Question 1

Financial intermediaries can provide six economic functions. Which of the below is NOT one of these?

Accepted Answer

Illiquidity is not one of the economic functions of financial intermediaries. The other options (A, B, and C) are all valid economic functions that financial intermediaries can provide.

Question 2

There are three types of investment companies: ________.

Accepted Answer

The three types of investment companies recognized by the SEC are open-end funds, closed-end funds, and unit investment trusts (also known as unit trusts). Option A is incorrect because unit funds are not a recognized type of investment company. Option B is incorrect because trusts are not the same as funds. Option D is incorrect because there is no such thing as a unit-end fund.

Question 3

Stock funds differ by ________.

Accepted Answer

Stock funds can be differentiated based on the average market capitalization of the stocks they hold, the investment style (such as growth or value), and the sectors they focus on. This allows investors to choose funds that align with their investment goals and risk tolerance.

Question 4

________, commonly referred to simply as mutual funds, are portfolios of securities, mainly stocks, bonds, and money market instruments.

Accepted Answer

Open-end funds are the most commonly referred to type of mutual funds as they allow investors to buy and sell shares at any time, while the fund continuously issues new shares and redeems existing ones. They typically invest in a variety of securities, making them a diversified investment option for investors. Closed-end funds have a fixed number of shares and are traded on an exchange, while unit trusts and unit-end funds are not commonly used terms in the mutual fund industry.

Question 5

A concept that revolutionized the fund industry and benefitted many investors is what the mutual fund industry calls a ________, a group of funds or a complex of funds provided by the same fund company.

Accepted Answer

The concept described in the statement is that of a "family of funds", which refers to a group of funds provided by the same fund company. Therefore, the best choice is C, "family of funds". The other options presented in the question do not accurately reflect this concept.

Question 6

Which of the below statements is FALSE?

Accepted Answer

This statement is false. The fund prospectus provides information on both annual operating expenses and transaction fees, as well as any other fees that may be charged to the investor. It is important for investors to carefully review the prospectus to understand all the costs associated with investing in a particular fund.

Question 7

Mutual funds must distribute at least ________ of their investment income in order to avoid taxation at the fund level.

Accepted Answer

Mutual funds are required to distribute at least 90% of their investment income to their shareholders to avoid being taxed at the fund level. This rule is designed to ensure that the tax liability is passed on to the investors rather than being borne by the fund itself.

Question 8

There are two types of costs borne by investors in mutual funds: the first cost is the shareholder fee and the second cost is the annual fund operating expense. Which of the below descriptions relate to the second cost?

Accepted Answer

The second cost, which is the annual fund operating expense, is covered by the expense ratio, which is charged to all funds. B, C, and D relate to the first cost, which is the shareholder fee.

Question 9

The shares of a ________ are very similar to the shares of common stock of a corporation in that the new shares are initially issued by an underwriter for the fund and after the new issue, the number of shares remains constant.

Accepted Answer

Closed-end funds issue a set number of shares during the initial public offering, and then these shares trade on an exchange like common stocks. The shares are not redeemable like open-end funds, and the number of shares remains constant unless the fund decides to issue additional shares. Unit-end funds and open-end trusts are not commonly used terms in the investment industry, and an "opened-end" fund is not a recognized term.

Question 10

An investment company is a financial intermediary in that it pools the funds of ________ and uses these funds to buy ________.

Accepted Answer

An investment company pools the funds of individual investors and uses them to buy portfolios of securities, thereby acting as a financial intermediary.

Question 11

Many mutual fund families often offer their funds with three share classes: A, B, and C. Which of the below correctly describes these three classes?

Accepted Answer

A shares typically have a front-end sales charge, where investors pay a fee when buying the shares. B shares usually have a back-end sales charge, or a contingent deferred sales charge (CDSC), which investors pay when selling the shares. The CDSC typically decreases over time until it reaches zero. C shares usually do not have a front-end or back-end sales charge, but they do have higher ongoing expenses than A and B shares, known as level loads.

Question 12

The ________ provides purchasers of new issues of securities with information regarding the issuer and, thus, helps prevent fraud.

Accepted Answer

The Securities Act of 1933 ("the '33 Act") requires issuers of new securities to register with the Securities and Exchange Commission (SEC) and provide purchasers with disclosures about the issuer's business, financial condition, and other relevant information. This helps prevent fraud by ensuring that investors have access to accurate and complete information before making investment decisions.

Question 13

Suppose that a mutual fund with 10 million shares outstanding has a portfolio with a market value of $430 million and liabilities of $30 million.

Accepted Answer

The net asset value (NAV) per share can be calculated as follows:

NAV = (Portfolio value - Liabilities) / Shares outstanding 
NAV = ($430 million - $30 million) / 10 million 
NAV = $40

Therefore, the best choice is B.

Question 14

In order to meet investor needs, mutual funds offered in the market differ by a variety of measures. Which of the below is not ONE of these?

Accepted Answer

The term "management segment" is not commonly used to differentiate mutual funds. Instead, mutual funds are differentiated by their asset category (e.g. stocks, bonds, real estate), management style (e.g. active or passive), and market segment (e.g. large-cap, small-cap).

Question 15

Two decades ago, sales charges on mutual funds were related to the manner of distribution. Which of the below types characterize the two types of distribution?

Accepted Answer

Sales charges on mutual funds two decades ago were related to how they were distributed, either through a sales force (where advisors sell the funds directly to investors, often incurring a sales charge) or direct (where investors buy the funds directly from the fund company without a sales intermediary, often avoiding a sales charge).

Question 16

A decade ago, many observers speculated that load funds would become obsolete. But, the actual trend has been quite different. Which of the below is offered as a reason for load funds maintaining a costly fee?

Accepted Answer

The answer of A decade ago, many observers speculated that...

Question 17

A rule called " ________" or "Plain English Disclosure" was enacted on October 1, 1998, to improve the readability of the fund prospectus and other fund documents.

Accepted Answer

The rule that was enacted on October 1, 1998, to improve the readability of the fund prospectus and other fund documents is called "prospectus simplification" or "Plain English Disclosure".

Question 18

A ________ is not active in trading of the bonds in the portfolio, have a fixed termination date, and are common in Europe.

Accepted Answer

Unit trust funds are not active in trading of the bonds in the portfolio, have a fixed termination date, and are common in Europe. Closed-end funds and opened-end funds are both actively traded and do not have a fixed termination date. "Whole fund" is not a commonly used term in the investment industry.

Question 19

The Investment Company Institute (ICI) has developed a measure that combines a fund's annual expense ratio and the annualized sales charge investors pay for one-time sales loads. From 1980 to 2006, this measure declined. There were three reasons for this decline. Which of the below is NOT one of these?

Accepted Answer

The other three options are valid reasons for the decline in the ICI measure. However, there is no evidence to suggest that investors have gotten wiser and avoided companies by understanding all costs, even those hidden.

Question 20

Mutual funds may be included in several different investment vehicles. One vehicle is often referred to as a nonqualified vehicle because it ________.

Accepted Answer

A nonqualified vehicle refers to an investment vehicle that does not provide tax advantages, unlike a qualified vehicle such as an IRA or 401(k). Mutual funds can be included in nonqualified vehicles such as taxable brokerage accounts, where the gains and income from the mutual funds are subject to taxes.

Quiz 7: Investment Companies and Exchange Traded Funds