Mutual Funds and Other Investment Companies Flashcards
practice questions
What is the net asset value (NAV) for the ABC fund, given the following information?
assets $250,000,000
liabilities $25,000,000
shares outstanding 10,500,000
base management fee 0.75%
The net asset value is the investment company’s assets minus its liabilities, stated on a per-share basis.
NAV = MVA - MVL / # shares outstanding
NVA - market value of assets
MVL - market value of liabilities
250,000,000 - 25,000,000 / 10,500,000 shares = $21.43
An important benefit of an exchange-traded fund’s creation and redemption process is that it:
- provides diversification to shareholders
- increase liquidity for investment company managers
- provides capital gains tax relief to existing shareholders
- allows investment companies to operate outside of SEC regulations
The in-kind process allows for the creation and redemption of shares through marker makers, which operate outside the legal structure of the fund. In a traditional open-end fund, when shares are redeemed, the manager must sell fund assets to pay off the redemption, thus possibly creating capital gains issues for the remaining fund shareholders.
Based on the following information, what is the net asset value (NAV) per share? There are currently no expenses and no load.
Cap stock sold $109,000
Price per share $10
Stock A: shares 1,051, price $10, book value $5
Stock B: shares 2,420, price $35, book value $29
Stock C: shares 1,851, price $9, book value $8
Stock D: shares 900, price$69, book value $63
NAV = MVA - MVL / # shares outstanding
MVA - market value of assets
MVL - market value of liabilities
Total number of shares = $109,000 / $10 (per share) = 10,900 shares
1,051 x 10 = 10,510 2,420 x 35 = 84,700 1,851 x 9 = 16,659 900 x 69 = 62,100 total market value = 173,969
NAV = 173,969 / 10,900 = 15.96 per square
Which of the following statements regarding SEC rule 12b-1 is most accurate? SEC rule 12b-1
- allows funds to charge a 0.25 to 1% management fee
- requires funds to redistribute any unspent fees at fiscal year end to fund holders
- allow funds to cover costs such as advertising, marketing, and commissions paid to brokers
- allows funds to deduct as much as 2.5% of average net assets per year to cover distribution costs
SEC rule 12b-1 allows funds to cover costs such as advertising, marketing, and commissions paid to brokers. Management fees are separate from 12b-1 fees. The SEC allows funds to deduct up to 1.25% of average net assets per year tp cover distribution costs.
A sales commission charged by an investment company at the time of redemption is called a:
- 12b-1 fee
- back-end load
- front-end load
- distribution fee
A front-end load is a sales commission charged at purchase. A distribution fee, also called a 12b-1 fee, is an ongoing fee, charged on an annual basis as a percentage of assets, which is used to cover any marketing expenses incurred by the management company. A charge to exit a fund is called a back-end load or a redemption fee.
Which of the following statements regarding mutual funds is most accurate?
- closed-end funds often sell at a 5-10% premium to net asset value (NAV)
- open-end mutual funds buy or sell shares at the per-share net asset value (NAV)
- both open- and closed-end funds are willing to buy back shares from investors
closed-end funds have become less popular over the last decade and the number of available funds is falling
Open-end mutual funds buy or sell shares at the per-shares at the per-share NAV and then may change a sales fee or redemption fee relative to the NAV. Closed-end funds often sell at a discount to NAV, not a premium. The number of closed-end funds has risen substantially in the past ten years from 20 to 268 funds. Only open-end funds buy back shares from investors.
A closed-end fund:
-has its price determined by the NAV
is traded in the primary market but not the secondary market
- has its price determined by supply and demand, regardless of its NAV
- has a share price equal to the NAV since the share price is determined in the secondary market
Closed-end investment companies are initiated through a stock offering to raise funds. The investment company does not issue or redeem shares after initial offering. Shares of a closed-end fund are traded in the public markets and are priced by supply and demand. The share price of a closed-end fund is not directly linked to the fund’s NAV. The NAV is the prevailing market value of all the shares and assets owned by the fund. Many closed-end funds sell at a discount of 5% to 20% from their NAV.
Mutual fund studies fail to provide support for which of the following conclusions?
- actively managed mutual funds with positive performance show some evidence of performance persistence
- without fail, annual returns on the Wilshire 5000 were higher than managed mutual fund returns
- actively managed mutual funds with negative performance show some evidence of performance persistence.
- annual returns on the Wilshire 5000 were higher than managed mutual funds returns in over half the years studied.
While the Wilshire 5000 outperformed managed mutual funds on average, it is important to note that managed mutual funds did outperform the index approximately 40% of the time.
