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Fundamentals of Investments, 8e (Jordan)
Chapter 4 Mutual Funds and Other Investment Companies
1) An investment company:
A) specializes in investing funds on behalf of a financial institution.
B) is a closed-end fund that invests in real estate.
C) pools funds from individual investors.
D) is a specific type of a bank.
E) is a specialized form of a joint stock company.
2) An investment company that will repurchase shares at any time is called a(n) ________ fund.
A) hedge
B) closed-end
C) open-end
D) public
E) exchange traded
3) An investment company that issues a fixed number of shares which can only be resold in the
open stock market is called a(n) ________ fund.
A) hedge
B) closed-end
C) open-end
D) public
E) market
4) The value of a load mutual fund's assets less its liabilities, divided by the number of shares
outstanding is referred to as the fund's:
A) net asset value.
B) offering price.
C) open-end value.
D) closed-end value.
E) prime value.
5) A fee that is charged at the time mutual fund shares are purchased by an investor is called a:
A) contingent deferred sales charge.
B) 12b-1 fee.
C) back-end load.
D) front-end load.
E) issuance charge.
6) A 12b-1 fee is a fee charged by a mutual fund:
A) at the time shares are issued.
B) if shares are sold within a stated period of time.
C) to cover trading costs.
D) to pay the fund's managers.
E) to cover marketing costs.
7) The turnover for a mutual fund refers to:
A) the length of time an average investor holds fund shares.
B) a measure of trading activity.
C) replacing the fund's investment manager.
D) the annual change in the number of shares outstanding.
E) the percentage change in the ownership of fund shares.
8) An open-end fund which invests solely in short-term debt obligations is called a(n) ________
mutual fund.
A) growth
B) stock
C) money market
D) asset allocation
E) balanced
9) A fund that is basically an index fund that trades like a closed-end fund is called a(n):
A) open-end fund.
B) money market fund.
C) exchange-traded fund.
D) mutual fund.
E) depository receipt.
10) Which one of the following describes an investment company that generally has an
unrestricted investment strategy and is not accessible to the general public?
A) mutual fund
B) open-end fund
C) closed-end fund
D) exchange-traded fund
E) hedge fund
11) Which of the following are three key advantages of mutual funds?
A) diversification, taxes, high initial investments
B) low initial investments, professional management, diversification
C) liquidity, high initial investments, diversification
D) professional management, high initial investments, taxes
E) costs, diversification, liquidity
12) Which one of the following statements is correct concerning mutual funds?
A) Mutual funds generally pay no taxes.
B) Mutual funds are risk-free.
C) Profits on the sale of mutual fund shares are tax-free.
D) All mutual funds are diversified.
E) Investments in mutual funds are guaranteed from loss by a private agency of the federal
government.
13) Which one of the following statements is correct concerning an open-end mutual fund which
charges a front-end load?
A) The number of shares outstanding was fixed at the time the fund was created.
B) If an investor wishes to sell her shares, she must do so by selling to another investor.
C) The NAV exceeds the offering price.
D) The load is expressed as a percentage of the NAV.
E) Investors receive the NAV when shares are sold.
14) Which one of the following statements correctly relates to closed-end funds?
A) Closed-end funds must sell at the NAV or above.
B) The number of shares outstanding changes on a daily basis as shares are sold and
repurchased.
C) Shares in closed-end funds must be held until the funds mature.
D) Once a fund closes, a new investor is unable to purchase shares in that fund.
E) Shares of closed-end funds trade just like stocks.
15) Shares in closed-end funds:
A) can be resold to the fund at any time.
B) are more popular than shares in open-end funds.
C) may sell for more or less than the NAV.
D) are referred to as mutual fund shares.
E) cannot be resold.
16) A mutual fund is owned by:
A) its shareholders.
B) a management company.
C) a financial institution.
D) the fund's board of directors.
E) a mutual fund family.
17) A mutual fund is created by which one of the following parties?
A) fund shareholders
B) fund's board of directors
C) SEC
D) investment advisory firm
E) discount broker
18) Mutual funds are generally created to:
A) provide tax shelters for investors.
B) generate fees for an advisory firm.
C) eliminate investment risk.
D) avoid taxes.
E) avoid regulation.
19) Investment advisory firms generally provide which of the following services to a mutual
fund?
I. marketing
II. record keeping
III. investment research
IV. tax payment
A) I only
B) II and III only
C) I, II, and III only
D) II, III, and IV only
E) I, II, III, and IV
20) An investment company will be treated as a "regulated investment company" by the Internal
Revenue Service provided that it:
I. invests almost all of its assets in bonds, stocks, and other securities.
II. invests solely in U.S. securities.
III. does not invest more than two percent of its assets in any one security.
IV. passes all its realized investment income through to its shareholders.
A) I and III only
B) I and IV only
C) II and III only
D) I, II, and IV only
E) I, III, and IV only
21) The income earned by a regulated investment company is:
A) exempt from all taxation.
B) taxed only at the state and local level.
C) taxed only at the federal level.
D) taxable income for the fund.
E) taxable income for the fund's shareholders.
22) Today, you are selling shares of an open-end mutual fund and will be charged a CDSC of 3
percent. The price you will receive per share is equal to:
A) 103 percent of the opening NAV.
