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Personal Finance: Chapter Seventeen
Terms in this set (119)
Mutual funds pool money from investors to purchase portfolios of investments.
The difference between stock mutual funds and bond mutual funds lies in the percentage of stocks and bonds that each fund purchases.
A mutual fund is a diversified portfolio of stocks and/or bonds depending on what the manager has purchased.
Two advantages of investing in mutual funds are diversification and professional management.
An advantage of investing in mutual funds is that they all have the objective of preserving capital.
The net asset value (NAV) per share of a mutual fund is determined by the market value of securities owned minus liabilities divided by the number of mutual fund shares outstanding.
There is no limit on the number of open-end mutual fund shares that a company can offer.
Open-end mutual fund companies sell directly to investors and repurchase shares whenever investors wish to sell them.
Closed-end mutual funds have a limited number of shares that are sold when the funds are first created and are resold over the stock exchanges.
The price per share for a closed-end mutual fund can differ from the fund's NAV per share.
No-load mutual funds sell directly to investors and charge a somewhat smaller management fee than load funds.
In most cases, the fees charged by load funds go to stockbrokers or other financial advisors who execute transactions for investors.
Studies on mutual funds have found that load funds perform better than no-load funds.
) Some mutual funds have much higher expenses or expense ratios than others, and this expense can affect your overall returns.
On average, mutual funds have an expense ratio of about 3 percent.
In general, it is prudent to purchase a no-load fund instead of a load fund.
In assessing different mutual funds, the returns vary, but the expenses are fixed.
While not all mutual funds have loads or commissions, they all have management fees and expenses that are charged to the mutual fund shareholders.
Of the management, advertising, and administrative fees charged by mutual funds, normally the management fee is the smallest.
Which is not a reason for investing in mutual funds?
A) Small amount of funds needed
B) Portfolio manager expertise
C) Specific investment goals
D) Overly diversified
Advantages of investing in mutual funds include all of the following except
A) diversification of your investment.
B) professional management.
C) meeting specific investment goals.
D) there is virtually no risk of loss.
The ________ is the market value of the securities that a mutual fund has purchased minus any liabilities.
A) book value
B) net asset value
C) gross asset value
D) net worth value
) The net asset value (NAV) is reported in most daily newspapers
A) for the total fund.
B) on a per-share basis.
C) in dollars and fractions of dollars.
D) on a weekly basis due to the complexity of computation.
In calculating the net asset value, which of the following is true?
A) Dividends are subtracted and expenses added
B) Interest is subtracted and expenses are added
C) Dividends are added and expenses are subtracted
D) Interest and other expenses are not included
Which of the following is not a true statement about mutual funds?
A) All have a minimum investment required.
B) All have the same investment goals.
C) The calculation of net asset value is the same.
D) All have a management expense ratio.
To calculate the NAV, the market value of the portfolio less liabilities is divided by the ________ to arrive at a per-share basis.
A) original number of shares
B) shares currently issued by the fund
C) maximum shares to be issued
D) average number of shares in comparable funds
Mutual funds, which sell shares directly to investors and repurchase shares investors want to sell, are called ________ funds.
D) fair value
An open-end mutual fund may do all of the following except
A) charge no fee to buy or sell shares.
B) charge a fee to buy but not sell shares.
C) charge a fee to sell but not buy shares.
D) charge a fee to both buy and sell shares.
A family of mutual funds is
A) where all of the funds have the same objective.
B) a number of funds with different objectives operated by one investment company.
C) where a number of competing investment companies pool their resources.
D) quite rare in the mutual fund industry.
Existing shares of closed-end mutual fund companies are purchased
A) from the investment company directly.
B) from the investment company through a broker.
C) from other investors in the stock market.
D) from a bank.
Which of the following characteristics are not true of closed-end funds?
A) They are not regulated
B) They do not repurchase shares from investors
C) They are bought and sold on stock exchanges
D) They may sell above or below NAV
Stock brokers typically do not sell no-load funds because
A) the return is lower than load funds and they want to sell only the best funds to keep their clients.
