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BUS-440 > Ch. 4 - Mutual Funds & Other Investment Companies > Flashcards

Ch. 4 - Mutual Funds & Other Investment Companies Flashcards

1
Q

a sales charge levied when investors redeem shares (also called a “back-end” load)

A

CDSC - contingent deferred sales charge

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2
Q

investment company with a fixed # of shares that are bought and sold only in the open stock market

A

closed-end fund

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3
Q

a sales charge levied on purchases of shares in some mutual funds

A

front-end load

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4
Q

an investment company that is not accessible by the general public

A

hedge fund

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5
Q

a business that specializes in pooling funds from individual investors and investing those funds

A

investment company

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6
Q

mutual fund specializing in money-market instruments

A

money market mutual fund

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7
Q

value of assets minus liabilities, held by a mutual fund, divided by the number of shares outstanding

A

net asset value (NAV)

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8
Q

investment company that stands ready to buy and sell shares at any time

A

open-end fund

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9
Q

a measure of how much trading occurs of a fund, calculated as the lesser of total purchases or sales during a year divided by the avg. amount of assets

A

turnover

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10
Q

Named after SEC rule which allows funds to spend up to 1 % of fund assets annually to cover distribution & shareholder costs

A

12b-1

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11
Q

with open end funds, does the # of outstanding shares fluctuate over time or stay the same

A

fluctuates because the fund allows new shares to be sold to and old ones to be redeemed at any time

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12
Q

which funds are more popular with individual investors, open ended or closed ended?

A

open ended b/c the investment company owning the funds will allow the selling and redeeming of shares at any time

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13
Q

what’s another name for an open-ended fund?

A

mutual fund

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14
Q

For an investment fund company, who selects the funds the company invests individuals’ money?

A

fund manager

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15
Q

who selects the fund manager for an investment company?

A

board of directors

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16
Q

who chooses the board of directors for an investment firm?

A

shareholders by vote

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17
Q

can outstanding shares of close-ended funds vary or do they stay at the same amount?

A

stay at the same amount

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18
Q

how are closed-ended funds traded?

A

between investors belonging to the investment company

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19
Q

Does an investment firm governing a closed-ended fund redeem outstanding shares itself or sell shares to new investors?

A

No. Shares are traded between members only.

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20
Q

how is the worth of a fund represented?

A

by net asset value

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21
Q

how is net asset value calculated

A

total # of outstanding shares

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22
Q

Does NAV fluctuate daily for all mutual funds and why?

A

Yes, b/c of fluctuations in the value of the asset, the number of outstanding shares, etc.

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23
Q

What category of mutual funds constitutes the exception to the rule when it comes to daily fluctuation of fund value?

A

money market mutual funds

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24
Q

Why may closed-ended mutual funds not be worth their NAV?

A

because they are bought and sold in the stock market

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25
Q

What business model do investment companies form?

A

corporations

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26
Q

why would an investment company hire another investment company?

A

to manage its portfolio and perform other administrative duties

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27
Q

what 3 types of an investment company’s expenses does its expense statement show?

A

1) shareholder transactions
2) annual operating
3) hypothetical example

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28
Q

Does an investment firm’s expense statement show the demographic profile of its investors?

A

No

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29
Q

what are 3 advantages to mutual fund investing (pdc)

A

professional management, diversification, convenience

30
Q

are mutual fund returns typically higher or lower than market average returns?

A

lower

31
Q

Can exchange traded funds (ETFs) be traded on the stock market? Yes or no

A

Yes

32
Q

Can ETF shares be sold short? Yes or no

A

Yes

33
Q

Can ETF shares be bought on margin? yes or no

A

Yes

34
Q

Do ETF investors own shares of the underlying sponsor of a fund?

A

No

35
Q

How are front-end loads expressed?

A

as a percentage of the offering price, not NAV.

36
Q

Do ETFs and Close-ended mutual fund shares trade in the primary or secondary market?

A

secondary

37
Q

what are the 3 investment style strategies

A

1) growth
2) value
3) large & small cap

38
Q

What is the main advantage of investing in a fund of funds (FOF)?

A

improved diversification of assets

39
Q

what type of fund will likely incur the least amount of tax liability for an investor?

A

municipal bond fund

40
Q

what type of fund will incur the greatest risk for mutual fund investors?

