MUTUAL FUNDS FINAL NOTES

Question 1

a collection of investment money pooled from a lot of people to be invested for a specific objective.

Answer 1

Mutual fund

Question 2

are investment companies that pool your money with the money of hundreds, thousands, or
even millions of other investors.

Answer 2

Mutual fund

Question 3

is a type of financial intermediary, which nothing more than an organization that takes
money from people who want to invest and then gives the money to those who need investment capital

Answer 3

Mutual fund

Question 4

When you invest in a mutual fund, you buy shares and become a _____ of the fund.

Answer 4

shareholder

Question 5

theoretically have no limit to the number of investors or the amount of money that they hold

Answer 5

Open-end funds

Question 6

simply means that the fund issues as many (or as few) shares as investors demand.

Answer 6

Open-end funds

Question 7

they are usually preferable than the other fund

Answer 7

Open-end funds

Question 8

they attract more investors over time

Answer 8

Management talent

Question 9

can afford to pay the necessary money to hire leading managers.

Answer 9

Management talent

Question 10

charge lower annual operating expenses

Answer 10

Expenses

Question 11

the value of a share (known as the net asset value) always equals 100% of what the fund’s investments (less liabilities) are currently worth.

Answer 11

Fee-free selling

Question 12

are those where the mutual fund companies decide upfront, before they take on any investors, exactly how many shares they’ll issue.

Answer 12

Closed-end fund

Question 13

tend to be much smaller and, therefore, more costly to operate.

Answer 13

Closed-end fund

Question 14

analyze and purchase investments that best meet the fund’s stated objectives

Answer 14

Fund managers

Question 15

requires you to place your money in different investments with returns that aren’t completely correlated.

Answer 15

Diversification

Question 16

the most common ownership investment traded on securities markets. If you want your money to grow over a long period of time (and you can put up with some bad years thrown in with the good)

Answer 16

Stock funds

Question 17

Bonds are the most common lending investment traded on securities markets. If you need current income and don’t want investments that fluctuate as widely in value as stocks do

Answer 17

➢ Bond fund

Question 18

are lending investments based on short-term loans and are about the safest in terms of risk to your investment among the various lending investments around. If you want to be sure that your invested principal doesn’t drop in value because you may need to use your money in the short term

Answer 18

Money market funds

Question 19

You have convenient access to your money. You can make your initial investment from the
comfort of your living room by filling out and mailing a simple form and writing a check

Answer 19

The ultimate couch potato investment

Question 20

important financial steps for you to take before you invest so you get the most from your mutual fund investments

Answer 20

Lining up Your Ducks before You Invest

Question 21

include balances on such items as credit cards and auto loans.

Answer 21

Consumer debts

Question 22

are goal-specific tools and humans are goal-driven animals, which is perhaps why the two make such a good match

Answer 22

Mutual funds

Question 23

simply means how your investments are divvied up among the major types of securities or funds, such as money market, bond, United States stock, international stock, and so on

Answer 23

Asset allocation

Question 24

if you need to tap into the money within two or
three years or less

Answer 24

Money market or short-term bond fund

Question 25

if your time horizon falls between three and seven years

Answer 25

Bond funds

Question 26

for long-term goals, seven or more years down the road

Answer 26

Stock funds

Question 27

allow existing shareholders of stock to reinvest their dividends in more shares of stock without paying brokerage commissions

Answer 27

Dividend Reinvestment Plans

Question 28

you enjoy going to parties and telling of your successes in the stock market

Answer 28

The boaster

Question 29

you hate delegating jobs to others, especially important ones, because no one does as good a job as you do

Answer 29

The controller

Question 30

you like to be just a little bit different and independent

Answer 30

The free spirit

Question 31

index funds that trade like stocks on a stock exchange

Answer 31

Exchange-Traded Funds

Question 32

have much in common with closed-end funds where they take an amount of money and buy a number of securities that meet the objectives of the UIT

Answer 32

Unit investment trusts (UITs)

Question 33

Load simply means _____

Answer 33

commission

Question 34

are quoted as a percentage of the fund’s assets or value.