B) they are prohibited by federal law.
C) the load is usually paid to the broker for selling the shares, therefore, no load, no fee.
D) there is no secondary market for them.
Regarding load and no-load mutual funds,
A) load funds usually out perform no-load funds.
B) no-load funds perform just as well as load funds when the fees are ignored.
C) the two types of funds perform about the same considering the fees.
D) load funds may be bought directly, where no-load funds must be purchased through a broker.
On the average, actively managed mutual funds have an expense ratio of about
A) 1.5 percent.
B) 2.5 percent.
C) 3 percent.
D) 5 percent.
Which of the following expenses is usually the highest for a mutual fund?
A) Management fees
B) Administrative fees
C) 12-b-1 fees
D) Referral fees
The amount by which a close-end fund's share price in the secondary market is above the fund's NAV is called the
A) market value.
D) par value.
The amount by which a close-end fund's share price in the secondary market is below the fund's NAV is called the
A) market value.
D) par value.
The component of expense ratios that includes the fee charged by some mutual funds to pay brokers is
A) management fees.
B) 12-b-1 fees.
C) administrative expenses.
D) referral fees.
A mutual fund has a beginning balance of $100 million, earns interest of $10 million, receives dividends of $15 million, and has expenses of $5 million. If 10 million shares are outstanding, what is the NAV?
What would be the return on a $1,000 investment in a mutual fund whose NAV is $20? The fund has a 3% front-end load and during the holding period, $400 of fund distributions are reinvested at a NAV of $25 (no load applied to reinvestments). The fund is ultimately sold at a NAV of $24. (Round to the nearest tenth of a percent.)
If a mutual fund's NAV is $50 and its expense ratio is 2.0 percent, what are the total expenses per share?
How much money would you need to purchase 400 shares of a mutual fund with a NAV of $55 per share and a 3% load? (Round to the nearest dollar.)
) The price of shares in a mutual fund is referred to as the ________.
Net Asset Value
Mutual funds that are traded on stock exchanges are called ________.
A mutual fund that does not charge investors a fee and sells direct to investors is a(n) ________ mutual fund.
A stock mutual fund that pays higher than normal dividends is called a growth fund.
Capital appreciation funds are mutual funds that focus on stocks that are expected to grow at a very high rate.
Capital appreciation funds tend to invest in stocks that distribute little or no dividends so that earnings can be reinvested for expansion.
Balanced growth and income funds contain both growth stocks and stocks that pay high dividends.
A mutual fund that buys only the stocks of gold mining companies is a good example of a sector fund.
Index stock funds always contain every company's stock that make up the particular index.
) Index mutual funds tend to have lower expenses than other types of mutual funds.
Index funds usually have lower capital gains on their investments and are, therefore, advantageous to investors in higher income tax brackets.
An international stock mutual fund is one that owns shares in companies from the United States and other countries.
Socially responsible mutual funds are those whose managers have taken and passed a strict financial ethics test.
Corporate bond funds focus on bonds issued by high-quality firms and, therefore, tend to have a low degree of default risk.
Municipal bond funds have tax advantages over other kinds of mutual funds.
A small-cap fund focuses on firms that are relatively small and somewhat overlap capital appreciation funds.
You are considering investing in a no-load mutual fund that focuses on growth stocks or in an index fund. The growth stocks had an annual return of 15% and expenses of 2 percent. The index fund had an annual return of 12% and expenses of 1 percent. Assuming equal risk, you should buy
A) the index fund.
B) the growth fund.
C) some of both.
D) neither; the expenses are too high.
You are investing for your retirement 20 years hence. You would be most interested in a fund whose investment objective is focused on
A) long-term growth.
B) capital conservation.
C) income generation.
D) a balance of some growth but mostly high dividends.
Which of the following is a stock mutual fund?
A) Ginnie Mae
B) Balanced growth and income
Which of the following stock mutual funds are more established than small-cap firms, but may have less growth potential?
A) Equity income
B) Sector funds
C) Mid-size capitalization
D) Balanced growth and income
Which of the following stock funds would probably have the lowest risk and return?
