Question 1

A redemption charge is a

Accepted Answer

A redemption charge is a type of back-end load, which is a fee that is charged when an investor sells shares of a mutual fund. This fee is typically a percentage of the value of the shares being sold and is meant to discourage short-term trading and encourage long-term investing. Front-end loads, on the other hand, are fees that are charged when an investor buys shares of a mutual fund, while management fees and carrying fees are ongoing fees that are charged to cover the costs of managing and administering the fund.

Question 2

A fund that attempts to match the overall market's performance is

Accepted Answer

An index fund is a type of mutual fund or exchange-traded fund (ETF) that attempts to replicate the performance of a market index, such as the S&P 500 or the Dow Jones Industrial Average. Index funds are designed to closely match the overall performance of the market, rather than trying to outperform it like other types of funds, such as maximum capital appreciation funds. Therefore, the best choice that fits the description is an index fund.

Question 3

One difference between open-end and closed-end funds is that

Accepted Answer

The main difference between open-end and closed-end funds is the way their shares are bought and sold. In an open-end fund, shares are bought and sold directly from or to the fund, while in a closed-end fund, shares are bought and sold on the stock exchange like any other corporation's shares. The other options are incorrect.

Question 4

If you are seeking moderate growth and moderate current return,you should select

Accepted Answer

A balanced fund invests in a mix of stocks, bonds, and sometimes other investments such as cash or real estate. This diversification can provide moderate growth potential while also offering some current income through the bond portion of the portfolio. It is a good choice for investors seeking a balance between growth and income. Money market funds and income funds may not offer enough growth potential, while mixed funds may have a higher level of risk than desired for moderate growth objectives.

Question 5

An important characteristic of money market mutual funds is that

Accepted Answer

Money market mutual funds are different from other types of mutual funds primarily in terms of their return and potential for default risk. They invest in short-term, low-risk securities such as certificates of deposit, treasury bills, and commercial paper. As a result, they generally provide lower returns than other mutual funds but are considered safer investments. They are not insured by FSLIC and can be either open-end or closed-end funds. Money market funds also have a low degree of interest-rate risk as they invest in short-term securities with minimal chance of fluctuations in interest rates affecting their returns.

Question 6

A sector fund invests in

Accepted Answer

A sector fund typically invests in a particular industry, such as technology, healthcare, or energy. This allows investors to focus their investments on a single industry that they have knowledge of or believe will perform well in the future. Investing in a sector fund can be a good choice for those who want to diversify their portfolio while still maintaining a specific focus.

Question 7

A mutual fund's net asset value (NAV)reflects

Accepted Answer

The net asset value (NAV) of a mutual fund reflects the market value of all its holdings, meaning the total value of all the securities and assets it owns. This is divided by the number of outstanding shares to determine the NAV per share. The NAV is important for investors as it helps to determine the value of their investment and to monitor the performance of the fund.

Question 8

Which service below is usually not provided by a mutual fund?

Accepted Answer

Mutual funds do not provide insurance to protect against market losses. The other options - fund switching within a family of funds, transactions by telephone, and reinvestment plans - are commonly provided by mutual funds.

Question 9

A closed-end fund has a

Accepted Answer

A closed-end fund has a fixed number of shares, which are traded on an exchange like regular stocks. The number of investors can fluctuate as shares are bought and sold, and the fund may or may not have a front-end or back-end load.

Question 10

A fund's reinvestment plan allows investors to

Accepted Answer

A fund's reinvestment plan allows investors to automatically reinvest their dividends and/or capital gains into the fund's shares. This helps to increase the overall value of their investment over time. It does not involve making periodic deposits or regular withdrawals from the fund, nor does it involve reinvesting profits from one fund into shares of another fund.

Question 11

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

Accepted Answer

Load funds charge a commission or sales fee, which is added to the net asset value of the fund when purchased. No-load funds do not have these fees, so you buy them directly at their net asset value.

Question 12

Which of the following is not a characteristic of money market mutual funds?

Accepted Answer

Money market mutual funds typically have minimum withdrawal limits, making option A incorrect as a characteristic.

Question 13

A closed-end fund's appeal is enhanced if it

Accepted Answer

A closed-end fund's appeal is enhanced if it sells at a discount, as investors can purchase the fund's shares at a lower price than the underlying assets' value. This provides the potential for higher returns in the future when the fund's shares trade closer to their net asset value. On the other hand, a premium would mean that the shares are trading at a higher price than their net asset value, potentially leading to lower returns for investors who purchase at that price. Load fees (front-end or back-end) are independent of the fund's market price and are paid to compensate the broker or financial advisor.

Question 14

In relation to no-load funds,load funds show

Accepted Answer

Load funds and no-load funds are both types of mutual funds, with the main difference being the presence or absence of a sales charge or "load" that is paid by investors to the fund company or broker. Studies have shown that load funds do not typically outperform no-load funds, and in some cases, may actually underperform when the sales charges and other fees are taken into account. Therefore, the best choice is to invest in no-load funds, which do not have sales charges and generally offer similar or better performance compared to load funds.

Question 15

The Ajax Fund,which trades on the New York Stock Exchange,was quoted with a NAV of $10 and an offer price of $10.50.Thus,we know the fund is

Accepted Answer

The fund is closed-end because it trades on the New York Stock Exchange. It has a load because the offer price is higher than the NAV.

Question 16

Which type of mutual fund can be purchased at a premium or discount?

Accepted Answer

Closed-end funds are traded on stock exchanges and their prices are determined by supply and demand, which means they can be purchased at a premium or discount to their net asset value (NAV). Load funds and no-load funds refer to the fees or commission charged to investors and do not affect the price at which the funds can be purchased. Open-end funds trade at their NAV, so they cannot be purchased at a premium or discount.

Question 17

A mutual fund is an organization that

Accepted Answer

A mutual fund is an organization that pools money from multiple investors and then invests that money in a diversified portfolio of securities issued by corporations and governments. The goal is to provide investors with diversification, professional management, and potential returns.

Question 18

The Druid Fund has a NAV of $9.00 and an offer price of $9.45.We know,then,that

Accepted Answer

The fact that Druid has an offer price higher than its NAV indicates that it is a load fund. Load funds charge a sales commission, which is added to the NAV to determine the offer price. In this case, the load is $0.45, which is added to the NAV of $9.00 to arrive at an offer price of $9.45.

Question 19

The Flash Fund owns 4,000 of GM and 8,000 shares of Microsoft.GM's price is $20 and Microsoft's is $25.If the fund has 5,000 shares outstanding,its NAV per share is

Accepted Answer

The answer of The Flash Fund owns 4,000 of GM...

Question 20

The Jerry Fund,which trades on the New York Stock Exchange,has a NAV of $20 and a market price of $22.We know,then,the fund is

Accepted Answer

The fact that the market price is higher than the NAV indicates that the fund is selling at a premium, which is a characteristic of a closed-end fund.

Quiz 12: Mutual Fundsother Pooling Arrangements: Simplifying, Maybe Improving Investment Performance