1215

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

A) a closed-end investment company.

B) an open-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.

1215

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.

1215

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.

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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

1215

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

A) back-end load.

B) 12b-1 fee.

C) front-end load.

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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.

1215

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) Disagree Disagree

B) Agree 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.

1215

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) 12.0% premium.

B) 12.0% discount.

C) 10.7% discount.

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(SP - NAV) / NAV =

(10.00 - 11.20) / 11.20 = ?0.107

1215

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