B) Capital appreciation
D) Sector funds
Which of the following funds have the higher potential risk and return?
B) Capital appreciation
Investing in which of the following funds will typically give you the least diversification?
A) Growth funds
B) Capital appreciation funds
C) Equity income funds
D) Sector funds
The return on an index fund may be less than the return on the index it represents because of all of the following except
A) it may not own all the companies included in the index.
B) the load charge.
C) the expense ratio.
D) excessive commissions on frequent trades by the fund.
________ funds are mutual funds that attempt to mirror the movements of existing broad market indicators.
Index funds incur ________ expenses and are ________ managed compared to other funds.
A) fewer; not actively
B) fewer; actively
C) more; not actively
D) more; actively
) Index funds also offer tax advantages because they ________ in much trading and, therefore, ________ capital gains.
A) engage; generate
B) do not engage; generate
C) engage; do not generate
D) do not engage, do not generate
The difference between an international and a global fund is
A) global funds invest in U.S. firms and those of other countries too.
B) international funds invest in U.S. firms or governments while global funds do not.
C) international funds invest in Treasury securities but no U.S. firms while global funds invest in both.
D) there is no difference except in name.
Global funds are not usually subject to the following risk?
A) Interest rate
High yield (junk) bond funds focus on relatively risky bonds issued by firms that are subject to
A) default risk.
B) interest rate risk.
C) exchange risk.
D) management risk.
) International bond funds are
A) issued by non-U.S. firms or governments.
B) offer a higher yield than U.S. bonds.
C) subject to exchange risk.
D) All of the above.
________ mutual funds invest in foreign bonds as well as U.S. bonds.
A) International bond
C) Treasury bond
D) Global bond
Index funds are popular for all of the following reasons except
A) their performance relative to other mutual funds.
B) they incur low expenses.
C) they are not actively managed.
D) performance is frequently lower than actively managed portfolios.
Which of the following statements regarding technology funds is not true?
A) These firms are relatively young.
B) They have a low degree of risk.
C) They have potential for high returns.
D) They do not have a consistent record of strong performance
A fund that would appeal to an investor who did not have strong opinions about which stocks to purchase would be a(n)
A) index fund.
B) sector fund.
C) exchange-traded fund.
D) growth fund.
A mutual fund that invests only in healthcare-related companies is an example of a(n) ________ fund.
funds that sell to individuals and invest in bonds
bond mutual funds
mutual funds that focus on a specific industry
stocks that are expected to grow at a very high rate
capital appreciation funds
mutual funds that focus on firms that pay a high level of dividends
equity income funds
mutual funds that are growth stocks and pay dividends
balanced growth and income
Mutual funds that receive dividends and capital gains must distribute these to investors in the same year.
Hedge funds, which are not regulated by the Securities and Exchange Commission, are only available to wealthy investors and are less risky than ordinary mutual funds.
Capital gains from mutual funds can be received if the mutual fund makes a profit on the shares it sells or if an individual investor realizes a gain on the sale of mutual fund shares.
Even bond mutual funds with little or no default risk have an interest rate risk.
) Investors in high tax brackets will normally achieve higher performance by selecting mutual funds that generate
A) long-term dividends.
B) long-term capital gains.
C) long-term stock dividends.
D) short-term capital gains.
A mutual fund must distribute ________ to investors in the same year as earned.
C) capital gains
D) Both A and C.
Which of the following is not a source of profits for owners of a stock mutual fund?
A) Dividends distributed by the mutual fund
B) Interest distributed by the mutual fund
C) Capital gains distributed by the mutual fund
D) Capital gains from the sale of your shares in the mutual fund
The possibility that the Fed may raise the discount rate is an example of
A) political risk.
B) exchange rate risk.
C) interest rate risk.
D) liquidity risk.
Treasury bond funds with short maturities have ________ default risk and ________ interest rate risk.
A) high; low
B) high; high
C) limited; high
D) low; limited
High yield bond funds have a ________ potential return and ________ risk.
