Week#5_FIN2062_Feb5_Exercise_MutualFunds-1_ExtrPracticeQs_Answers_MH

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Week #5, Class #5 – Mutual Funds (I) Web Search, Chapter 17 - “Web Practice ” Questions Question #1 : Which of the following statements best describes the difference in management style between “managed” products and “structured” products? a. Managed products are actively managed and structured products are passively managed b. Managed products are passively managed and structured products are actively managed c. Managed products are either actively or passively managed and structured products are passively managed d. Managed products are actively managed and structured products are either actively or passively managed Text Reference: Ch. 17, p. 19 Question #2 : Which of the following issues is least likely to be a disadvantage associated with investing in “structured" products? a. High cost b. Complexity c. Lack of transparency d. Illiquidity of the secondary market Text Reference: Ch. 17, p. 12 1

Question #3 : The fact that a large mutual fund might have a portfolio of 60-100 different securities in 15-20 different industries is most closely associated with the advantage of …? a. Low cost investments b.Diversification of holdings c. Greater transparency d.Short-selling opportunities Text Reference: Ch. 17, p. 6 Question #4 : Which of the following business structures is the most common for mutual funds in Canada? a. Open-end trust b.Closed-end trust c. Open-end trust deed d.Unincorporated fund Text Reference: Ch. 17, p. 8 Question #5 : Which of the following statements is not true concerning the responsibilities of either a fund manager or fund custodian? a. The custodian is responsible for a mutual fund’s net asset value per share (NAVPS) and preparing the mutual fund’s prospectus b.The fund manager provides day-to-day supervision of the mutual fund’s investment portfolio c. The custodian sometimes also serves as the mutual fund’s registrar and transfer agent to maintain records of who owns mutual fund shares at any point in time d.The fund manager supervises shareholder and unitholder record-keeping practices Text Reference: Ch. 17, pp. 9/10 2

Question #6 : A mutual fund has $25,000,000 in assets. This includes $2,000,000 in cash and $1,000,000 in derivative products. The mutual fund also has $500,000 in liabilities. If it has 5,000,000 units outstanding, what is the current net asset value per unit for the fund? a. $4.50 b.$4.60 c. $4.90 d.$5.00 Text Reference: Ch. 17, pp. 11/12 Calculation : ($25,000,000 - $500,000) / $5,000,000 = $24,500,000 / $5,000,000 = $4.90 Note: Cash is included in total fund assets of $25,000,000. Derivatives do not factor into the NAVPS calculation. Why? Question #7 : Maria-Victoria made an investment into “Sky High” mutual fund, which had a NAV of $25. Investment fees are calculated in the basis of a “front-end” load of 3%. In this case, what is the offering (ie. purchase) price of the fund units? a. $24.25 b. $25.00 c. $25.75 d. $25.77 Text Reference: Ch. 17, p. 13 Calculation : $25,000,000 / (100% - 3%) = $25.77 3

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Question #8 : Referring back to Maria-Victoria and “Sky High” mutual fund, based on the offering (ie. purchase) price of the fund units, what is the sales commission? a. 2.99% b.3.08% c. 3.18% d.Insufficient information is provided to determine the sales commission Text Reference: Ch. 17, p. 13 Calculation : $.77 / $25.00 = 3.08% Question #9 : Anastasia purchased units in “Smart Thinking” mutual fund, which charges a back-end load that begins at 6% in the first year and then declines by 1% annually until it reaches 0% after the sixth year. The charge is based on the NAVPS at the time of redemption. If Anastasia purchased her units at $12, and then the unit price rose to $14 a year and a half later, when she the sold her units, what would her redemption (ie. selling) price be? a. $11.40 b.$12.60 c. $13.16 d.$13.30 Text Reference: Ch. 17, pp. 13/14 Calculation : $14 - ($14 x 0.05) = $14 - $0.70 = $13.30 Note: The load is 6% in the first year and 5% in year 2 (when Anastasia sold her units). 4

