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 composed of bonds that offer periodic coupon payments are

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

Answer 2

A

Question 3

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

Answer 3

D

Question 4

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

Question 5

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

Question 6

Mutual funds

A)are unregulated.
B)are required to disclose the names of their portfolio managers in the prospectus.
C)must disclose their performance record over the past 20 years.
D)are exempt from all taxes.

Question 7

Mutual funds that do not repurchase their shares from investors are

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

Question 8

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 9

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 10

Most closed-end funds invest in

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

Question 11

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 12

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 13

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 14

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 15

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)they do not accommodate investors who want to sell their shares back to the fund.
D)they invest in very limited set of securities.

Question 16

To cover managerial expenses, mutual funds typically charge

A)management fees of 1 to 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 17

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

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

Question 18

Money market funds invest mostly in

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

Question 19

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 20

Investing in mutual funds is different from depositing money in a depository institution in that it represents partial ownership, whereas deposits represent a form of credit.

Question 21

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 22

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 23

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 24

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 25

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 26

Money market fund assets are dominated by

A)commercial paper.
B)repurchase agreements.
C)Treasury bills.
D)CDs.

Question 27

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 28

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

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

Question 29

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 30

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 31

____ are most likely to invest in mortgages.

A)Stock mutual funds
B)Bond mutual funds
C)Load funds
D)Closed-end funds
E)none of the above

Question 32

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 33

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 34

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 35

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 36

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 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

Mutual funds that are composed of bonds that offer periodic coupon payments and vary in exposure to risk are called ____ mutual funds.

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

Question 39

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 40

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 41

Hedge funds commonly engage in short selling.

Question 42

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

Question 43

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 44

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

Question 45

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

Question 46

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

Question 47

Exchange-traded funds can be shorted.

Question 48

____ are the most popular mutual funds when measures according to total assets.

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

Question 49

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 50

Exchange-traded funds can be purchased on margin.

Question 51

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

Question 52

Exchange traded funds can be

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

Question 53

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

Question 54

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 55

____ are not exchange-traded funds.

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

Question 56

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

Question 57

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

Question 58

Most closed-end funds invest in

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

Question 59

Which of the following statements is incorrect?

A)Commercial paper is the largest component in money market funds.
B)From an investor's perspective, money market funds usually have a low level of credit risk.
C)If managers are unable to change the asset composition of money market funds, they can still influence performance by changing the maturities of the securities in which they invest.
D)If mutual fund managers expect interest rates to decrease in the future, they should use funds generated from maturing securities to purchase new securities with shorter maturities.

Question 60

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

Question 61

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

Question 62

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

Question 63

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

Question 64

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

Question 65

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

Question 66

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

Question 67

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

Question 68

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

Question 69

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

Question 70

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

Question 71

Late trading of mutual funds involves engaging in a trade on prices that are stale or no longer appropriate.

Question 72

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

Question 73

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

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

Question 74

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 75

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

Question 76

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

Question 77

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

Question 78

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

Question 79

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 80

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