Finance 3 (Finished)

Question 1

Types of Investment Companies

Answer 1

1) Mutual Fund (Open-End Fund)
2) Closed-End Fund
3) Exchange Traded Fund (ETF)

Question 2

Mutual Fund (Open-End)

Answer 2

1) Shares are created or destroyed depending on demand.
2) Investors buy shares or redeem (sell) shares directly from the mutual fund.
3) By far the most common type of investment company.

Question 3

Closed-End Mutual Fund

Answer 3

1) Fixed number of shares of each fund.
2) Shares trade on a stock exchange. Investors buy shares from or sell shares to other investors.
3) Relatively uncommon.

Question 4

Exchange Traded Fund

Answer 4

1) Shares are created or destroyed depending on demand.
2) Shares trade on a stock exchange. Investors buy shares from or sell shares to other investors.
3) Have experienced rapid growth recently.

Question 5

Fund Family

Answer 5

An investment company offering a number of different mutual funds

Question 6

Money Market Fund

Answer 6

1) Invests in money market securities
2) The value of the shares are generally held constant at $1.00
3) May offer check writing privileges

Question 7

Bond Fund

Answer 7

A mutual fund that primarily invests in bonds.

Question 8

Equity Fund

Answer 8

A mutual fund that primarily invests in stocks.

Question 9

Hybrid (or Balanced) Fund

Answer 9

A mutual fund that invests in both stocks and bonds.

Question 10

Value Fund

Answer 10

An equity fund that seeks to find stocks that are undervalued based on current earnings and other economic factors. Also, funds that invest in low-P/E-ratio companies.

Question 11

Growth Fund

Answer 11

An equity fund that seeks to find stocks that are expected to grow rapidly in the future. Also, funds that invest in high-P/E-ratio companies.

Question 12

Index Fund

Answer 12

Mutual funds holding a bond or stock portfolio designed to match a particular market index, e.g., an S&P 500 fund

Question 13

NAV

Answer 13

Net Asset Value is the per share value of the securities in a fund’s portfolio.
=(Market value of securities-liabilities)/(Number of shares outstanding)

Question 14

Annual Expenses (Mutual Funds)

Answer 14

Annual costs deducted from fund assets before earnings are distributed to shareholders. Expressed as a percentage of funds under management.

Question 15

Load

Answer 15

A sales charge either at the time of purchase (front-end load) or at the time of redemption (back-end load).

Question 16

Mutual Fund Share Classes

Answer 16

Class A: typically charge a front-end load along with annual expenses.
Class B: Typically do not charge a front-end load but may charge a redemption fee. Annual expenses are typically larger than Class A shares. May be converted to Class A shares after a certain amount of time.
Class C: Typically do not charge a front-end load but may charge a redemption fee. Annual expenses are typically larger than Class A shares.

Question 17

Morningstar Ratings

Answer 17

A rating system for mutual funds that compare return and risk across a similar group of funds. Funds are rated from one start to five stars, with five being best.

Question 18

Benchmarking (Mutual Funds)

Answer 18

Comparing the performance of a mutual fund to an index of securities with similar risk.

Question 19

No-Load Mutual Fund

Answer 19

A mutual fund without a front-end sales charge.

Question 20

International Funds

Answer 20

Mutual funds that invests in stocks and bonds of foreign companies and governments.

Question 21

Why invest through mutual funds?

Answer 21

1) Convenience.
2) Can be diversified while investing only a small amount.
3) Professional management.