Deck 23: Mutual Fund Operations

Question 1

The net asset value of a mutual fund is estimated once every week.

Answer 1

False

Question 2

Mutual funds with ____ expense ratios tend to ____ others that have a similar investment objective.

A)lower; underperform
B)higher; outperform
C)lower; outperform
D)A and B

Answer 2

C

Question 3

Mutual funds composed of bonds that offer periodic coupon payments are

A)income funds.
B)specialty funds.
C)dividend funds.
D)growth funds.

Answer 3

A

Question 4

Mutual funds whose bonds have a ____ average time to maturity are ____ sensitive to interest rate fluctuations.

A)longer; less
B)shorter; less
C)shorter; more
D)A and C

Question 5

Which of the following is not disclosed in the prospectus?

A)the minimum amount of investment required
B)the investment objective of the funds
C)the fees incurred by the mutual fund
D)all of the above are disclosed

Question 6

Mutual funds

A)are unregulated.
B)are required to disclose the names of their portfolio managers in the prospectus.
C)are not required to disclose any information about their past performance.
D)are exempt from all taxes.

Question 7

The net asset value of international stock mutual funds ____ as the dollar strengthens against foreign currencies. (Assume no change in the prices of foreign stocks.)

A)increases
B)decreases
C)is unaffected
D)can increase or decrease depending on the dollar's degree of strength

Question 8

Which of the following statements is incorrect?

A)Mutual funds serve as a key financial intermediary.
B)Managers of mutual funds do not analyze economic and industry trends.
C)Because of their diversification, management expertise, and liquidity, mutual funds have grown at a rapid pace.
D)Some mutual funds offer check-writing privileges.

Question 9

____ funds do not normally repurchase their shares from investors.

A)Closed-end
B)Load mutual
C)No-load mutual
D)Open-end mutual

Question 10

If investors sell their mutual fund shares after the net asset value of the fund increases, the return is called

A)share price appreciation.
B)capital gains distribution.
C)dividends.
D)split net asset value.

Question 11

To cover managerial expenses, mutual funds typically charge

A)management fees of less than 2 percent of total assets per year.
B)commissions of typically 8 to 10 percent of transaction market value per year.
C)management fees of typically more than 10 percent of total assets per year.
D)commissions of typically 3 to 5 percent of the transaction market value per year.

Question 12

Hedge funds differ from open-end mutual funds in the sense that

A)they require a much smaller initial investment.
B)they are open to additional investments at any time.
C)their investors cannot sell shares back to the fund at any time they desire.
D)they invest in very limited set of securities.

Question 13

Mutual funds that are willing to repurchase their shares from investors at any time are referred to as

A)closed-end funds.
B)load mutual funds.
C)no-load mutual funds.
D)open-end mutual funds.

Question 14

Shares of open-end mutual funds are purchased and sold on exchanges.

Question 15

Exchange-traded funds are like open-end funds in the sense that

A)their shares are traded on an exchange, and their share price changes throughout the day.
B)they have a fixed number of shares.
C)they are not actively managed.
D)none of the above

Question 16

A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.

Question 17

Most closed-end funds invest in

A)stock and bonds.
B)money market securities.
C)gold.
D)derivatives.

Question 18

Money market funds invest mostly in

A)stocks.
B)long-term bonds.
C)real estate.
D)short-term securities.

Question 19

No-load mutual funds are normally promoted by ____. Load funds are promoted by ____.

A)registered representatives of a brokerage firm; registered representatives of a brokerage firm
B)registered representatives of a brokerage firm; the mutual fund of concern
C)the mutual fund of concern; registered representatives of a brokerage firm
D)the mutual fund of concern; the mutual fund of concern

Question 20

Mutual funds composed of stocks that have potential for very high growth, but may also be unproven, are called

A)income funds.
B)capital appreciation funds.
C)specialty funds.
D)dividend funds.

Question 21

Money market fund assets include all of the following, except

A)stocks.
B)repurchase agreements.
C)Treasury bills.
D)CDs.

Question 22

A mutual fund prospectus does not contain

A)minimum amount of investment required.
B)return on the fund since its inception.
C)investment objective of the mutual fund.
D)exposure of the mutual fund to various types of risk.
E)fees incurred by the mutual fund.