A) high; low
B) high; high
C) low; high
D) low; low
Which of the following bond mutual funds has both the highest default risk and interest rate risk?
A) Long-term Treasury
B) Short-term Ginnie Mae
C) Short-term corporate
D) Long-term high-yield
Which of the following bond mutual funds has both the lowest default risk and interest rate risk?
A) Short-term Treasury
B) Long-term Ginnie Mae
C) Long-term corporate
D) Short-term high yield
Investors can earn a return on an investment in a mutual fund in all of the following ways except
A) dumping the fund after a couple of bad years.
B) dividend distribution.
C) capital gains distributions.
D) redeeming shares.
The susceptibility of a mutual fund's performance to general stock market conditions is known as
A) interest rate risk.
B) market risk.
C) exchange risk.
D) corporate risk.
What would be the tax consequence of owning a mutual fund that made distributions of $600 resulting from short-term gains and $800 resulting from long-term gains assuming a 30% tax bracket and a 10% capital gains rate?
If a mutual fund's performance is the result of factors in the general stock market, the fund is being impacted by the ________ risk.
Choosing a mutual fund or an investment company involves reviewing past performance and also comparing fees and expenses charged.
Before investing in a mutual fund, you should request and evaluate the fund's prospectus, which is available for a small charge.
A breakdown of the fees and expenses of a mutual fund is not one of the items addressed in a prospectus.
A(n) ________ is a document that provides financial information about a mutual fund, including expenses and past performance.
A) annual report
C) financial statement
D) balance sheet
Before investing in a mutual fund the very least you should do is
A) read the prospectus.
B) consult an attorney.
C) open an account with a broker.
D) consult a certified financial planner.
Which of the following is not included in the prospectus?
A) Redemption fee or back-end load
B) Expenses including management fees
C) Expenses including advertising and marketing fees
D) Advice on when to buy and sell
In considering various fund characteristics, which of the following should you not consider?
A) Minimum investment
B) Investment objective
C) Investment company
D) S & P ratings
In deciding if a no-load mutual fund is a good investment for you, you should carefully consider all of the following except
A) the fund's investment objective.
B) the broker's recommendations.
C) the fund's investment strategy.
D) your risk tolerance level.
The most important expense statistic mentioned in the prospectus is
A) gross profit margin ratio.
B) the expense ratio.
C) times interest earned ratio
D) back-end load ratio.
You may purchase an open-end no-load mutual fund in all of the following ways except
A) over the phone.
B) by U.S. mail.
C) over the Internet.
D) from a broker.
The best way to predict a mutual fund's performance is to
A) ask your stock broker.
B) look it up on the Internet.
C) look at past performance.
D) study the investment strategy as it relates to the current economic conditions.
) A stock mutual fund's prospectus typically states that the fund is subject to all of the following risks except
A) market risk.
B) general decline in the stock market.
C) substantial declines in individual stocks.
D) default risk.
List five considerations or characteristics when purchasing a mutual fund.
Investment objective, return, expense ratio, load or no-load, minimum investment amount, risk, types of stocks or bonds in the portfolio, prior history and financial condition of the fund, investment company.
When an investment company offers several different mutual funds, its name is printed in bold, but individual funds are not listed.
Stocks that performed well in one quarter will not necessarily perform well in another quarter.
) Lipper indexes indicate the mean return for various types of mutual funds.
Because a mutual fund is already diversified with perhaps 100 or more different investments, further diversification is not recommended or necessary.
The best investment strategy is to
A) diversify across stock and bond mutual funds with different objectives.
B) hold only bond mutual funds from U.S. corporations.
C) buy only one or two stock mutual funds.
D) buy individual stocks and bonds in different sectors.
An arrangement offered by some brokerage firms that enable investors to diversify among various mutual funds and receive summary statement information is called a
A) mutual fund firm.
B) mutual fund security.
C) mutual fund supermarket.
D) mutual fund family.
Which of the following statements about hedge funds is not true?
A) Sell shares to wealthy individuals and financial institutions
B) Charge high management fees
C) Require a large initial investment
D) Exposed to very little risk
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