Question 1

Sally wants to invest in a mutual fund. The mutual fund must provide a(n) ____ to her as a potential investor.

Accepted Answer

A prospectus is a legal document that mutual funds are required to provide to potential investors. It contains information such as the fund's investment objectives, past performance, risks, and fees. This information is important for Sally to make an informed decision about investing in the mutual fund. While analysis, past performance reports, quarterly reports, and summary reports may be helpful, they are not as comprehensive as a prospectus.

Question 2

Earnings paid to shareholders that are not related to the sale of securities in the fund's portfolio are called

Accepted Answer

Income dividends are payments made by the mutual fund to its shareholders from the fund's net investment income and other income sources, such as dividends and interest earned on the securities in the fund's portfolio. These earnings do not come from the sale of securities in the fund's portfolio, which is different from capital gain distributions, which are payments made from the net gains of the fund's securities sales.

Question 3

Which of the following provides up-to-date information quickly without having to make a trip to the library?

Accepted Answer

The answer of Which of the following provides up-to-date information...

Question 4

Professional advisory services provide detailed information about mutual funds. Which of the following is not a professional advisory service?

Accepted Answer

Dun and Moody's are credit rating agencies that provide credit ratings and reports on bonds, not mutual funds. The other options listed are all professional advisory services that provide information about mutual funds.

Question 5

Which of the following is not a way one can access reliable information about mutual funds on the internet?

Accepted Answer

Reviewing blogs from amateur investors is not a reliable source of information about mutual funds as these investors may not have the necessary expertise or qualifications to provide professional advice. The other options listed are all reliable sources of information about mutual funds.

Question 6

Which of the following have reduced or eliminated mutual fund coverage?

Accepted Answer

Newspapers have reduced or eliminated mutual fund coverage due to the rise of digital media and the availability of more timely information online.

Question 7

Which of the following is true about mutual funds and taxes?

Accepted Answer

Investment companies are required by law to send each shareholder a year-end statement that specifies how much each received in income dividends and capital gain distributions. This statement is needed to accurately report the income on your federal tax return. Option A is incorrect as capital gain distributions are taxed as long-term or short-term depending on how long you held the shares. Option B is also incorrect as income dividends are only taxed when they are received by the shareholder, which can be monthly or annually depending on the fund. Option D is incorrect as capital gains distributions are reported on your federal tax return. Option E is incorrect as taxes cannot be completely eliminated, but they can be deferred if you hold your mutual fund shares in a tax-advantaged account like a 401(k).

Question 8

Melinda wants to withdraw some money from her mutual fund. She has a minimum asset value of $10,000. Which of the following is not an option available for her to systematically withdraw some money?

Accepted Answer

Options A, B, C, and D are common systematic withdrawal plans offered by mutual funds. Option E is incorrect because mutual funds typically do not differentiate between principal and interest dividends/capital gains for withdrawal purposes; earnings are reinvested to purchase more shares, and withdrawals typically reduce the number of shares owned.

Question 9

The Anderson Balanced mutual fund charges a sales load of 4.85%. If you invest $15,000, how much of your investment will actually be used to purchase shares in the fund?

Accepted Answer

The sales load of 4.85% on a $15,000 investment would be $727.50. Therefore, the amount of the investment that will actually be used to purchase shares in the fund is $15,000 – $727.50 = $14,272.50.

Question 10

All of the following are valid ways to purchase open-end mutual funds except

Accepted Answer

All of the options listed (A through D) are valid ways to purchase open-end mutual funds. A regular account transaction involves buying shares directly, a voluntary savings plan allows for periodic investments, a contractual savings plan involves a commitment to invest a fixed amount regularly, and a reinvestment plan enables the reinvestment of dividends or capital gains.

Question 11

When you sell your shares in a mutual fund, you may receive a profit that results from an increase in value called

Accepted Answer

When you sell your shares in a mutual fund, if the value of the shares has increased since you purchased them, you may receive a profit known as a capital gain.

