Investments
Investments
11th Edition
ISBN: 9781259277177
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
Question
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Chapter 4, Problem 1PS
Summary Introduction

To determine:

Which amongst the two fixed income unit investment trust or open end fixed income mutual fund will have less operating expense?

Introduction:

A Unit Investment trust refers to the investment company which provide fixed portfolio that comprises of bonds and stock in the form of redeemable units for a particular time period to its investor. This helps an investor to earn dividend income and capital appreciation. Mutual fund refers to the investment policy under which the funds are pooled from the investor and same is invested in different securities such as debentures, bonds and stocks. Mutual funds are advantageous for the small investor as it provides leverage to make investments in small amounts.

Expert Solution & Answer
Check Mark

Answer to Problem 1PS

Fixed income unit investment trust must have lesser expense associated with operation when compared with open end fixed income mutual fund.

Explanation of Solution

In this situation, once the trust is established the investment trust portfolio is fixed. There is no need to incur any expenses for the portfolio management by the manager to rebalance and monitor the portfolio on a continuous basis as the opportunities changes or due to a perceived need. The unit investment does not incur any trading cost as the portfolio is fixed. Mutual fund on the other hand provide various benefits such as diversification, tax benefits, professional management, diversification, however, all these services come along with maintenance fees ascertained from the investor.

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