Overview Flashcards
All of the following are defined as “investment companies” under the Investment Company Act of 1940 EXCEPT:
A. Face Amount Certificate Company
B. Unit Investment Trust
C. Oil and Gas Leasehold Partnership
D. Management Company
The best answer is C.
The Investment Company Act of 1940 defines 3 types of investment companies; face amount certificate companies, unit investment trusts, and management companies.
To find the NAV (Net Asset Value) of a mutual fund, which is deducted from the value of all assets owned by the fund?
A. Liabilities
B. Operating Expenses
C. Management Fees
D. Redemption Fees
The best answer is A.
The formula for Net Asset Value per share of a mutual fund is the market value of all fund investments (assets) minus any fund liabilities (for example, mutual funds can borrow from banks within limits, so any bank loans would be deducted). This gives Net Asset Value (NAV). Dividing NAV by the number of outstanding shares gives NAV per share.
Which statement is TRUE when comparing types of management companies?
A. Open-end funds are publicly traded funds
B. Open-end funds are mutual funds
C. Closed-end funds have no management
D. Closed-end funds are not publicly traded funds since these are closed to the general public
The best answer is B.
Management companies are either open-end or closed-end. Either has an investment manager, managing the fund based on a stated investment objective.
An open-end management company is a mutual fund. Mutual funds (open-end funds) are “open” to new investment. Shares are issued and redeemed at the end of the day and do not “trade.”
A closed-end management company is “closed” to new investment. It has a 1-time share offering under a prospectus, and then the shares are listed and trade like any other stock.
Mutual Funds
NAV Buy Chg
ALPO Fund 9.51 10.39 +.02
AUDI Fund 6.82 7.45 +.04
The funds listed are:
A. open end management companies
B. closed end management companies
C. fixed unit investment trusts
D. participating unit investment trusts
The best answer is A.
These funds are open-end management companies, commonly called mutual funds. Closed-end management companies are not sold with a sales charge. They trade on an exchange and are bought at the prevailing market price plus a commission.
Which of the following terms are synonymous?
A. Open end fund / Publicly traded fund
B. Open end fund / Mutual fund
C. Closed end fund / Mutual fund
D. Closed end fund / Privately traded fund
The best answer is B.
An open-end fund portfolio is managed by an investment adviser and the fund continuously issues and redeems its common shares - so it is an “open end” management company. These funds are not publicly traded but rather issued and redeemed based on end-of-day pricing.
A closed-end fund has a 1-time stock issuance and then “closes” its books to new investment and then lists its stock on an exchange or Nasdaq. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is a “publicly traded” fund.
Mutual fund shares are:
A. Negotiable and Managed
B. Negotiable and Non-Managed
C. Redeemable and Managed
D. Redeemable and Non-Managed
The best answer is C.
Mutual fund shares represent an undivided interest in a portfolio of securities that is managed to meet an investment objective. Mutual fund shares do not trade - they are not negotiable. The shares are issued by the fund when a purchase is made and are redeemed by the fund when the shares are sold. The fund continuously issues and redeems its shares.
An open end fund has a Net Asset Value of $10 per share. The minimum price at which a share can be purchased is:
A. $10
B. $10 plus a commission
C. the market price
D. the market price plus a commission
The best answer is A.
Mutual fund (open-end management company) shares are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a “sales load.” For a “no load” fund, the customer would simply pay Net Asset Value - this is the minimum price for an open-end fund.
This contrasts to a closed end fund, where the fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed-end fund share is purchased at the prevailing market price plus a commission.
An open end fund has a Net Asset Value of $10 per share. The minimum price at which a share can be purchased is:
A. $10
B. $10 plus a commission
C. $10 plus a mark-up
D. any price because this is negotiated in the market
The best answer is A.
Mutual fund (open-end management company) shares are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a “sales load.” For a “no load” fund, the customer would simply pay Net Asset Value - this is the minimum price for an open-end fund.
This contrasts to a closed end fund, where the fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed-end fund share is purchased at the prevailing market price plus a commission (or a mark-up if it is an OTC principal transaction).
A closed-end management company is a:
A. mutual fund
B. publicly traded fund
C. fixed unit investment trust
D. participating unit investment trust
The best answer is B.
A publicly traded fund has a 1 time stock issuance; closes its books to new investment and then lists its stock on an exchange. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is a “closed-end” fund - that is, closed to new investment.
Publicly traded fund shares are:
A. Negotiable and Managed
B. Redeemable and Managed
C. Negotiable and Non-Managed
D. Redeemable and Non-Managed
The best answer is A.
Publicly traded fund shares represent an undivided interest in a portfolio of securities that is managed to meet an investment objective. A publicly traded fund has a 1-time stock issuance and then “closes” its books to new investment and then lists its stock on an exchange. The stock then trades like any other common stock (negotiable), except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is negotiable it trades in the market like any other stock.
Which of the following terms apply to publicly traded fund shares?
A. Negotiable with a one-time stock issuance
B. Redeemable with a one-time stock issuance
C. Negotiable with a continuous stock issuance
D. Redeemable with a continuous stock issuance
The best answer is A.
Publicly traded fund shares (closed-end funds) represent an undivided interest in a portfolio of securities that is managed to meet an investment objective. A publicly traded fund has a 1-time stock issuance and then “closes” its books to new investment and then lists its stock on an exchange. The stock then trades like any other common stock (negotiable), except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is “closed-end” - that is, closed to new investment.
The essential difference between an open end fund and closed end fund is that a(n):
A. open-end fund is managed; while a closed-end fund is not managed
B. closed-end fund is managed; while an open-end fund is not managed
C. open-end fund has a different capital structure than a closed-end fund
D. open-end fund computes Net Asset Value daily; while a closed-end fund does not
The best answer is C.
Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund’s stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange where they trade. Therefore, open-end and closed-end funds are capitalized differently. Both open-end and closed-end funds compute Net Asset Value per share daily.
The essential difference between an open end management company and a closed end management company is:
A. management
B. capitalization
C. investment objective
D. regulation
The best answer is B.
Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund’s stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange where they trade. Therefore, open-end and closed-end funds are capitalized differently. Both types of funds are regulated under the Investment Company Act of 1940.
The principal difference between an open end management company and a closed end management company is:
A. capitalization
B. management
C. investment objective
D. expense ratio
The best answer is A.
Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund’s stated objectives. Open-end funds continuously issue and redeem shares.
Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange where they trade. Therefore, open-end and closed-end funds are capitalized differently.
The expense ratio of a fund measures of the “cost” of running the fund, and applies to both open and closed end funds (the largest component of the cost of running either type of fund is the annual management fee).
Which of the following MUST be a closed end fund?
A. Net Asset Value = $10 / Purchase Price = $9.50
C. Net Asset Value = $10 / Purchase Price = $10.50
D. The fund is issued and redeemed at end-of-day
The best answer is A.
A closed end fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed end fund share is purchased at the prevailing market price plus a commission.
This contrasts to mutual fund (open end management company) shares that are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a “sales load.” Thus, the minimum price for a mutual fund is Net Asset value(if the fund is no-load) ; while the only type of fund that can trade for less than Net Asset Value is a closed end fund.
