ARE_143_Lecture_Probs_Chap_4

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143

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Finance

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Jan 9, 2024

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An investment company which issues shares to anyone wishing to buy and redeems shares from anyone wishing to sell is called a(n) fund. a. hedge b. closed-end c. open-end d. public e. exchange traded A closed-end fund is a fund which: e aee o will no longer issue new shares but will still redeem existing shares. issues new shares only when old shares are redeemed by the fund. has a fixed net asset value. issues a fixed number of shares. trades only with a pre-selected group of investors. A fund charges 5 percent of the offering price as a fee when it issues new shares. This fee is called a(n): S R contingent deferred sales charge. 12b-1 fee. back-end load. front-end load. issuance charge. The annual fee charged by funds to cover the distribution and marketing expenses is called a(n): A contingent deferred sales charge. 12b-1 fee. back-end load. front-end load. issuance charge. An open-end fund which invests strictly in short-term, high-quality, low-risk securities is a0 o called a(n) mutual fund. bond stock money market asset allocation balanced You own shares in a mutual fund which charges a 4 percent front-end load. You are redeeming those shares today. The price that you will receive per share is: o0 o the NAV of the fund at the time the redemption order is received by the fund. the offering price of the fund at the time the redemption order is received by the fund. today’s opening NAV. today’s closing NAV. today’s closing offering price. Closed-end funds: a. o0 o are valued only at the end of each trading day. trade like a stock. have a fluctuating number of shares outstanding. are always purchased at NAV. can sell at a premium but never at a discount.

A mutual fund is owned by: o e o Investment advisory firms frequently create new mutual funds so that the advisory firm can: raise cash by issuing additional shares of stock and selling them to the fund. o0 o An investment company will be treated as a “regulated investment company” by the Internal Revenue its shareholders. a management company. a financial institution. the fund’s board of directors. a mutual fund family. pass its taxable income through the fund and thereby avoid income taxes. earn management fees by providing services to the fund. increase its number of outstanding shares and thereby raise new equity capital. leverage the fund’s assets and thereby increase the advisory firm’s rate of return. Service provided that it: L II. 1. Iv. o0 op invests almost all of its assets in bonds, stocks, and other securities. invests solely in U.S. securities. does not invest more than 5 percent of its assets in any one security. passes all its realized investment income through to its shareholders. I and III only I and IV only IT and 11T only I, 11, and IV only L, 111, and TV only Which one of the following lists the two best reasons for considering a load fund? a0 o lack of good no-load funds and superior market performance preference for a particular fund manager or a specialized type of fund superior market performance and preferential tax treatment tax-free income and superior fund managers no management fees and a particular fund manager The net asset value of a money market mutual fund: o0 o Which one of the following is the recommended method of determining the objective of a mutual fund? oo o generally fluctuates on a daily basis. is guaranteed to be $1. can be equal to or greater than $1 but not less than $1. can fall below $1. is guaranteed by the FDIC. refer to the fund’s objective statement read the fund’s prospectus review the portfolio’s holdings read the sales literature read the portfolio manager’s comments in the annual report

The primary difference between an index fund and an exchange traded fund (ETF) is the: a. higher expenses associated with the ETF. b. fact that you can short sell an index fund but not an ETF. c. fact that you pay commissions to purchase an index fund but not an ETF. d. greater variety of industry-specific offerings provided by index funds as compared to ETFs. e. fact that ETFs are traded like stocks throughout the trading period. NET ASSET VALUE The High Tech Fund owns the following stocks: Stock Shares Stock Price A 2,500 $92 B 6,000 $51 C 9,800 $34 The fund has no liabilities and has 40,000 shares outstanding. What is the fund’s net asset value? OFFERING PRICE The Asian Industrial Fund has $840 million in assets and $40,000 in liabilities. There are 35 million shares outstanding. The fund charges a 5 percent front-end load. What is the offering price? OFFERING PRICE You are interested in purchasing a fund which has an offering price of $46.30 and a 3.5 percent front-end load. What is the net asset value of the fund? FRONT-END LOAD You want to buy 2,500 shares of a fund that has an NAV of $18.75. The fund charges a 4 percent front- end load. How much will you have to spend to make this purchase? MONEY MARKET FUNDS You invest $3,500 in a money market fund at the beginning of the year. The fund’s assets appreciate by 4.2 percent over the year. How many shares of the fund do you own at the end of the year?

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1. Suppose ABC Mutual Fund had no liabilities and owned only four stocks as follows: Stock Shares Price Market Value 4 w 1,000 $12 $12,000 X 1,200 15 18,000 Y 1,500 22 33,000 - ' z 800 16 12,800 / $75,800 . )/ \,,J\ i . The fund began by selling $50,000 of stock at $8.00 per share. What is its NAV? 4. CMD Asset Management has the following fee structure for clients in its equity fund: 1.00% of first $5 million invested 0.75% of next $5 million invested - T | 0.60% of next $10 million invested 0.40% above $20 million ¢ﬂ/1 a. Calculate the annual dollar fees paid by Client 1, which has $27 million under management, and \F/ - Client 2, which has $97 million under management. L R T | b. Calculate the fees paid by both clients as a percentage of their assets under management. c. ‘What is the economic rationale for a fee schedule that declines (in percentage terms) with increases in assets under management? i 8 Mutual funds can effectively charge sales fees in one of three ways: front-end load fees, 12b-1 (i.e., ‘ ’ annual) fees, or deferred (i.e., back-end) load fees. Assume that the SAS Fund offers its investors 1 the choice of the following sales fee arrangements: (1) a 3 percent front-end load, (2) a 0.50 percent - annual deduction, or (3) a 2 percent back-end load, paid at the liquidation of the investor’s position. Also, assume that SAS Fund averages NAV growth of 12 percent per year. e il a. If you start with $100,000 in investment capital, calculate what an investment in SAS would be f V\MA ‘ worth in three years under each of the proposed sales fee schemes. Which scheme would you - choose? b. If your investment horizon were 10 years, would your answer in Part a change? Demonstrate. c. Explain the relationship between the timing of the sales charge and your investment horizon. In general, if you intend to hold your position for a long time, which fee arrangement would you ’ prefer? [ ——— ol - 7Ot are considering investing $1 ¥ expect your investment to earn 15 ,000 in a load fund that charges a fee of 8 percent, and you y, you could invest in a ges a 1 percent redemption fee. You estimate that this no- your expectations, which is the better investment and by how percent over the next year. Alternativel pose SUp no-load fund with similar risk that char load fund will earn 12 percent. Given s much? i) = T