Question 12

If you hold mutual fund shares in your Roth individual retirement account, the taxes on reinvested income will be

Accepted Answer

Since a Roth IRA is funded with after-tax dollars, any income (including reinvested income) generated by mutual fund shares held within the account will not be subject to taxes. Therefore, the taxes on reinvested income will be eliminated.

Question 13

Which of the following contains a letter from the president of the investment company, detailed financial information, a schedule of investments, and a letter from the fund's independent auditors?

Accepted Answer

A mutual fund annual report typically includes a letter from the president of the investment company, detailed financial information, a schedule of investments, and a letter from the fund's independent auditors.

Question 14

How do mutual funds provide returns to their shareholders?

Accepted Answer

Mutual funds can provide returns to their shareholders through income dividends, capital gain distributions, and capital gains. Income dividends are paid out by mutual funds to their shareholders when the underlying holdings of the fund generate income, such as interest or dividend payments from stocks or bonds. Capital gain distributions are paid out when the fund sells holdings for a profit and distributes the profits to shareholders. Capital gains occur when the value of the mutual fund holdings increases and the fund is sold for a profit. So, mutual funds provide returns to their shareholders through dividends, distributions, and gains.

Question 15

The investments in the Alamo Basics Contingency Fund have a current market value of $800 million. The fund also has liabilities that total $60 million. If this mutual fund has 20 million shares, what is the net asset value per share?

Accepted Answer

The net asset value per share is calculated by dividing the net assets of the fund by the number of shares outstanding. The net assets of the fund are the current market value of the investments minus the liabilities. In this case, the net assets are $800 million - $60 million = $740 million. The net asset value per share is $740 million / 20 million shares = $37.00.

Question 16

The investments in the Already Been Counted Fund have a current market value of $600 million. The fund also has liabilities that total $40 million. If this mutual fund has 25 million shares, what is the net asset value per share?

Accepted Answer

The net asset value (NAV) per share is calculated by subtracting the fund's liabilities from its assets to get the net assets, and then dividing by the number of shares. Here, the net assets are $600 million - $40 million = $560 million. Dividing by 25 million shares gives a NAV per share of $22.40.

Question 17

A problem with taxation of mutual funds is

Accepted Answer

The problem with taxation of mutual funds is that investors are required to report reinvested income dividends and capital gain distributions on their federal tax return as current income. This means that even if an investor does not sell their mutual fund shares, they still have to pay taxes on the dividends and capital gains that the fund generates. This can be a burden for investors, especially if they hold multiple mutual funds in their portfolio.

Question 18

Payments to a fund's shareholders that result from the sale of securities in the fund's portfolio are

Accepted Answer

Payments to a fund's shareholders that result from the sale of securities in the fund's portfolio are capital gain distributions. This is because mutual funds are required by law to distribute any net capital gains to shareholders at least once a year. These capital gains can result from the sale of securities within the fund's portfolio, and are typically classified as short-term or long-term depending on the holding period of the securities. Income dividends, on the other hand, are payments made by a fund's portfolio of income-generating securities, such as stocks and bonds.

Question 19

The Anderson Balanced mutual fund charges a sales load of 4.85%. If you invest $15,000, how much must you pay in commissions?

Accepted Answer

The sales load charged by the Anderson Balanced mutual fund is 4.85%, which means that 4.85% of the invested amount needs to be paid as commission. Therefore, the commission payable on an investment of $15,000 will be 4.85% of $15,000, which is $727.50. So, the correct answer is D, $727.50.

Question 20

Professional advisory services provide research on mutual funds in a report that includes all of the following areas except

Accepted Answer

Professional advisory services typically provide a comprehensive report on mutual funds that includes all of the areas listed - historical profile, statistical information, performance, risk, and portfolio analysis, as well as a summary of the analyst's research. Therefore, all of these areas are typically included by professional advisory services, making option E the correct answer.

Quiz 13: Investing in Mutual Funds