Question #10 : What is term used to describe the annual fee that a mutual fund manager pays to the distributor who sold the fund as long as the client holds the fund? a. “F -Class” charge b.Trailer fee or back-end load c. Service fee or front-end load d.Trailer fee or service fee Text Reference: Ch. 17, p. 14 Question #11 : “Switching” fees are most likely to occur when … a. An investor keeps their money in the same mutual fund but switches from a back-end load to a front-end load b.An investor keeps their money in the same mutual fund but switches from a front-end load to a back-end load c. An investor exchanges units of one fund for another fund in the same family or fund company d.An investor exchanges units of one fund for another fund in another family or fund company Text Reference: Ch. 17, p. 15 5

Question #12 : Which of the following fees are included in the management expense ratio (MER) of a mutual fund? I. Interest charges II. Audit and legal fees III. Safekeeping and custodial fees a. (I) only b.(I) and (II) only c. (I) and (III) only d.All of the above Text Reference: Ch. 17, p. 16 Question #13 : The biggest difference between “F-Class” mutual funds and traditional mutual funds is that …? a. F-Class mutual funds have lower MERs b.F-Class mutual funds have higher MERs c. F-Class mutual funds hold fewer securities d.F-Class mutual funds are passively managed Text Reference: Ch. 17, p. 16 Question #14 : Which of the following documents must an investor receive upon purchase of mutual fund units? a. “Fund Facts” document only b. “Fund Facts” document and a simplified prospectus c. “Fund Facts” document and an annual information form (AIF) d. “Fund Facts” document, a simplified prospectus and an annual information form (AIF) Text Reference: Ch. 17, p. 20 6

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Question #15 : The most important use of derivatives for mutual fund managers is to … a. Increase return and reduce volatility b.Increase return and hedge against risk c. Facilitate market entry and exit and increase return d.Facilitate market entry and exit and hedge against risk Text Reference: Ch. 17, pp. 27/28 Question #16 : Which of the following types of risks is most closely associated with “managed” products, but not with “structured” products? a. Inflation risk b.Currency risk c. Pre-payment risk d.Non-systematic risk Text Reference: Ch. 17, pp. 6/8 Explanation: Since “structured” products are passively managed, the type of risk this product category is most affected by is systematic risk. Question #17 : Which of the following mega-trends has had the least influence on the strong growth of “managed” and “structured” products over the past few decades? a. Demographics b.Search for yield c. Search for “alpha” d.Growth in demand for passive investments Text Reference: Ch. 17, p. 5 7

Question #18 : The benefit of “diversification” that is available with mutual fund investments is most closely associated with the ability to reduce or eliminate which of the following types of risks? a. Market risk b.Systematic risk c. Non-systematic risk d.Business Text Reference: Ch. 17, p. 6 Question #19 : What unique benefit do “pre-authorized contribution plans (PACs)” offer to investors? a. They allow investors to time the market b.They allow investors to contribute small amounts of money on a regular basis c. They allow investors to reduce the “management expense ratio (MERs)” on funds they hold d.They allow investors to switch money between funds with no additional charges Text Reference: Ch. 17, p. 6 Question #20 : What is the benefit to investors from mutual funds that are set up using a “trust” structure rather than a “corporate” structure? a. As a trust, the mutual fund itself is able to avoid taxation b.As a trust, the mutual fund offers greater confidence to investors concerning the management of their financial assets c. As a trust, the mutual fund management can guarantee that it will only charge fees if the mutual fund portfolio generates a positive rate of return d.As a trust, there is no significant benefit to investors that is not also available to investors in “corporate” structure mutual funds Text Reference: Ch. 17, p. 8 8

Question #21 : Which of the following parties holds ultimate responsibility for the activities and decisions related to a mutual fund? a. The directors b.The fund manager c. The custodian d.The distributors Text Reference: Ch. 17, pp. 9/10 Question #22 : Which of the following activities is not a responsibility of the fund manager? a. Calculating the “net asset value (NAV)” of the mutual fund portfolio b.Preparing the prospectus and other reporting requirements of the mutual fund c. Supervising all the functions related to keeping accurate records of share/unit holder transactions d.Accepting and transmitting orders for redemptions of mutual fund shares or units Text Reference: Ch. 17, pp. 9/10 Question #23 : A mutual fund has $25,000,000 worth of securities in its investment portfolio. It has an additional $2,000,000 in cash reserves to cover possible redemptions. It also has $1,500,000 in liabilities. If there are 10,000,000 units outstanding, what is the current “net asset value (NAV)” of each mutual fund unit outstanding? a. $2.35 b.$2.50 c. $2.55 d.$2.70 Text Reference: Ch. 17, p. 11 9