Question 23

If a mutual fund distributes at least ____ percent of its taxable income to shareholders, the fund is exempt from taxes on dividends, interest, and capital gains distributed to shareholders.

A)25
B)50
C)75
D)90

Question 24

According to SEC regulations, the majority of the members on a mutual fund's board of directors must be

A)employed by the fund.
B)outsiders (not employed by the fund).
C)certified public accountants.
D)certified financial analysts.

Question 25

The composition of asset allocation funds

A)is focused completely on one type of security as specified by the particular mutual fund.
B)is fixed and not altered by the mutual fund managers.
C)A and B
D)none of the above

Question 26

Hedge funds that exceed a specified size must register with the

A)Securities and Exchange Commission (SEC).
B)Federal Reserve.
C)Office of Thrift Supervision.
D)Federal Mutual Fund Board.

Question 27

Equity real estate investment trusts invest

A)in mortgage and construction loans.
B)directly in properties.
C)in common stocks issued by construction companies.
D)in common stocks issued by real estate brokerage firms.

Question 28

Because ____ real estate investment trusts essentially represent a fixed income portfolio, their market value will ____ as interest rates increase.

A)equity; increase
B)equity; decrease
C)mortgage; increase
D)mortgage; decrease

Question 29

The majority of mutual fund assets are in the form of

A)common stocks.
B)preferred stocks.
C)U.S. government bonds.
D)municipal bonds.

Question 30

____ are most likely to invest in mortgages.

A)Stock mutual funds
B)Bond mutual funds
C)Load funds
D)Closed-end funds

Question 31

The ____ of a mutual fund indicates the value per share.

A)net asset value
B)gross asset value
C)net stock value
D)net bond value
E)none of the above

Question 32

When the redemptions of money market mutual fund shares exceeds sales of shares, the fund accommodates the amount of excessive redemptions by

A)selling some of the assets contained in the portfolio.
B)issuing stock.
C)issuing bonds.
D)borrowing from banks.

Question 33

Mutual funds that include some non-U.S. stocks and U.S. stocks are called ____ funds.

A)global
B)foreign
C)combined
D)mixed

Question 34

When interest rates decline, investors who want to earn a high return may tend to ____ in stock mutual funds, and ____ deposits in depository institutions.

A)reduce; reduce
B)reduce; increase
C)increase; reduce
D)increase; increase

Question 35

Mutual funds whose funds are promoted strictly by the mutual fund of concern are called

A)closed-end funds.
B)load mutual funds.
C)no-load mutual funds.
D)open-end mutual funds.

Question 36

An expense ratio represents ____ divided by the fund's ____.

A)annual fees charged to investors; 12b-1 fees
B)annual fees charged to investors; net asset value
C)initial sales charge (load); 12b-1 fees
D)initial sales charge (load); net asset value

Question 37

A mutual fund consisting only of stocks of firms that are in a specific industry is an example of a ____ fund.

A)specialty
B)growth
C)capital appreciation
D)growth and income

Question 38

Money market funds are normally perceived to have ____ interest rate risk, and ____ default risk.

A)low; high
B)high; high
C)high; low
D)low; low

Question 39

Mutual funds that are composed of bonds that offer periodic coupon payments are called ____ mutual funds.

A)tax-free
B)income
C)high-yield
D)growth
E)none of the above

Question 40

If money market funds definitely expect interest rates to increase, they will ____ their average asset maturity.

A)not adjust
B)shorten
C)lengthen
D)shorten (if the expected change is small) or lengthen (if the expected change is large)

Question 41

Venture capital funds typically invest in stocks of publicly-traded companies.

Question 42

The number of exchange-traded funds has declined over the last several years because the cost of managing them was excessive.

Question 43

Closed-end fund managers must hold more cash than mutual fund managers.

Question 44

Index mutual funds are not traded throughout the day, while exchange-traded funds are.

Question 45

Mutual fund managers seek securities that have much liquidity so that they could easily sell them in the secondary market at any time.

Question 46

Which of the following statements is incorrect?

