mutual funds

Question 1

identifies three different types of investment companies

Answer 1

—face-amount certificate companies, unit investment trusts (UITs), and management companies.

Question 2

advantages of mutual funds

Answer 2

diversified
professional managed
liquidity
record keeping
convenience

Question 3

The Statement of Additional Information (SAI)

Answer 3

Statement of Additional Information provides more detailed information than the prospectus about a fund and its investment policies and risks. Unlike the prospectus, the SAI is not required to be given to any person who simply expresses an interest in purchasing the fund’s shares. However, the fund is required to provide a copy of the SAI to any person who requests it.

Question 4

mutual fund organization

Answer 4

board of directors, investment adviser, custodian, tranfer agent, underwriter,

Question 5

Aggressive Growth Funds

Answer 5

These funds invest in small companies and often participate in the initial public offerings of these companies’ shares. The stocks of these companies can be very volatile, but historically they have also produced high returns for long-term investors.

Question 6

Growth Funds

Answer 6

Capital appreciation is the main objective of a growth fund. The advisers of these funds invest in stocks that they believe will show above-average growth in share price.

Question 7

Specialized or Sector Funds

Answer 7

Some funds concentrate their investments to stocks in a particular industry (e.g., high tech stocks or pharmaceuticals) or in a particular geographic location. Although specialized funds are riskier than more diversified funds, they allow fund managers the opportunity to take advantage of unusual situations.

Question 8

International and Global Funds

Answer 8

Mutual funds that focus on foreign securities are often the easiest way for U.S. investors to invest abroad. International funds invest primarily in the securities of countries other than the United States. They include funds that invest in a single country and regional funds that invest in a particular geographic region (e.g., Europe or the Pacific Basin). On the other hand, global funds invest all around the world, both in the U.S. and abroad

Question 9

Equity Income Funds

Answer 9

Equity income funds invest in companies that pay high dividends in relation to their market prices. These funds usually hold positions in mature companies that have less potential for capital appreciation, but are also less likely to decline in value than growth companies

Question 10

Growth and Income Fund

Answer 10

These funds have both capital appreciation and current income as their investment objectives. Growth and income funds invest in companies that are expected to show more growth than a typical equity income stock and higher dividends than most growth stocks. However, the trade-off is that they usually offer less capital appreciation than pure growth funds, and lower dividends than income funds

Question 11

Bond Funds

Answer 11

The main objectives of bond funds are current income and preservation of capital. Since the portfolio consists of bonds only, many of these funds are susceptible to the same risks as direct investments in bonds, including credit risk, call risk, reinvestment risk, and interest-rate risk.

Question 12

Index Funds

Answer 12

Index funds have become increasingly popular in recent years. An index fund creates a portfolio that mirrors the composition of a particular benchmark stock or bond index, such as the S&P 500 Index. The fund attempts to produce the same return as the index; therefore, investors cannot expect the fund’s returns to outperform the relevant benchmark. These funds typically have low expenses

Question 13

Balanced Funds

Answer 13

Balanced funds maintain some percentage of their assets in stocks, bonds, and money-market instruments (cash equivalents). Although the percentages will vary from time to time as market conditions change, a portion of the portfolio will always be invested in each type of security.

Question 14

Asset Allocation Funds

Answer 14

Similar to balanced funds, these funds also invest in stocks, bonds, and money-market instruments. Fund managers determine the percentage of the fund’s assets to invest in each category based on market conditions

Question 15

Money-Market Funds

Answer 15

Money-market funds invest in short-term debt (money-market) instruments that typically have maturities of less than one year. The two principal benefits for investors in money-market funds are liquidity and safety.

Question 16

mutual funds are purhcased at thie

Answer 16

POP

Question 17

mutual funds are solde at their

Answer 17

intrinsic net asset value NAV

Question 18

nav

Answer 18

NAV of a mutual fund (or any other investment company) is determined by dividing its total net assets (securities valued at their current market price, plus cash, minus total liabilities) by the total number of shares outstanding.
The net asset value of a fund must be computed at least once per day. A fund’s prospectus discloses the cutoff time that’s used for share purchases and redemptions and explains how its NAV is calculated. The NAV is normally computed daily as of the close of trading on the New York Stock Exchange (4:00 p.m. Eastern Time

Question 19

forward pricing

Answer 19

Orders to buy and sell fund shares are based on the next computed price. This is referred to as forward pricing since purchases and redemptions are based on the next calculated price. For example, if an individual places an order to purchase shares at 11:00 a.m., the purchase price will not be known until the net asset value is computed after the close of business on that day.

Question 20

contingent deferred sales charge (CDSC).