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Calculation : [($25,000,000 + $2,000,000) - $1,500,000] / $10,000,000 = [$27,000,000 - $1,500,000] / $10,000,000 = $25,500,000 / $10,000,000 = $2.55 Note: Cash is a portfolio asset and must be included in the NAVPS calculation. Question #24 : Robert is a big spender. He purchased one mutual fund unit on January 2 nd 2020 when it had a net asset value (NAV) of $20.00. At the time Robert bought his one unit, it was sold to him with a “back-end load” that started at 6% and then declined by 1% for each following year. The fee was to be calculated using the NAV for the unit at the time Robert decided to sell his unit. If the unit was worth $24.00 when Robert finally sold it in October 2023, what would be the price the Robert would receive for his unit? a. $23.28 b.$23.40 c. $23.70 d.$24.00 Text Reference: Ch. 17, pp. 13/14 Calculation : $24 - ($24 x 0.03) = $23.28 Note: The load would be 6% in 2020, 5% in 2021, 4% in 2022 and 3% in 2023 Question #25 Which of the following mutual fund costs is the annual fee paid by the fund company to the fund representative who sold the investment to the client? a. Trailer fee b.Front-end load c. Back-end load d.Redemption fee Text Reference: Ch. 17, p. 14 10

Question #26 : Which of the following statements about the “Fund Facts” document are you most likely to disagree with? a. The document is required to be delivered to the client within two business days of the client making an investment in the mutual fund b.The document is divided into two major sections; each with its own list of related disclosure items c. The disclosure items covered in the first section of the document provide information about the fund including quick facts and risks d.The disclosure items covered in the second section of the document provide information about past performance of the fund and costs associated with purchasing, owning and selling units of the fund Text Reference: Ch. 17, p. 17 Question #27 : Which of the following statements about the “Simplified Prospectus” and “Annual Information Form” documents are you most likely to agree with? a. The simplified prospectus must be updated quarterly b.The simplified prospectus must be delivered to the investor upon his/her request c. The annual information form does not have any information in it that is also included in the simplified prospectus d.The annual information form does not have to be made available to investors if they are already receiving the simplified prospectus Text Reference: Ch. 17, pp. 23/25 11

Question #28 : Which of the following restrictions that limit investment decisions for traditional mutual funds do not apply to the manager of a specialty mutual fund? a. No borrowing for leverage purposes b.The fund cannot own more than 10% of a company’s voting shares c. The fund cannot place more than 10% of its investment assets into the shares of an individual company d.All of these same restrictions would apply to the manager of a specialty mutual fund as well as the manager of a traditional mutual fund Text Reference: Ch. 17, p. 27 Question #29 : What is the common industry term for the prohibited sales practice of “quoting a future price”? a. “Front running” b.Back-dating orders c. Offer to repurchase d.Guaranteeing returns Text Reference: Ch. 17, p. 28 12

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Question #30 : YYZ Bank also recently received approval to sell mutual funds through its downtown branch. Mr. Walker is an employee of the bank and is also licensed as a mutual fund sales representative on behalf of YYZ bank. Mr. Walker was recently approached by a new client who wanted to make an investment into one of the YYZ mutual funds. To do so, the client asked Mr. Walker to loan the money to the client, who would then purchase the mutual fund units with Mr. Walker. In order for this request to be acceptable order …”? a. Mr. Walker can take the order as this request is not a restricted sales practice b.Mr. Walker must get the approval from a senior lending officer in his branch c. Mr. Walker must get the approval from a senior lending officer at YYZ bank d.This is not an acceptable order. Mr. Walker must decline to request and cannot proceed with the order Text Reference: Ch. 17, pp. 37/38 Note: This is absolutely incorrect (in my opinion). The correct answer should be “D” (personal loans from an advisor to a client are absolutely forbidden!) 13