karoliukas

A sales commission charged by an investment company at the time of redemption is called a:

A) 12b-1 fee.

B) back-end load.

C) front-end load.

---

A front-end load is a sales commission charged at purchase. A distribution fee, also called a 12b-1 fee, is an ongoing fee, charged on an annual basis as a percentage of assets, which is used to cover any marketing expenses incurred by the management company. A charge to exit a fund is called a back-end load or a redemption fee.

karoliukas

Based on the following information, what is the net asset value (NAV) per share. There are currently no expenses and no load.

Cap Stock Sold $109,000
Price per share $10
Stock	Shares	Price	Book Value
A	1,051	$10	$5
B	2,420	$35	$29
C	1,851	$9	$8
D	900	$69	$63

A) $15.96.

B) $13.26.

C) $27.03.

---

Total number of shares sold	=	$109,000	=	10,900 shares
		$10 (per shares)
Total market value	=	1,051 × 10	=	10,510
		2,420 × 35	=	84,700
		1,851 × 9	=	16,659
		900 × 69	=	62,100
				173,969
NAV	=	173,969	=	15.96 per share
		10,900

karoliukas

An investor is contemplating buying a load fund versus a no load mutual fund. She is trying to figure out the actual amount she will have to spend on the load fund. The shares have a net asset value (NAV) of $34.50 and a load of 5.2%. Determine which type of fund will always have a share price equal to the NAV and the price she will pay for the load fund.

Fund

Offering Price

A) open-end $34.50

B) open-end $36.39

C) close-end $36.39

---

The share price of an open-end fund will always equal the NAV, since the investment company is obligated to redeem shares at any time at current market value.
Offering price = $34.50 / (1 – 0.052) = $36.39.

karoliukas

A closed-end fund:

A) has its price determined by the net asset value (NAV).

B) has its price determined by supply and demand, regardless of its net asset value (NAV).

C) is traded in the primary market but not the secondary market.

---

Closed-end investment companies are initiated through a stock offering to raise funds. The investment company does not issue or redeem shares after the initial offering. Shares of a closed-end investment company are traded in public markets and are priced by supply and demand. The share price of a closed-end fund is not directly linked to the fund’s NAV. The NAV is the prevailing market value of all the shares and assets owned by the fund. Many closed-end funds sell at a discount of 5 to 20% from their NAV.

karoliukas

Open-end investment companies:

A) can continue to sell and repurchase shares after their initial public offerings.

B) must register a maximum number of shares with the Securities and Exchange Commission (SEC).

C) must redeem shares at the net asset value with no fees included.

---

The primary difference between open-end and closed-end funds is that open-end funds continue to sell and repurchase shares after their initial public offerings. Open-end investment companies can be load or no-load.

karoliukas

Which statement about mutual funds is most accurate?

A) The liquidity of an open-end fund is provided by the open market.

B) The redemption fee for a closed-end fund is the commission charged on the sale and a portion of the bid/ask spread of the shares.

C) Some open-end funds charge no fees.

---

Since closed-end funds are traded in the secondary market for a price determined by supply and demand for shares, the spread along with the sales commission represent the redemption fee. All funds charge fees, although the fees vary widely from fund to fund. In addition, some funds charge a load in addition to fees. The liquidity of an open-end fund is provided by the company that manages it, not the open market.

karoliukas

Which statement is the least accurate analysis of a mutual fund equity investment strategy?

A) Stable value funds invest in long-term fixed-income securities with regular cash flows and a steady interest rate.

B) Sector funds may set performance targets drastically different than the overall market’s expected returns.

C) Global funds managed by U.S. investment companies often contain U.S. stocks.

---

Stable value funds seek both timely principal payments and steady interest rates, but tend to invest in short-term securities with regular principal payments. Global funds frequently contain stocks from the investment manager’s home country. Index funds are designed to track a certain index, and fees are typically lower than those of actively managed funds. Because different industry sectors have different growth characteristics, some sector funds’ targets will of necessity diverge from the broader market.

karoliukas

The Big Fund is a mutual fund that invests primarily in the equity of pharmaceutical companies. The investment style of the Big Fund can best be classified as a:

A) style strategy.

B) large-cap strategy.

C) sector strategy.

---

A large-cap strategy focuses on the equities of companies with large capitalization. Both large cap and growth are examples of style strategies, which look for investments with common underlying characteristics. A sector strategy invests in one, defined industry.

karoliukas

Growth, value, large-cap, and small-cap investing are all examples of:

A) style investment strategies.

B) sector investment strategies.

C) index investment strategies.

---

A sector strategy invests in the stocks of a particular industry. An index strategy models the portfolio to mimic the benchmark index. A style strategy looks for investments with common underlying characteristics.

karoliukas

A portfolio that pursues a stable-value investment strategy would most likely invest in:

A) low P/E stocks.

B) short-term Treasuries.

C) high P/E stocks.

---

Investing in low P/E stocks is a value strategy. Buying high P/E stocks is a growth strategy. A stable-value fund would be most likely to invest in short-term, fixed-income securities.