B) 97 percent of the opening offering price.
C) 97 percent of the closing NAV.
D) 103 percent of the closing offering price.
E) the closing offering price.
23) Which one of the following costs can a mutual fund shareholder avoid by holding shares for
an extended period of time?
A) 12b-1 fee
B) front-end load
C) management fee
D) contingent deferred sales charge
E) trading costs
24) When the offering price and the NAV are the same, you know that a mutual fund is not
charging which one of the following fees?
A) 12b-1 fee
B) front-end load
C) management fee
D) contingent deferred sales charge
E) trading costs
25) Assume a mutual fund is a pure no-load fund. Which of the following costs should an
investor still expect to incur?
I. contingent deferred sales charge
II. management fee
III. trading costs
IV. redemption fee
A) I, II, and III only
B) II and III only
C) II, III, and IV only
D) I, II, III, and IV
E) none of the costs listed
26) Contingent deferred sales charges:
A) are applied at the time fund shares are purchased.
B) are applied only to front-end load funds.
C) are charged on an annual basis to cover distribution and marketing costs.
D) are no longer permissible.
E) can be avoided.
27) Mutual fund trading costs:
A) are computed as a percentage of a fund's assets.
B) are generally set at a flat amount per year.
C) generally include a bonus fee for outperforming an index.
D) increase in direct relation to the turnover rate.
E) are the costs paid to brokers in the form of sales commissions.
28) Which one of the following is not included in the fee table found in a mutual fund
prospectus?
A) 12b-1 fee
B) turnover rate
C) redemption fee percentage
D) management fee
E) front-end load
29) What are the two best reasons for considering a load fund?
A) lack of good no-load funds and superior market performance
B) preference for a particular fund manager or a specialized type of fund
C) superior market performance and preferential tax treatment
D) tax-free income and superior fund managers
E) no management fees and a particular fund manager
30) Money market mutual funds do which one of the following?
A) offer a guaranteed rate of return
B) invest in securities that mature in 90 days or less
C) provide a risk-free means of investing
D) invest only in government bonds
E) trade for $10 a share
31) The net asset value of a money market mutual fund:
A) is dependent upon the value of the fund's assets.
B) is guaranteed to be $1 a share.
C) fluctuates as new shares are issued and old shares are redeemed.
D) varies inversely with market interest rates.
E) is insured by the sponsoring investment advisory firm.
32) Money market mutual funds:
A) must be valued at $1 a share or more.
B) invest only in certificates of deposit.
C) produce income that is always tax-exempt.
D) can provide "triple-tax-free" income.
E) are insured by the FDIC.
33) To determine the actual objective of a fund, you should primarily refer to the:
A) fund's objective statement.
B) fund's prospectus.
C) portfolio holdings.
D) sales literature.
E) portfolio manager's comments in the annual report.
34) Which type of stock fund focuses on maximizing share price appreciation?
A) growth and income
B) large-company
C) equity income
D) capital appreciation
E) growth
35) Which type of stock fund focuses primarily on current income?
A) growth and income
B) small-company
C) equity income
D) capital appreciation
E) growth
36) Small-cap funds:
A) generally focus on dividend-paying stocks.
B) focus more on capital appreciation than on current income.
C) are defined as the smallest 20 percent of all funds based on total asset value.
D) are defined as the 20 percent of funds with the smallest NAVs.
E) are generally also classified as equity income funds.
37) The primary difference between an international fund and a global fund is the fact that:
A) a global fund invests in U.S. stocks while an international fund does not.
B) an international fund invests in U.S. stocks while a global fund does not.
C) all international funds are country specific while global funds are not.
D) global funds may opt to be country or region specific while international funds may not.
E) international funds tend to be more geographically diversified than global funds.
38) Which type of fund should you purchase if you are interested in investing primarily in
countries that have relatively new stock markets?
A) international fund
B) emerging markets fund
C) social conscience fund
D) global fund
E) sector fund
39) A sector fund:
A) tends to perform consistently from one year to the next.
B) is usually highly diversified.
C) rarely outperforms other types of funds.
D) concentrates on investing in one industry or one commodity.
E) is best evaluated by its past performance.
40) A fund which tracks the S&P 500 would best be classified as which type of fund?
A) sector
B) global
C) equity income
D) index
E) growth
41) Which one of the following characteristics best fits an index fund?
A) market outperformer
B) high expenses
C) passively managed
D) dividend oriented
E) high turnover rate
42) You want to purchase shares in a fund and also ensure that your money does not support
firms that harm the environment. Which type of fund should you purchase?
A) international fund
B) income fund
C) tax-managed fund
D) index fund
E) social conscience fund
43) Which one of the following is a general characteristic of a tax-managed fund?
A) low turnover rate
B) concentration on income-producing securities
C) high level of realized capital gains
D) higher trading costs than average funds
E) matching of dividend income to capital gains
44) Which one of the following is the distinguishing characteristic of a municipal bond fund?
A) high-yield
B) federally tax-free income
C) mortgage backed
D) short-term
E) low quality
45) Which one of the following types of bond funds tends to have the highest level of risk?
A) short-term government
B) intermediate-term corporate
C) treasury
D) high-yield
E) single-state municipal
