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Finance 3300 > Chapter 16 > Flashcards

Chapter 16 Flashcards

1
Q

How many individuals own mutual funds?

A

90 million

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2
Q

How many mutual funds are there today?

A

over 11,000

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3
Q

What is the combined value of assets owned by mutual funds in 2018?

A

$18.75 trillion

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4
Q

What are the three major reasons investors purchase mutual funds?

A

professional management; convenient way to invest; diversification

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5
Q

Elaborate on diversification as a reason for investors to purchase mutual funds.

A

investors’ funds are used to purchase a variety of investments, which provides some safety

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6
Q

Define closed-end funds. (2)

A

shares issued by an investment company only when fund is organized; after all original shares are sold, you can purchase shares only from another investor who is willing to sell

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7
Q

How many closed-end funds were there in 2017?

A

568

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8
Q

What was the value of closed-end funds in 2017?

A

$289 billion

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9
Q

Define exchange-traded funds. (3)

A

funds that invest in the stocks contained in a specific stock index; not actively managed; trade like a stock

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10
Q

How many exchange-traded funds were there in 2017?

A

1,411

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11
Q

What was the value of exchange-traded funds in 2017?

A

$2 trillion

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12
Q

Describe open-end funds. (2)

A

shares issued and redeemed by the investment company at the request of investors; investors can buy and sell shares at the net asset value

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13
Q

How many open-end funds were there in 2017?

A

7,923

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14
Q

What was the value of open-end funds in 2017?

A

$15.9 trillion

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15
Q

What is net asset value?

A

the price per share after expenses

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16
Q

What is the formula to calculate net asset value?

A

(value of fund’s portfolio - liabilities) / number of outstanding shares

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17
Q

Define load fund. (2)

A

investors pay commission (sales charge) every time they purchase shares; average charge is 2-5% for which an investor can get purchase advice and explanations

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18
Q

Give two synonyms for load fund.

A

front load; Class A shares

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19
Q

Define no-load fund. (2)

A

investors pay no upfront sales charge because there are no sales people; deal directly with investment company

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20
Q

Define contingent deferred sales load. (3)

A

charged upon withdrawal of funds (1-5%); discourages early withdrawal of funds; generally decreases on a sliding scale, depending on the number of years the shares are held

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21
Q

Give two synonyms for contingent deferred sales load.

A

back load; Class B shares

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22
Q

Define management fee.

A

charged yearly (0.5 - 1% average) based on a percentage of the fund’s asset value

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23
Q

Define 12b-1 fees.

A

Annual fee to defray distribution and marketing costs; cannot exceed 1% of a fund’s assets per year; cannot exceed 0.25% to be called “no-load”

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24
Q

Give a synonym for 12b-1 fees.

A

Class C shares

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25
Q

Define expense ratio. (2)

A

consists of different management fees and additional fund operating costs for a specific mutual fund; should not exceed 1%

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26
Q

Aggressive growth funds buy

A

risk-oriented stocks in fast-growing companies, such as Amazon, Facebook, and Uber

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27
Q

Equity income funds invest in

A

stocks of companies with a long history of paying dividends, such as McDonald’s or AT&T

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28
Q

Global stock funds buy

A

stock in companies in the U.S. and other countries (Vanguard Global Stock Index Fund: 55% overseas and 45% US)

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29
Q

Growth stock funds buy

A

stock in companies with higher-than-average revenue and earnings growth, such as Target or ExxonMobil

30
Q

Index funds buy

A

stocks that mirror and index, such as Vanguard Inflation-Protected Securities Fund

31
Q

International funds invest in

A

foreign stocks sold in securities markets throughout the world, excluding the US, such as Shell Oil

32
Q

Large-cap funds invest in

A

companies with a capitalization of $10 billion or more, such as Apple

33
Q

Mid-cap funds invest in

A

companies with a total capitalization of $2 to $10 billion, such as Ulta or Best Buy