A)Commercial paper is commonly purchased by money market funds.
B)From an investor's perspective, money market funds usually have a low level of credit risk.
C)Money market funds tend to have low interest rate risk compared to bond funds.
D)If mutual fund managers expect interest rates to decrease in the future, they should use funds generated from maturing securities today to purchase new securities with shorter maturities.

Question 47

Many businesses that go public are partially backed by venture capital before the IPO.

Question 48

____ are beneficial for investors who want to invest in tax-exempt securities.

A)Municipal bond funds
B)Growth and income funds
C)International and global funds
D)Money market funds

Question 49

Which of the following statements is incorrect?

A)ETFs are like index mutual funds because the share price adjusts over time in response to the change in the index level.
B)Both ETFs and index mutual funds pay dividends in the form of additional shares to investors.
C)The portfolio management of both ETFs and index mutual funds is very complex.
D)ETFs can be traded throughout the day.

Question 50

____ are not exchange-traded funds.

A)Spiders
B)Growth mutual funds
C)Diamonds
D)Sector Spiders

Question 51

Investors can sell exchange-traded funds short.

Question 52

Vulture funds are a type of private equity fund that purchase distressed assets of a firm that is in or near bankruptcy.

Question 53

Hedge funds commonly engage in short selling.

Question 54

Exchange-traded funds can be purchased on margin.

Question 55

Private equity funds use most of their money to invest in stocks of publicly-traded companies.

Question 56

Closed-end funds are closed to new investment but allow redemptions by shareholders.

Question 57

When the demand for a particular closed-end fund is ____, the fund is likely priced at a ____.

A)high; discount
B)low; discount
C)high; premium
D)B and C are correct

Question 58

Funds that are designed to mimic particular stock indexes and are traded on a stock exchange are known as

A)index mutual funds.
B)exchange-traded funds.
C)money market funds.
D)none of the above

Question 59

Exchange traded funds can be

A)traded throughout the day.
B)purchased on margin.
C)sold short.
D)all of the above

Question 60

The most common investment by closed-end funds is in

A)derivatives.
B)bonds.
C)money market securities.
D)international equity securities.

Question 61

Mutual funds must register with the U.S. Treasury and provide to interested investors a prospectus that discloses details about the components of the funds and risks involved.

Question 62

____ trade at one-tenth of the S&P 500 value.

A)Spiders
B)Cubes
C)Diamonds
D)World Equity Benchmark Shares

Question 63

Portfolio managers are hired by the mutual fund to invest in a portfolio of securities that satisfies the desires of investors.

Question 64

Closed-end funds may sometimes engage in a stock repurchase, in which they purchase shares on the exchange where the shares are listed.

Question 65

The expenses incurred by a mutual fund are billed separately to investors, and are not included in the fund's net asset value (NAV).

Question 66

Capital appreciation funds are suited for investors who are more willing to risk a possible loss in value.

Question 67

Investors who feel capable of making their own investment decisions often prefer to invest in load funds.

Question 68

Equity REITs essentially represent fixed-income portfolios. Thus, their market values will be influenced by interest rate movements.

Question 69

A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.

Question 70

Exchange-traded funds differ from open-end funds in that their share price is adjusted only at the end of every day.

Question 71

Index funds are becoming increasingly unpopular because most mutual fund managers consistently outperform indexes.

Question 72

A mutual fund's performance is usually unrelated to market conditions.

Question 73

Diversification among types of mutual funds usually does little to reduce the volatility of returns on the overall investment.

Question 74

The net asset value (NAV) is estimated each day by first determining the market value of all securities comprising the mutual fund.

Question 75

Because money market funds contain instruments with short-term maturities, their market values are not very sensitive to movements in market interest rates.

Question 76

The term "mutual funds" is normally used to represent closed-end funds, and does not include open-end funds.

Question 77

The returns on international stock mutual funds are affected only by foreign companies' stock prices, and are independent of currency movements.

Question 78

Equity REITs are sometimes purchased to hedge against inflation, as rents and property values tend to rise with inflation.

Question 79

The SEC requires that a majority of the directors of a mutual fund board be independent (not employed by the fund).

Question 80

Large mutual funds can exert some control over the management of firms because they commonly represent the largest shareholders.