Alternative Investments【Reading 66】Sample investment, 2012, company, assets

kim226

The per-share value of an investment company’s assets minus its liabilities is called the:

A) discount.

B) net asset value.

C) current market value.

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The net asset value (NAV) of an investment company is calculated as assets minus liabilities, stated on a per-share basis.

kim226

For the equity shares of an open-end investment company, the share value:

A) is determined in the secondary market.

B) always equals NAV.

C) may or may not equal NAV.

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Shares of a closed-end investment company are determined in the secondary market and may or may not equal NAV. Share value of an open-end investment company always equals NAV because the investment company stands ready to redeem shares at their net asset value.

kim226

Both open-end and closed-end funds typically charge:

A) an annual management fee.

B) a front-end load.

C) a premium to the underlying net asset value (NAV).

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Both types of managed funds, open-end and closed-end, typically charge an annual management fee. Open-end funds sometimes charge a front-end load or a redemption fee, but closed-end funds do not. Closed-end funds can sell at a premium (or discount) to underlying NAV, but this does not result in compensation to the fund.

kim226

An investment company that stands ready to redeem investor shares at market value is classified as:

A) an open-end investment company.

B) a closed-end investment company.

C) a managed investment company.

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A closed-end investment company does not redeem investor shares; after issuance, shares trade in the secondary market. Some managed investment companies may redeem shares, but others may not. An open-end investment company always offers a redemption feature.

karoliukas

The net asset value (NAV) of an open-end fund is determined by the:

A) book value of all assets divided by the number of shares outstanding.

B) market value of assets minus liabilities divided by the number of shares outstanding.

C) supply and demand for the shares in the investment management company.

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This is the equation for the calculation of NAV.

karoliukas

You are going to invest in a closed-end mutual fund and are told that the net asset value of the fund is $20.40, and the share price is $18.20. What is the discount you would receive or the premium that you would pay?

A) -0.1078.

B) -0.1209.

C) 0.1209.

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18.20 − 20.40	= -0.1078
20.40

karoliukas

Which of the following statements about investment companies is least accurate?

A) The investment company's board of directors hires an investment management company to select securities, manage the portfolio, and handle administrative duties.

B) Investment companies are generally wholly owned subsidiaries of the investment advisory firm that creates them.

C) Generally the investment advisory firm initiating the fund will also act as the fund's investment management company.

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Investment companies are owned by individual investors. For example, individuals who purchase shares in a mutual fund are the "owners" of that fund.

karoliukas

Jillian Best is choosing between two mutual funds. Fund A has a front-end load of 4%, a net asset value (NAV) of $60.00, and an expected return of 13.0%. Fund B has a redemption fee of 1.5%, a NAV of $27, and an expected return of 10%. Jillian will invest $50,000 in either fund. Which of the following statements is most accurate if Jillian has a 6-month holding period? The:

A) investor is better off with the front-end load fund by $120.00.

B) investor is better off with the redemption fee fund by $592.50.

C) investor is better off with the redemption fee fund by $712.50.

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Front end load fund:	$50,000 (1 – 0.04)(1.065)	= $51,120.00
Redemption fee fund:	$50,000 (1.05)(1 – 0.015)	= $51,712.50
Redemption fee fund advantage		$ 592.50

karoliukas

The net asset value of a closed-end mutual fund is $11.20, and the share price is $10.00. The discount or premium is closest to:

A) 10.7% discount.

B) 12.0% premium.

C) 12.0% discount.

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(SP - NAV) / NAV =
(10.00 - 11.20) / 11.20 = −0.107

karoliukas

Bill Lynch, CFA, is a branch manager for a brokerage firm. He is reviewing a set of slides for a sales presentation that one of his subordinates will deliver next week. In a section that explains the nature of the various fees charged by investment companies, Lynch finds slides that state the following:
Slide 8: Fees charged by investment companies are a trade-off from the investor’s point of view. Lower fees will subtract less from the investor’s rate of return, but higher fees give portfolio managers greater incentives to achieve higher returns.
Slide 12: When choosing between a fund’s share classes, the investor should select the class with the lowest total annual fees.
Should Lynch agree or disagree with the statements on these two slides?

Slide 8

Slide 12

A) Agree Disagree

B) Disagree Disagree

C) Disagree Agree

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Lynch should disagree with both of these statements. Premiums, loads, and redemption fees are compensation for sales and marketing efforts, but they are not performance incentives for the portfolio managers. Different classes of shares can be structured with different schedules of front-end, back-end, and distribution fees. The optimal choice depends on the investor’s expected holding period and is not necessarily the one with the lowest total annual fees.