Chapter 4 - mutual funds and other investment companies

Question 1

net asset value (NAV)

Answer 1

= (market value of assets - liabilities) / shares outstanding

Question 2

unit investment trust

Answer 2

• Money pooled from many investors that are invested in a portfolio fixed for the life of the fund
• Management fees can be lower than those of managed funds

Question 3

Redeemable trust certificates

Answer 3

shares or units

Question 4

Open-end fund

Answer 4

ready to redeem or issue shares at their net asset value

Question 5

closed-end fund

Answer 5

• do not redeem or issue shares
• however, you can sell shares to other investors

Question 6

load

Answer 6

a sales charge

Question 7

exchange-traded funds (ETFs)

Answer 7

Similar to an open-end mutual fund except for shares of ETFs are through brokers

Question 8

commingled funds

Answer 8

• Partnerships of investors that pool funds
• The management firm that organizes the partnership, does so for a fee
• The fund offers units, which are bought and sold at NAV

Question 9

commingled funds

Answer 9

• Partnerships of investors that pool funds
• The management firm that organizes the partnership, does so for a fee
• The fund offers units, which are bought and sold at NAV

Question 10

Real Estate Investment Trusts (REITs)

Answer 10

Invest in real estate or loans secured by real estate
They raise capital by borrowing from banks and issuing bonds or mortgages
Most highly leveraged, with a typical debt ratio of 70%

Question 11

equity REITs

Answer 11

invest in real estate directly

Question 12

mortgage REITs

Answer 12

invest primarily in mortgage and construction loans

Question 13

hedge funds

Answer 13

Allows private investors to pool assets to be invested by a fund manager

Question 14

mutual fund

Answer 14

common name for an open-end investment company

Question 15

money market funds

Answer 15

• Invest in money market securities such as T-bills, CP, repos, or CDs
• Average maturity is a little more than 1 month
• NAV is fixed at $1 per share
• So there are no capital gains or losses tax

Question 16

government funds

Answer 16

holds short-term US treasury or agency securities and repos collateralized by such securities

Question 17

prime funds

Answer 17

hold other money market securities such as CP or CDs

Question 18

equity funds

Answer 18

• Invest primarily in stock, may hold fixed-income securities
• Commonly hold a small fraction of total assets in MM securities to provide liquidity for the redemption of shares

Question 19

Income funds

Answer 19

tend to hold shares of firms with high div yields that provide high current income

Question 20

growth funds

Answer 20

willing to forgo current income, focusing instead on the prospectus for capital gains

Question 21

specialized sector funds

Answer 21

concentrate on a particular industry

Question 22

bond funds

Answer 22

• Specialize in the fixed-income sector
• Further specialization e.x. Corporate, T, MBS, or muni bonds, or maturity

Question 23

global funds

Answer 23

invest in securities worldwide

Question 24

international fudns

Answer 24

invest in securities of firms located outside the US

Question 25

regional funds

Answer 25

concentrate on a particular part of the world

Question 26

emerging market funds

Answer 26

invest in companies of developing nations

Question 27

balanced funds

Answer 27

Hold both equities and fixed-income securities in stable proportions

Question 28

life-cycle funds

Answer 28

asset mix can range from aggressive to conservative

Question 29

Static allocation life-cycle funds

Answer 29

maintain a stable mix across stocks and bonds

Question 30

target-date funds

Answer 30

gradually become more conservative as time passes

Question 31

funds of funds

Answer 31

mutual funds that invest in other mutual funds

Question 32

Asset allocation and flexible funds

Answer 32

- May dramatically vary the proportions allocated to each market in accordance with the portfolio manager’s forecast of performance in each sector - Engaged in market timing

Question 33

index funds

Answer 33

try to match the performance of a broad market index

Question 34

operating expenses

Answer 34

- the costs incurred by the mutual fund in operating the portfolio - Include administrative expenses and advisory fees paid to the manager - Typically range from 0.2% to 1.5% - The expenses are periodically deducted from the assets of the fund

Question 35

front end load

Answer 35

a commission or sales charge paid when you purchase the shares

Question 36

low load funds

Answer 36

have loads that range up to 3% of invested funds

Question 37

no load funds

Answer 37

have no front-end sales charges

Question 38

back-end load

Answer 38

- a redemption, or “exit” fee incurred when you sell your shares - Typically, funds that impose back-end loads reduce them by one percentage point for every year the funds are left invested

Question 39

12B-1 charges

Answer 39

- SEC allows managers of 12b-1 funds to use fund assets to pay for distribution costs - Advertising, promotional literature including annual reports and prospectuses, and commissions paid to brokers who sell the funds to investors - Fees are deducted from the assets - These fees are limited to 1% of a fund’s average net assets per year

Question 40

RoR for fund =

Answer 40

= (NAV1 - NAV0 + income and capital gain distribution) / NAV0

Question 41

soft dollars

Answer 41

- a PM earns soft-dollar credits with brokerage firms by directing the fund’s trades to that broker - Based on those credits, the broker will pay for some of the mutual fund’s expenses

Question 42

how does taxation work in mutual funds?

Answer 42

- Taxes are paid only by the investor in the mutual fund, not by the fund itself - as long as: The fund is sufficiently diversified and virtually all income is distributed to shareholders

Question 43

turnover

Answer 43

the ratio of the trading activity of a portfolio to the assets of the portfolio

Question 44

Smart beta funds/actively managed ETFs

Answer 44

- Have other investment objectives other than tracking indexes - Such as value, growth, dividend yield, liquidity, recent performance, or volatility

Question 45

synthetic ETFs: Exchange-traded notes(ETNs)/ exchange-traded vehicles(ETVs)

Answer 45

- Nominally debt securities but with payoffs linked to the performance of an index - Often an illiquid and thinly traded asset class

Question 46

total return swap

Answer 46

with an investment bank in which the bank agrees to pay the ETF the return on the index in exchange for a relatively fixed fee

Question 47

bank discount rate (T-bill quotes)

Answer 47

rBD = (10,000 - P) / 10,000 * (360 / n)

Question 48

margin call occurs when:

Answer 48

- MV <= borrowed / (1 - MMR) - equity / MV <= MMR

Question 49

margin equity =

Answer 49

= position value - borrowing + additional cash

Question 50

short sale equity =

Answer 50

= total margin account - market value