Chapter 7 Closed–end Investment Companies, Real Estate
Investment Trusts (REITs), and Exchange–Traded Funds (ETFs)
TRUE/FALSE
fund.”
closed–end investment company depends on the difference
between the fund’s assets and liabilities and the number of
shares outstanding.
the investor should receive the net asset value minus the
cost of the liquidation.
for a discount from net asset value.
sell for a discount from their net asset value.
investment company is fixed by the fund.
investment company are the commissions to buy and sell the
shares.
earnings and capital gains.
subject to federal income taxation.
fixed portfolio of securities such as federal government
bonds.
to a closed–end investment company.
securities of one sector of the economy, systematic risk is
reduced.
illustrative of a closed–end investment company.
by the federal government.
mortgage loans.
its financing is entirely equity).
index fund.
shares of stock.
net asset value.
the process of constructing a well diversified portfolio.
inefficient, that argues for pursuing a more active
portfolio strategy and purchasing exchange–traded funds
instead of individual stocks.
substantial debt.
individual investor’s IRAs.
while shorting another.
investors and financial institutions such as pension plans.
that specialize in foreign investments.
invest in foreign securities cannot sell for a premium over
their net asset values.
American securities markets, then foreign investments may
offer the U. S. investor no advantages over investing in
domestic securities.
MULTIPLE CHOICE
1. have a fixed capital structure
2. issue new stock whenever an individual buys shares
3. may sell for a premium over net asset value
4. must sell for their net asset value
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
company increases with
a. higher stock prices
b. lower stock prices
c. larger number of shares
d. increased liabilities
securities in efficient financial markets, they
a. cannot outperform the market consistently
b. should not outperform the market consistently
c. will underperform the market when stock
prices decline
d. primarily bear unsystematic risk
coefficients less than 1.0
a. have outperformed the market
b. have underperformed the market
c. have more systematic risk than the market
d. have less systematic risk than the market
a discount,
a. its price exceeds the net asset value
b. its price is less than the net asset value
c. dividend income exceeds capital gains
d. capital gains exceed dividend income.
a. pays federal income taxes
b. retains all of its earnings
c. invests in mortgages or rental properties
d. cannot use debt financing
investing in real estate investment trusts (REITs)?
a. fluctuations in dividend payments
b. excessive use of debt financing by some REITs
c. fluctuating interest rates affecting securities
valuations
d. the federal tax rate paid by the trust
a. redeem their shares
b. only buy exchangeable securities
c. are bought and sold in secondary markets
d. cannot be sold short
a. consistently outperform other funds
b. mimic an index of securities
c. require investors to select individual stocks
d. are illustrations of load funds
a. high quality securities
b. stocks that respond to changes in consumer
prices (the Consumer Price Index or CPI)
c. stocks included in an aggregate measure of
stock prices
d. stocks and bonds of companies in a particular
industry
a. is a public financial institution
b. has its shares registered with the Federal Reserve
c. is open to a select number of individual investors
d. has actively traded shares
a. acquiring shares in mutual funds
b. shorting “overvalued” stocks while buying
“undervalued” stocks
c. limiting their portfolios to money market
instruments
d. underwriting new issues (IPOs)
a. stress European securities
b. exclude U. S. securities
c. are a diversified mix of securities from all
countries with security markets
d. specialize in the securities of one country
equities by acquiring
1. iShares specializing in foreign country indexes
2. international mutual funds
3. country closed–end investment companies
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
PROBLEMS
1. If an investor purchases shares in a no load mutual fund
for $36, receives cash distributions of $1 and redeems the
shares after one year for $42, what is the percentage
return on the investment?
2. The net asset value of shares in a closed–end investment
company is $36. An investor buys the shares for $34 in the
secondary market. The company distributes $1 and after one
year, the net asset rises to $42. The investor sells the
shares for $44 in the secondary market.
a. What is the discount?
b. What is the percentage return on the investment?
c. In both problems 1 and 2, the investment company’s
net asset value rose from $36 to $42 and the company
distributed $1. Why are the percentage returns different?
3. If an investor buys shares in a closed–end investment
company for $46 and the net asset value is $53, what is
the discount? If the company distributes $1, the net asset
value rises to $58, and the investor sells the shares for a
premium of 5 percent over the net asset value, what is the
percentage earned on the investment?
4. Mutual fund A earned 10 percent while B earned 8
percent. The standard deviations of the returns were 10
percent and 7 percent, respectively. According to the
Sharpe ratio, which fund performed better?
5. A mutual fund’s net asset value is $50, but the fund
charges an exit fee of 1 percent of net asset value and a
load fee of 4 percent of net asset value. An individual
purchases the shares. During the year the fund distributes
$2.34. The net asset value rises to $58.38 and the investor
redeems the shares.
a. What is the percentage return the fund can report
that was achieved by its portfolio managers.
b. What is the percentage return the individual earned
on the investment?
c. Why are the two percentages different?
6. You buy a REIT for $50 a share. The REIT distributes
$3.00 consisting of return of capital. You are in the 30%
income tax bracket (which also applies to short-term capital
gains) and the 15 percent long-term capital gains bracket.
What is the tax implication of this distribution?
7. An investor bought 100 shares of a REIT for $54 a share
and two years later sold the shares for $62. The REIT
annually distributed $4.00 per share ($400) consisting of
$2.00 return of capital $200), $1.20 ($120) in income and
$0.80 ($80) in long-term capital gains. The investor’s income
tax bracket is 30%. The long-term capital gains tax rate is
15 percent. What is the investor’s second year’s tax
obligation?
SOLUTIONS TO THE PROBLEMS
