Investments Lesson 7 Flashcards
Closed End Funds
Fixed initial market capitalization because specific number of shares sold
No new issues
May trade at premium or discount
Open End Funds
Unlimited number of shares
May be bought/redeemed directly from fund family
Traded at NAV
NAV = (assets-liabilities)/shares outstanding
Unit Investment Trust Funds
Can be equity or fixed income Managed by trustee Self-liquidating Passive management Not trading Units, not shares Sold back at NAV Very thinly traded secondary market
Types of mutual funds
Aggressive growth: small caps, greatest potential for capital appreciation
Growth: equities with high p/e, little to no dividends, growing earnings & revenue quickly
Growth & income: equities & income producing assets; primary objective to provide capital appreciation & income
Value: invests in undervalued runs with low p/e, high dividend yields & positive future outlook
Balanced: more bonds, seeks well balanced return in form of income & capital appreciation
Bond: liquid bond investment that is cost effective & conservative
Money market: highly liquid, appropriate for emergency fund, maturities of less than 90 days
Index: tracks various market indices, passive, tax efficient, low turnover rates, minimize capital gains distributions
Sector: not well diversified/low r squared
Asset Allocation/Lifecycle: well diversified
Global: international and US
International: only foreign
Example Exam Question:
Growth objective, requires large percentage to be tax efficient. Which would be most appropriate?
A. Non-leveraged equipment leading
B. Balanced mutual fund
C. Preferred stock mutual fund
D. Stock index fund
D
A Shares
Front end load
Small 12b-1 fee (marketing/trailing commissions)
No redemption fee
Long term investors
B Shares
Back end sales load High 12b-1 fee (max 1%) No front end Can be converted to A shares Many funds no longer offer b shares
C Shares
No front end load
Small back end load & max 12b-1 fee
Most appropriate for short term
Do not convert to a
ETFs
Portfolio of stocks that represent an index
Traded on an exchange/intra-day
Do not have to buy/sell blindly
Low cost of ownership
Passive
Tax efficient due to low asset turnover & passive strategy
Structured to track index but can be actively managed
REITs
Low correlation with stock market
Diversification benefit
Hedge against inflation
Must distribute 90% of investment income to shareholders to maintain tax-exempt status
3 types:
Equity: for cap appreciation (income from rental income & appreciation)
Mortgage: in mortgages & construction loans, make spread between lending & borrowing rate
Hybrid: combo of both
American Depository Receipts (ADRs)
Foreign stock held in domestic bank’s foreign branch
Entitle shareholder to dividends & capital gains (include currency fluctuations)
Trade on us exchanges, denominated in US dollars, trade in US dollars
Do not eliminate exchange rate risk
Example Exam Question:
ADRs used to:
1. Finance foreign exports
2. Eliminate currency risk
3. Sell us securities in overseas markets
4. Trade foreign securities in us markets
A. 1,3 B. 1,4 C. 2,4 D. 4 E. 1,2,4
D
Alternative Investments
Not for average investor
Higher risk
High minimum purchase price & high fees
Actively managed, May use leverage, illiquid
No secondary market but May offer redemptions
Most common alternatives:
Hedge funds: no regulation, self report, accredited investors only
Collectibles: high risk of fraud, subject to demand & consumer taste, federal tax rate of 28%
Precious metals: directly, etfs, or futures, considered inflation hedges
Crypto: value derived from supply/demand, high risk investors
Lesson 7 Review:
Client, 35, invest in which shares? Objective is incest in mutual fund to help meet retirement goal.
A. A shares
B. B shares
C. C shares
D. None
A