Answer 34

fund’s operating expenses

Question 35

usually written and edited by an attorney who wouldn’t know a lively and comprehensible sentence if it clobbered him on the head with a law dictionary.

Answer 35

Prospectus

Question 36

the date so that you know how recent its information is, table of contents, and particular fund family

Answer 36

Cover page

Question 37

contain a synopsis of the main attributes of the fund (description of the fund’s investment objectives and the strategies that it employs to accomplish its objectives)

Answer 37

Fund profile

Question 38

(when dividends and capital gains are distributed, who manages the fund, how long the fund has been in existence, what the fund’s total assets are and so on)

Answer 38

Other fund information

Question 39

(explains in detail what the fund is trying to accomplish and what risks the fund is subject to)

Answer 39

Investment objectives and risks

Question 40

(provides background about the investment adviser who actually manages the investments of this fund)

Answer 40

Investment adviser

Question 41

is the price per share of the fund.

Answer 41

Net Asset Value (NAV)

Question 42

represents what investors in the fund have earned historically.

Answer 42

Total Return

Question 43

tells you how much trading takes place in a fund.

Answer 43

Turnover Rate

Question 44

includes Net Asset Value, Total Return and Turnover Rate

Answer 44

Financial highlights

Question 45

explain how well the fund has performed recently and why.

Answer 45

Chairman’s letter

Question 46

is where the portfolio managers of the fund explain how the economic environment affected the fund’s performance

Answer 46

Report from the Advisor”

Question 47

lists every investment the fund owns where you get the details that tell you exactly where your money is invested.

Answer 47

Statement of Net Assets

Question 48

a supplementary document added to a mutual fund's prospectus that contain

Answer 48

Statement of Additional Information (SAI)

Question 49

contains information about a mutual fund that may not be found in its original prospectus.

Answer 49

Statement of Additional Information (SAI)

Question 50

a mutual fund service where you can purchase hundreds of funds without paying any transaction fees (that is, you pay the same cost as if you’d bought the funds through the mutual fund company itself).

Answer 50

No Transaction Fee (NTF) funds

Question 51

tend to have higher operating expenses than non-NTF funds

Answer 51

No Transaction Fee (NTF) funds

Question 52

no one can predict future movements in the financial markets to know which types of investments will do well and which ones won’t.

Answer 52

crystal ball phenomenon

Question 53

the compensation that a supplier of funds expects and a demander of funds must pay.

Answer 53

Interest rates and Required Returns

Question 54

takes on a historical perspective (what return did an investment actually provide)

Answer 54

Actual returns

Question 55

takes on a forward-looking perspective (what return should we expect the investment to provide in the future given its risk)

Answer 55

Expected returns

Question 56

weighs more heavily than actual returns do in a decision-making context

Answer 56

Expected returns

Question 57

occurs at the intersection of the supply function and the demand function

Answer 57

Equilibrium Interest rate

Question 58

increase in the prices of most goods and services

Answer 58

Inflation

Question 59

the riskier the particular investment is, the higher return

Answer 59

Risk

Question 60

the general tendency of investors to prefer short-term securities

Answer 60

Liquid preference

Question 61

when a loan carries an interest rate below zero, the lender essentially pays interest to the borrower rather than the other way around.

Answer 61

Negative Interest Rate

Question 62

the actual rate of interest charged by the supplier of funds and paid by the demander

Answer 62

Nominal interest rate

Question 63

the increase in purchasing power that the investment provides

Answer 63

Real interest rate

Question 64

Formula in getting the real interest rate

Answer 64

(1 + r) = (1 + r*) (1 + i)

Question 65

nominal interest rate

Answer 65

r

Question 66

real interest rate

Answer 66

r*

Question 67

expected inflation rate

Answer 67

i