Question 1

5-5 Long-term mutual funds invest primarily in long-term,fixed-income securities such as corporate and/or government bonds.

Accepted Answer

Long-term mutual funds can invest in a variety of assets, including stocks, not just fixed-income securities like bonds.

Question 2

5-4 Commercial banks are not allowed to own or invest in mutual funds.

Accepted Answer

Commercial banks are allowed to own or invest in mutual funds, but there are certain restrictions and regulations in place to ensure safety and soundness of the banking system.

Question 3

5-18 Fees of load funds that are used to cover the costs of trading in securities are called 12b-1 fees.

Accepted Answer

12b-1 fees are used to cover marketing and distribution expenses, not the costs of trading in securities.

Question 4

5-7 Equity mutual funds may contain common stock,but not preferred stock.

Accepted Answer

Equity mutual funds can contain both common and preferred stocks, as they are both types of equity securities.

Question 5

5-10 Most individuals who invest in mutual funds for the first time realize that mutual fund investment carries some risk.

Accepted Answer

Mutual funds invest in stocks, bonds, and other securities, and the value of these investments can fluctuate daily. Therefore, it is important for investors to understand that there is some degree of risk when investing in mutual funds.

Question 6

5-1 Mutual funds are financial intermediaries that invest in diversified portfolios of assets.

Accepted Answer

Mutual funds collect money from individual investors and use that money to buy a portfolio of different assets such as stocks, bonds, and other financial instruments. This diversification helps to spread the risk and can make investing in the stock market more accessible for individual investors who may not have the knowledge or resources to invest in a diversified portfolio on their own.

Question 7

5-3 Mutual funds achieve economies of scale for individual investors by realizing the benefits of lower transaction costs and commissions as compared to those incurred by individual investors.

Accepted Answer

Mutual funds pool together money from multiple investors, which allows for larger trades and negotiation of lower transaction costs and commissions with brokers. This translates to lower expenses for individual investors who participate in the mutual fund.

Question 8

5-20 Mutual fund supermarkets often allow investors to purchase funds within large number of fund companies with no transaction fees.

Accepted Answer

Mutual fund supermarkets, also known as fund supermarkets, do offer the convenience of allowing investors to purchase funds from a large number of fund companies with no transaction fees. This allows investors to diversify their portfolio among multiple fund families without incurring additional costs.

Question 9

5-19 Since 2002,the amount of assets invested in load funds have exceeded those invested in no-load funds.

Accepted Answer

Load funds, which charge a sales fee, have generally seen less investment compared to no-load funds, which do not charge such fees, as investors often prefer to avoid additional costs.

Question 10

5-13 In 1998,the SEC required that portions of mutual fund prospectuses must be written in easily understood "plain" English.

Accepted Answer

In 1998, the SEC did require that portions of mutual fund prospectuses must be written in easily understood "plain" English.

Question 11

5-16 The net asset value of a mutual fund is a value determined by an end-of-day marking-to-market process.

Accepted Answer

The net asset value (NAV) of a mutual fund is calculated by dividing the total value of the fund's assets by the number of outstanding shares. This calculation is based on the market values of the assets at the end of each trading day, which is known as the marking-to-market process. Therefore, option A is correct.

Question 12

5-6 Short-term mutual funds invest solely in money market securities.

Accepted Answer

Short-term mutual funds typically invest in money market securities such as treasury bills, commercial paper, and certificates of deposit, which are considered low-risk and provide stable returns.

Question 13

5-2 Open-end mutual funds are the major type of mutual funds.

Accepted Answer

Open-end mutual funds are indeed the major type of mutual funds. They are called open-end because they continuously issue and redeem shares based on investor demand. In contrast, closed-end funds have a fixed number of shares that are traded on an exchange, and unit investment trusts have a fixed portfolio of securities that are held until maturity.

Question 14

5-9 A change from commercial bank deposits to money market mutual funds typically allows an investor to benefit from higher yields,but with the cost of losing deposit insurance coverage.

Accepted Answer

Money market mutual funds generally have higher yields compared to commercial bank deposits, but they are not insured by the FDIC or any other government agency, which means that there is a risk of losing the principal investment. Therefore, the investor can benefit from higher yields but at the cost of losing deposit insurance coverage.

Question 15

5-14 The SEC requires that prospectuses or advertisements regarding a mutual fund contain information that returns of the mutual fund carry some risk.

Accepted Answer

This statement is true. The SEC requires that all prospectuses or advertisements regarding a mutual fund contain a disclaimer stating that investments in mutual funds involve risks, including the possible loss of principal. This is to ensure that investors are aware of the potential risks associated with investing in mutual funds.

Question 16

5-11 One of the goals of mutual funds is to achieve superior diversification through fund and risk pooling compared to what individual investors can achieve.

Accepted Answer

This statement is true. Mutual funds enable investors to pool their money together to purchase a diversified portfolio of securities. This diversification helps to spread out risk and potentially achieve better overall returns compared to what individual investors could achieve on their own.

Question 17

5-12 A mutual fund objective statement provides general information about the types of securities a mutual fund will hold as assets.

Accepted Answer

A mutual fund objective statement typically outlines the investment goals and the types of securities that a mutual fund will invest in to achieve those goals.

Question 18

5-8 The proportionate mix of assets invested in long-term versus short-term mutual funds has varied over the last twenty years.

Accepted Answer

The statement suggests that the mix of assets invested in long-term versus short-term mutual funds has not remained constant over the last twenty years. Therefore, it is true.

Question 19

5-15 The return from investing in mutual funds can include dividends,gains from the sale of the mutual fund assets,and gains from the sale of the mutual fund shares.

Accepted Answer

The return from investing in mutual funds can indeed include dividends, gains from the sale of the mutual fund assets, and gains from the sale of the mutual fund shares.

Question 20

5-17 Load funds use sales agents,and thus usually have an up-front commission charge.

Accepted Answer

Load funds typically have up-front commission charges that are paid to sales agents. This is a way for the sales agent to be compensated for their services in selling the fund to investors.

Quiz 5: Financial Services: Mutual Funds and Hedge Funds