Question 1

One of the advantages of municipal bond funds is that

Accepted Answer

Municipal bond funds can provide tax advantages as they are generally exempt from federal taxes and may also be exempt from state taxes depending on the state in which the investor resides. This can make them a beneficial investment for individuals seeking tax benefits.

Question 2

How is an asset allocation fund different from a balanced mutual fund?

Accepted Answer

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Question 3

Which of the following funds protect you from systematic risk?

Accepted Answer

Systematic risk, also known as market risk, affects the overall market, not just a particular stock or industry. It includes risks such as interest rates, recessions, and wars that cannot be eliminated through diversification. Therefore, none of the options provided (S&P 500 Index fund, Growth fund, Balanced fund) can protect you from systematic risk, as they are all subject to market-wide fluctuations.

Question 4

If you want to invest only in the telecommunications industry,which fund would be appropriate for you?

Accepted Answer

Both a Telecommunications sector fund and a Telecommunications ETF are specifically designed to invest in the telecommunications industry, making them appropriate choices for someone looking to invest solely in this sector.

Question 5

A balanced mutual fund is aimed at investors who want

Accepted Answer

A balanced mutual fund is designed to provide a combination of all three objectives - steady income, moderate growth in capital, and moderate stability in investments. Hence, investors who want any or all of these objectives can consider investing in a balanced mutual fund.

Question 6

Why are stock mutual funds so popular? Briefly outline the highlights of each type of fund.

Accepted Answer

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Question 7

What are the differences between an ETF and a mutual fund?

Accepted Answer

All of the options are correct. ETFs can be traded like stocks, can be purchased on margin or sold short like stocks, and are generally more tax-efficient than mutual funds. Mutual funds can only be bought or sold at the end of the trading day at the net asset value (NAV), while ETFs can be bought or sold throughout the trading day at market prices. Therefore, ETFs have additional flexibility and also offer the ability to trade on margin or short sell, which is not available in mutual funds.

Question 8

The mutual fund that invests in Treasury bills and very short-term notes and is considered practically risk free is the

Accepted Answer

The mutual fund that invests in Treasury bills and very short-term notes and is considered practically risk-free is a money market fund. Money market funds invest in short-term, low-risk debt securities, making them a good option for investors seeking a low-risk way to park cash or hold funds while making investment decisions.

Question 9

Prepare a case for investing in a bond fund versus individual bonds.

Accepted Answer

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Question 10

Bond funds differ from individual bond purchases in that

Accepted Answer

Bond funds do not have a maturity date like individual bonds, which means investors may be exposed to interest rate risks. However, they do offer professional management and higher liquidity compared to individual bonds. Option A is incorrect because bond funds offer higher liquidity with the ability to buy or sell shares daily, unlike individual bonds that have a fixed maturity date. Option B is also incorrect.

Question 11

There are dissimilarities between U.S.government,GNMA,municipal,and corporate bond funds.Please point them out.

Accepted Answer

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Question 12

Which of the following mutual fund services is similar in concept to compounding and the time value of money?

Accepted Answer

Automatic reinvestment allows investors to reinvest their dividends or capital gains, which is similar to compounding and takes advantage of the time value of money by potentially increasing the value of their investment over time.

Question 13

Life cycle funds

Accepted Answer

Life cycle funds are designed to tailor the holdings to the investor's individual age and risk tolerance. Therefore, option D is the correct choice. Option A is incorrect because life cycle funds can also be designed for people with less than 20 years until retirement. Option B is incorrect because life cycle funds usually do not require the investor to decide how to allocate their investments. Option C is incorrect because life cycle funds usually become more conservative as the retirement date nears.

Question 14

Donel is investing in a mutual fund that really is not as diversified as other funds.It may enjoy good capital gains but is also much riskier when it comes to unsystematic risk.This fund is called a(n)________ fund.

Accepted Answer

A sector fund concentrates on stocks in a particular industry or sector, making it less diversified than other funds. It may have good returns, but it also carries a higher risk of unsystematic risk.

Question 15

Money market mutual funds

Accepted Answer

Money market mutual funds are generally considered low-risk investments, making option A incorrect. Additionally, money market mutual funds can often be purchased with a minimum investment of as little as $1,000, making them accessible to many individual investors and ruling out option B. Finally, option C is correct, as money market mutual funds typically do not carry any load fees. Therefore, the best choice is C.

Question 16

Which of the following services do ETFs offer?

Accepted Answer

ETFs do not inherently offer services like automatic reinvestment, bookkeeping, tax help, or switching. These are typically features of mutual funds or brokerage services, not ETFs themselves.

Question 17

For an investor with some speculative money to invest,which fund would be an appropriate choice for potentially large returns?

Accepted Answer

All the options listed - Junk bond fund, Aggressive growth fund, and High technology sector fund - are suitable for an investor with speculative money looking for potentially large returns. These funds carry higher risks but also offer the possibility of higher rewards.

Question 18

Bonnie and James are retired.They wish to continue to invest in their portfolio and are seeking income instead of growth.Which should they invest in?

Accepted Answer

Bond funds are the best choice for Bonnie and James as they provide income and are less volatile than growth or sector funds. Growth funds are designed for growth, not income, while sector funds tend to be more specialized and riskier than bond funds.

Question 19

Compare the investment vehicles and tax treatment of tax-exempt and government securities money market mutual funds.

Accepted Answer

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Question 20

Of the different types of mutual funds,________ are by far the most popular,and now account for half of all mutual funds.

Accepted Answer

Stock mutual funds are by far the most popular type of mutual fund and account for half of all mutual funds. This is because they offer investors the opportunity to invest in a diversified portfolio of stocks, which can help to reduce risk and maximize returns. Additionally, stock mutual funds offer investors the ability to invest in a wide range of companies and industries, which can further diversify their investment portfolio.

Quiz 14: Mutual Funds: an Easy Way to Diversify