A

small-cap growth fund

41
Q

what type of mutual fund fee is assessed annually?

A

12b-1

42
Q

12b-1 fees, assessed annually for a mutual fund, are the biggest or smallest expense for a long-term fund?

A

biggest

43
Q

What are the most difficult mutual fund fees and expenses to assess?

A

trading fees

44
Q

Why do some invest in front - end load mutual funds?

A

b/c no-load funds might not be available or an assumption that you get what you pay for

45
Q

The Net Asset Value (NAV) of money market mutual funds should always equal?

A

$1

46
Q

The NAV of money market mutual funds never ___________ and is extremely rare to _________.

A

rises, falls

47
Q

Why does the NAV of money market mutual funds always = $1?

A

because the number of shares available is kept constant at the level of the total dollar value of the fund

48
Q

why are exchange traded funds are popular with active traders?

A

b/c margin purchases and short sells are allowed

49
Q

Do exchange traded funds have continuous or end-of-day pricing?

A

continuous

50
Q

Do index mutual funds have continuous or end-of-day pricing

A

end-of-day

51
Q

why are index mutual funds better for periodic investors who invest in small amounts?

A

b/c there are no big commission fees like there are with ETFs

52
Q

how does keeping approx. 5% of assets liquid (cash) affect the returns of open-ended funds?

A

if the fund’s returns increase due to an increase in the fund’s value, then holding assets in cash decreases the return. If the fund’s value decreases, then having a % of its assets in cash may increase its return, or keep it from being as low as it would be had that portion of the assets not been kept in cash.

53
Q

Why is so much more of assets set aside in cash reserves for open-ended mutual funds vs. close-ended funds?

A

because open-ended funds have to be prepared to redeem outstanding shares of shareholders, which isn’t necessary for close-ended funds.

54
Q

Why do 12b-1 fees make so little sense wherein close-ended mutual funds are concerned?

A

b/c 12b-1 fees are supposed to pay for marketing and shareholder service fees which should not be necessary since close-ended funds are only sold on the secondary market

55
Q

If money market mutual funds can earn interest (which they can), then how is the $1 NAV (net asset value) maintained?

A

by issuing more shares to fund owners

56
Q

what happens to poor-performing mutual funds?

A

they are merged into better-performing funds since those that don’t do well don’t attract investors

57
Q

why are newly-offered closed-end funds generally considered very poor investments?

A

b/c they lose value immediately due to fund promoter fees and discount rate

58
Q

mutual funds can or cannot generally sell short or with high leverage (margin)?

A

cannot

59
Q

An Exchange Traded Fund (ETFs) is an index fund of ___ ________ _______.

A

(an index fund) of an index fund

60
Q

An ETF seeks to reach the same what?

A

return as a particular market index, such as Standard & Poor’s Depository Receipt (SPDR)

61
Q

what type of fee is associated with an ETF?

A

commission once an investor buys or sells funds

62
Q

What is the composition of an index fund?

A

index funds consist of stocks that make up a particular index in the same relative proportion of the entire particular index

63
Q

what are the 3 factors are NOT required of hedge funds which indicate they are close-ended funds?

A 
no
1)diversification 
2) liquidity
3) disclosure
are required
64
Q

what are the 6 terms of an options contract that must be stipulated? (ISCEED)

A

1) identity of underlying stock
2) strike price
3) contract size
4) expiration date (maturity)
5) exercise style
6) delivery /settlement procedure

65
Q

a list of available option contracts and their prices for a particular security arrayed by strike price and maturity

A

option chain

66
Q

options clearing corporation

A

private agency that guarantees terms of an option contract will be fulfilled if the option is exercised

67
Q

The S&P 100 Index, S&P 500 Index, & Dow Jones Industrials Average are all examples of?

A

stock index options

68
Q

the payoff an option holder receives assuming the underlying stock price remains unchanged from its current value

A

intrinsic value

69
Q

for call option w/ strike price of $50 and expiration price of $55, what’s the intrinsic value of the contract?

A

$5 per share of the contract(s)

70
Q

in the money option = ?

A

any option with a positive intrinsic value

71
Q

at the money option

A

any option w/ a strike price exactly equal to the underlying price

BUS-440 (5 decks)

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