Chapter 14: Investment Vehicles

Question 1

Assets, such as securities and real assets, created by the investment industry to help investors move money from the present to the future, with the hope of increasing the value of their money.

Answer 1

Investment vehicles

Question 2

Investors make ______ when they buy securities issued by companies and governments and when they buy real assets, such as precious metals, art, or timber.

Answer 2

Direct investments

Question 3

Investors give their money to investment firms, which then invest the money in a variety of securities and assets on their behalf. Investors make these kind of investments when they buy the securities of companies, trusts, and partnerships that make direct investments.

Answer 3

Indirect investments

Question 4

An indirect investment vehicle in which investors pull their money together to get any advantages of being part of a large group.

Answer 4

Pooled investments

Question 5

All pooled investment vehicles disclose their investment policies, deposit and redemption procedures, fees and expenses, and past performance statistics in an official offering document called a _____.

Answer 5

Prospectus

Question 6

Pooled investment vehicles used by many individual and institutional investors. They have the ability to issue or redeem (re-purchase) shares on demand. When investors want to invest, the fund issues new shares in exchange for cash that the investors deposit.

Answer 6

Open-end mutual funds

Question 7

Calculated by dividing the total net value of the fund (value of all assets minus the value of all liabilities) by the funds current total number of shares outstanding.

Answer 7

Net asset value (NAV)

Question 8

Special class of open-end mutual funds that investors view as an uninsured interest -paying bank accounts. Unlike other open-end mutual funds, regulators permit _____ to accept deposits and satisfy redemptions at a constant price per share if they meet certain conditions.

Answer 8

Money market funds

Question 9

Pooled investment vehicles that have a fixed number of shares and thus do not issue or redeem shares on demand.

Answer 9

Closed-end funds

Question 10

Pooled investment vehicles that are typically passively managed to track a particular index or sector and that trade continuously as common stocks on exchanges or through dealers.

Answer 10

Exchange-traded funds (ETF’s)

Question 11

A group of securities representing a given security market, market segment, or asset class.

Answer 11

Security market index

Question 12

The process of adding and removing securities included in the index

Answer 12

Index reconstitution

Question 13

An index in which the weight assigned to each security is determined by dividing the price of the security by the sum of all the prices of the securities.

Answer 13

Price-weighted index

Question 14

The weight assigned to each security depends on the securities market capitalization. Market capitalization is equal to the market price of a security multiplied by the number of shares outstanding of the security.

Answer 14

Capitalization-weighted indices (cap-weighted indices, market-weighted indices, or value-weighted indices)

Question 15

Show what returns would be made if an equal value were invested in each security included in the index.

Answer 15

Equal-weighted indices

Question 16

A portfolio of securities structured to track the returns of a specific index called the benchmark index

Answer 16

Index fund

Question 17

Private investment pools that investment managers organize and manage. They are less widely used by investors than index funds because they tend to be more complex, less transparent, and less liquid, with higher costs and a high minimum investment level.

Answer 17

Hedge funds

Question 18

Reflects the highest value, net of fees, that the fund has reached at any time in the past

Answer 18

High-water mark

Question 19

Investment vehicles that invest in other funds

Answer 19

Funds of funds

Question 20

The charges for investment services, such as brokerage, investment advice, financial planning, and investment accounting, are all wrapped into a single flat fee.

Answer 20

Wrap account

Question 21

The capital of two or more investors is pooled together and jointly managed.

Answer 21

Commingled account

Question 22

Allow investors to avoid paying taxes on investment income and capital gains as they earn them. In addition, contributions made to these accounts may have tax advantages. In exchange for these privileges, investors must accept stringent restrictions on when the money can be withdrawn from the account and sometimes on how the money can be used.

Answer 22

Tax-advantaged accounts