Chapter 4 - Mutual Funds

Question 1

mutual fund

Answer 1

1) means of pooing funds of a large group of investors
2) Advantages: diversification, professional management, minimum initial investment
3) drawbacks: risk (MF value could fall below initial investment) , costs (fees), taxes (on dividends and capital gains and profit from sales)–IRA exception

Question 2

Investment Company

Answer 2

1) a business that specializes in pooling funds from individual investors and investing them (not all are MFs)

Question 3

Open-end fund

Answer 3

1) an investment company that stands ready to buy and sell shares at any time
2) if investor wants to buy, fund issues them and invests received money
3) investor wants to sell - fund sells assets to cover sale
4) more popular than closed- end stocks
5) include MMF and l-t funds and mutual funds

Question 4

Closed-End Fund

Answer 4

1) investment company with a fixed number of shares that are bought and sold only in the public market
2) Does NOT buy or sell stocks directly

Question 5

Net asset Value

Answer 5

1) the value of assets less liabilities held by a mutual fund, DiVided by shares outstanding (NAV)
2) changes essentiallly every day as stock value fluctuates

Question 6

Front-End Loads

Answer 6

1) a sales charge levied on purchases of shares in some mutual funds
2) percentage charge of the offering price (Excess of NAV), not NAV
3) 2-3% = low-load fund, most 5%
4) A-shares

Question 7

Prospectus

Answer 7

1) contains financial statements and specific budget info

2) required to be ditrubted by fund to its investors

Question 8

Types of Expenses and Fees

Answer 8

1) Sales charges or “loads”
2) 12b-1 fees
3) mgt fees
4) transaction costs

Question 9

No-load funds

Answer 9

1) no load charges

2) sold at NAV

Question 10

CDSC

Answer 10

1) Contingent Deferred Sales Charge
2) levied when investor’s redeem shares, also called a “back-end” loan
3) also known as B-shares

Question 11

Level Load

Answer 11

1) fixed fee

2) often leads to increases in other fee areas

Question 12

12b-1 Fees

Answer 12

1) named for SEC rule 12b-1 which allows funds to spend up tto 1% of fund assets annually to cover distribution and marketing costs
2) frequently used in conjuction with back-end loads

Question 13

Trading costs and Turnover

Answer 13

1) Turnover - a measure of how much trading a fund does, calculated as the lesser of total purchases or sales during a year divided by average daily assets
2) higher turnover = more more trading = more commssion / trading costs

Question 14

Reasons to pay loads/fees

Answer 14

1) invest in a well managed fun
2) ex. fidelity magellan fund
3) invest in specialized fund (ex foreign investment)

Question 15

Money Market Mutual Funds (MMMF)

Answer 15

1) a mutual fund specializing in money market instruments
2) S-t debt obligations issued by govts and corps
3) all MMF are open-end funds
4) low-risk investments
5) NAV always = $1 / share

Question 16

MMF Accounting

Answer 16

1) NAV always = $1
2) as fund earns interest on investments fund simplu gives more shares to owners
3) NAV = $1 to resemble bank account
4) “breaking the buck” = when NAV < $1 bad and rare

Question 17

MMF and taxes

Answer 17

1) either taxable or tax exempt (muicipal)
2) can avoid state tax by investing in secuirties only issued by one state
3) securities by NYC = “triple-tax free” = no fed, state, local taxes

Question 18

Types of stock funds - Capital appreciation vs income

Answer 18

1) Capital appreciation - invest in companies that have highest prospects for share price appreciation (invest in unproven companies)
2) Growth - seek to capital appreciation, but invest in larger, more established co’s(less volatile than 1), dividends not imp
3) Growth and Income - capital appreciation sitll main goal, but some focus on divided paying co’s
4) equity income - focus entirely on stocks with high dividend yields, maximizing current portfolio inc
5) greater emphasis on groth = greater tisk

Question 19

Types of Stock Funds - Company-size

Answer 19

1) Small Company - small-cap emphasize capital appreciation
2) Midcap - stocks too small to be in S&P 500 but to large to be small-cap
3) large company (large-cap) - invest in cos with high market values

Question 20

Index Fund

Answer 20

1) hold stocks that make up a particular index in same proportion as index
2) most imp = S&P 500 index funds
3) generally largest stock mutual funds ex. vangaurd 500
4) low turn-over and operating expense (bs passively managed)

Question 21

Mutual Fund styles and sizes

Answer 21

style 
- value
- blend
-growth
size
- largecap
-midcap
- small cap

Question 22

Exchange-traded funds (ETFs)

Answer 22

1) relatively new innovation
2) an index fund that seeks to achieve the same return as a particular market index (buy an ETF = buy index basket)
3) Well known ETFs and their indexes
SPDR - S&P 500
Cubes “QQQQ” - NASDAQ 100
Diamonds “DIA” - DOW
4) heavily traded
5) there are specialized ETFs
6) created when sponsor sets aside shares adn files with SEC

Question 23

ETFs vs index funds

Answer 23

1) ETFs traded like a closed -end fund

2) commission when buy/sell

Question 24

Hedge Funds

Answer 24

1) investment company not accessed by the public (do not sell securities to public)
2) few limitations/regulations - register with SEC, subject to inspection
3) limit number of investors to 50 - 100 inst/indiv
4) charge management feees - 2/20 2% fee + 20% profit

Question 25

Fund of Funds

Answer 25

1) investing in a number of hedge funds
2) diersificatoin
3) more fees

Question 26

Bond Mutual Funds

Answer 26

may specialize in

1) Short-term bonds
2) intermediate -term bonds
3) high-yield bonds
4) mortgages
5) int bonds