Chapter 10: Investment Companies

Question 1

Open-End Investment Company

Answer 1

Also called a mutual fund. An investment company is an entity in which multiple investors pool their cash and then use this cash to buy securities.

• Shares purchased from fund itself through creation of more shares
• Shares are sold back to the fund through redemption (liquidation) of shares

Question 2

Net Asset Value (NAV)

Answer 2

NAV = (Total assets - total liabilities) / number of shares outstanding

Question 3

Many organizations categorize mutual funds according to common objectives. Is there a universal categorization model used by all fund companies?

Answer 3

No. The planner must make this judgement based on his knowledge of various organizations’ classification schemes.

Question 4

Calculating the ask price of a mutual fund.

Answer 4

Question 5

Closed-End Investment Company

Answer 5

Shares in a closed-end investment company can be bought and sold ONLY to another investor.

Question 6

Common Stock Funds

Answer 6

Stock funds hold portfolios that consist primarily of common stocks and perhaps a small number of preferred stocks.

Question 7

Mixed Portfolio Funds

Answer 7

A mutual fund that owns a portfolio of bonds, stocks, and other investment instruments.

Question 8

Regular Dividend

Answer 8

The distribution of dividend and/or interest income that a mutual fund has accrued.

Question 9

Contingent Deferred Sales Charge

Answer 9

A fee, calculated as a percentage of net asset value, that investors might pay to redeem their shares of a mutual fund depending on how long the shares are held.

Question 10

Portfolio Turnover Ratio

Answer 10

The lesser of annual purchases or annual sales (excluding securities with less than one-year maturities) divided by the average monthly net assets.

Question 11

Switching

Answer 11

When an investor moves money from one fund in a family to another fund in the same family.

Question 12

Multi-Class Funds

Answer 12

Mutual funds that have more than one class of shares. Usually the classes are A, B, and C.

Question 13

Lifeboat Provisions

Answer 13

Provisions offered by some closed-end funds specifying that the funds take some action to bolster their shares if they sell at a discount exceeding 10 percent for a specified period.

Question 14

Income Share

Answer 14

One of the two types of shares issued by a dual purpose investment company. An income share is like a preferred stock with a maturity date.

Question 15

Capital Appreciation Share

Answer 15

One of the two classes of shares in a dual purpose investment company. It promises no dividends during the life of the income shares.

Question 16

Holding Company Depository Reciepts (HOLDRs)

Answer 16

Analogous to sector funds–that is, they are ETFs that, instead of mimicking an index, hold selected stocks in a particular industry.

Question 17

Blind Pool

Answer 17

A form of investment venture in which the precise purposes of the venture are not revealed to the pool of investors until later.

Question 18

Style Drift

Answer 18

A portfolio that is drifting away from what had been an established style for a mutual fund.