34
Q

Regional funds buy

A

stock in companies in a specific region of the world, such as Europe or the Pacific Rim

35
Q

Sector funds buy

A

stock in companies in a particular industry, such as biotechnology or energy

36
Q

Small-cap funds buy

A

stock in lesser-known companies with a capitalization of between $300 million and $2 billion, such as Fossil

37
Q

Socially responsible funds avoid

A

investing in companies that produce harmful products

38
Q

High yield (junk) bond funds buy

A

corporate bonds that are higher risk and higher yield

39
Q

What is the term length of intermediate corporate bonds?

A

3-10 years

40
Q

Intermediate U.S. bond funds buy

A

Treasury notes with maturities of 3-10 years

41
Q

What is the term length of long-term corporate bonds?

A

greater than 10 years

42
Q

Long-term U.S. bond funds buy

A

U.S. Treasury and U.S. zero-coupon bonds with maturities greater than 10 years

43
Q

What are short-term corporate bonds?

A

investment-grade bonds with maturities of 1-3 years

44
Q

Short-term U.S. bond funds invest in

A

U.S. Treasury issues of 1-3 years

45
Q

Municipal bonds provide

A

investors a tax-free interest income

46
Q

World bond funds buy

A

bonds of foreign companies and governments

47
Q

Define asset allocation funds.

A

invest in various asset classes, such as stocks and bonds, with precise amounts within each type

48
Q

Define balanced funds.

A

invest in both stocks and bonds, with the primary objectives of conserving principal, providing income as well as growth

49
Q

Define funds of funds.

A

invest in shares of other mutual funds

50
Q

Define lifecycle funds.

A

initially invest in more risk-oriented securities and become increasing conservative + income-oriented as specified retirement date approaches

51
Q

Give another name for lifecycle funds.

A

target date funds

52
Q

Define money market funds.

A

invest in CDs, government securities, and other safe investments

53
Q

What are exchange privileges?

A

allow you to move your money from one fund to another within the fund family with little or no penalty

54
Q

An index mutual fund is

A

mirror image of a specific index

55
Q

How have most managed funds performed in the S&P 500?

A

Most managed funds have underperformed in the S&P 500 Index over a long period of time

56
Q

Which one has a lower expense ratio — managed or indexed funds?

A

indexed funds, with a lower expense ratio less than or equal to 0.50%

57
Q

Which types of mutual funds have to be purchased in a securities exchange or in the OTC market?

A

closed-end funds or exchange-traded funds

58
Q

Define income dividends.

A

earnings that fund pay to shareholders from dividend and interest income

59
Q

How are income dividends taxed?

A

taxed as regular income (5% if MTR is 10-15%; 15% if MTR is 25-35%)

60
Q

Capital gains are reported where?

A

Sch. D of Form 1040

61
Q

How are shares taxed when selling?

A

taxed on short-term basis if less than 1 year, taxed on long-term basis if 1 year or greater

62
Q

What are capital gain distributions?

A

payments to shareholders from fund’s internal sale of securities

63
Q

Where are capital gain distributions reported?

A

Sch. D of form 1040

64
Q

How are capital gain distributions taxed?

A

taxed as long-term, regardless of how long you own shares in the mutual fund

65
Q

Which sources/outputs of money can be reinvested in a mutual fund?

A

income; capital gains distribution

66
Q

What is the turnover ratio?

A

measures percentage of fund that has been replaced in one year

67
Q

What is the relationship between turnover ratio and tax liability in funds that are NOT tax deferred?

A

higher turnover ratio = higher tax liability

68
Q

What are automatic investments?

A

money is taken from your account monthly and invested in a fund

69
Q

What are reinvestment plans?

A

income from dividends and capital gain distributions are automatically used to purchase more shares

70
Q

What is internal switching?

A

moving money fro one fund to another in the same family

Finance 3300 (15 decks)

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