional management.
D)too much diversification.

Question 76

The Hirt & Block mutual fund has assets of $147 million, liabilities of $7 million and 7 million shares outstanding. The shares trade at $21.60 per share. What is the percentage load fee?

A)2.85%
B)6.00%
C)7.41%
D)8.00%

Question 77

The difference between a load fund and a no-load fund is that:

A)no-load funds do not charge commissions, and are sold directly by the investment company.
B)load funds do not charge commissions, and are sold directly by the investment company.
C)no-load funds charge higher commissions than load funds.
D)no-load funds charge lower commissions than load funds.