Answer 20

Rather than assessing a sales charge at the time of purchase, some funds allow investors to buy shares at the NAV and will then assess a sales charge when the investors redeem their shares. Usually, the longer the investor owns the shares, the greater the decrease will be in the back-end load. Due to the decreasing charge, this form of load is referred to as a contingent deferred sales charge (CDSC). In fact, if the investor holds the shares long enough, there may be no sales charge imposed at the time of redemptio

Question 21

No-Load Funds

Answer 21

Not all mutual funds assess sales charges. When a mutual fund sells its shares to the public at their net asset value (i.e., with no sales charge), it’s referred to as a no-load fund. In other words, this fund’s net asset value and public offering price are equal. Most no-load funds are purchased directly from the fund’s distributor without any compensation being paid to the salespersons.
To be marketed as a no load fund, this type of fund may not assess a front-end load, a deferred sales load, or a 12b-1 fee (described next) that exceeds .25% of the fund’s average annual net assets.

Question 22

mutual fund fees

Answer 22

12b-1 Charges (Distribution Fees)
service fees
admin charge

Question 23

Expense Ratio

Answer 23

ratio is defined as the percentage of a fund’s assets that are used to pay operating costs and is calculated by dividing the fund’s total expenses by the average net assets in the portfolio. The expense ratio includes the management fee, administrative fees, and 12b-1 fees, but does not include sales charges.

Question 24

A shares

Answer 24

Sales Charges: Front-end load
12b-1 Fees: Low or none
Breakpoints available for large purchases

Question 25

B shares

Answer 25

Contingent deferred sales charge assessed if held less than 6 to 8 years
Higher than for Class A shares
Often convert to Class A shares after 6 to 8 years; no breakpoints available

Question 26

C shares

Answer 26

May have a front-end load, or a contingent deferred sales charge, or both
Higher than for Class A shares, generally the same as for Class B shares
No conversion to Class A shares

Question 27

Letters of Intent

Answer 27

Investors receive the benefit of a breakpoint without immediately depositing all of the required funds.

Question 28

Rights of Accumulation

Answer 28

The investor is able to add up all of the purchases made in the same fund complex. Once a breakpoint is reached, all future purchases are entitled to the reduced sales charge.

Question 29

Dollar Cost Averaging (DCA)

Answer 29

Dollar cost averaging is a popular method of investing in mutual funds in which a person invests a fixed-dollar amount at regular intervals, regardless of the market price of the shares. An investor who uses dollar cost averaging is ultimately buying more shares when the price is low and fewer shares when the price is high. Dollar cost averaging lessens the risk of investing a significant amount of money at the wrong time and is especially appropriate for long-term investors, such as those investing for retirement.

Question 30

Redemption Fees

Answer 30

When mutual fund shares are redeemed, some funds deduct a small redemption fee from the amount that’s paid to the investor. Redemption fees have a range of .5% to approximately 2% and are returned to the fund’s portfolio. Ultimately, the fee, which is separate from any deferred charge that may apply, is designed to discourage investors from redeeming shares too quickly. Some funds waive redemption fees after the shares have been held for a specific period

Question 31

Face-Amount Certificate Companies

Answer 31

face-amount certificate company issues debt certificates that pay a predetermined rate of interest. Investors purchase these certificates in either periodic installments or by depositing a lump sum and then receive a fixed amount if they hold the certificates until maturity. However, investors who cash in their certificates early will receive a lesser amount—referred to as a surrender value.

Question 32

Unit Investment Trusts

Answer 32

Unit investment trusts (UITs) are formed under a legal document that’s referred to as an indenture and have trustees rather than boards of directors. UITs invest in a fixed portfolio of income-producing securities, such as bonds or preferred stocks.
UITs issue only redeemable securities that are referred to as units or shares of beneficial interest (SBIs) that are generally sold in minimum denominations of $1,000. Investors are able to buy or sell SBIs in the secondary market. Each unit entitles the holder to an undivided interest in the UIT’s portfolio that’s proportionate to the amount of money invested
UITs are supervised, but not managed, investment companies. In other words, UITs don’t utilize the services of investment advisers to determine what securities to buy and sell. Since these trusts are not managed, they don’t have associated management fees.

Question 33

closed vs open end funds

Answer 33

Open-End Funds Closed-End Funds
Continuously issue new shares
Issue a fixed number of shares
May issue only common shares
May issue common shares or senior securities, such as preferred stock and bonds

Sold at NAV + sales charge (if any)
Price is determined by market forces which result in shares selling at discounts or premiums to the NAV Commissions are paid on purchases and sales

Fund sponsor stands ready to redeem shares at the next calculated NAV
Fund sponsor does not stand ready to redeem shares
Shares don’t trade in the secondary market
Shares are traded in the secondary market
Prospectus delivery is required
No prospectus delivery requirement