Chapter 4: Mutual Funds
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.
See Section 4.2.
Blooms: Knowledge
Jordan - Chapter 04 #1
Learning Objective: 04-01 The different types of mutual funds.
Level of Difficulty: Core
Section: 4.2
Topic: Investment 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
See Section 4.2.
Blooms: Knowledge
Jordan - Chapter 04 #2
Learning Objective: 04-01 The different types of mutual funds.
Level of Difficulty: Core
Section: 4.2
Topic: Open-End Fund
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
See Section 4.2.
Blooms: Knowledge
Jordan - Chapter 04 #3
Learning Objective: 04-01 The different types of mutual funds.
Level of Difficulty: Core
Section: 4.2
Topic: Closed-End Fund
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.
See Section 4.2.
Blooms: Knowledge
Jordan - Chapter 04 #4
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.2
Topic: Net Asset 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.
See Section 4.4.
Blooms: Knowledge
Jordan - Chapter 04 #5
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.4
Topic: Front-End Load
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.
See Section 4.4.
Blooms: Knowledge
Jordan - Chapter 04 #6
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.4
Topic: 12b-1 Fees
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.
See Section 4.4.
Blooms: Knowledge
Jordan - Chapter 04 #7
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.4
Topic: Turnover
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
See Section 4.5.
Blooms: Knowledge
Jordan - Chapter 04 #8
Learning Objective: 04-01 The different types of mutual funds.
Level of Difficulty: Core
Section: 4.5
Topic: Money Market Mutual Fund
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.
See Section 4.8.
Blooms: Knowledge
Jordan - Chapter 04 #9
Learning Objective: 04-04 The workings of exchange-traded funds and hedge funds.
Level of Difficulty: Core
Section: 4.8
Topic: Exchange Traded Funds
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
See Section 4.8.
Blooms: Knowledge
Jordan - Chapter 04 #10
Learning Objective: 04-01 The different types of mutual funds.
Level of Difficulty: Core
Section: 4.8
Topic: 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
See Section 4.1.
Blooms: Knowledge
Jordan - Chapter 04 #11
Learning Objective: 04-01 The different types of mutual funds.
Level of Difficulty: Core
Section: 4.1
Topic: Mutual Funds
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.
See Section 4.1.
Blooms: Knowledge
Jordan - Chapter 04 #12
Learning Objective: 04-01 The different types of mutual funds.
Level of Difficulty: Core
Section: 4.1
Topic: Mutual Funds
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.
See Section 4.2.
Blooms: Knowledge
Jordan - Chapter 04 #13
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.2
Topic: Open-End Fund
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.
See Section 4.2.
Blooms: Knowledge
Jordan - Chapter 04 #14
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.2
Topic: Closed-End Fund
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.
See Section 4.2.
Blooms: Knowledge
Jordan - Chapter 04 #15
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.2
Topic: Closed-End Fund
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.
See Section 4.3.
Blooms: Knowledge
Jordan - Chapter 04 #16
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.3
Topic: Mutual Fund Organization
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
See Section 4.3.
Blooms: Knowledge
Jordan - Chapter 04 #17
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.3
Topic: Mutual Fund Organization
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.
See Section 4.3.
Blooms: Knowledge
Jordan - Chapter 04 #18
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.3
Topic: Mutual Funds
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
See Section 4.3.
Blooms: Knowledge
Jordan - Chapter 04 #19
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.3
Topic: Investment Advisory Firms
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
See Section 4.3.
Blooms: Knowledge
Jordan - Chapter 04 #20
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.3
Topic: Regulated Investment Company
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.
See Section 4.3.
Blooms: Knowledge
Jordan - Chapter 04 #21
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.3
Topic: Regulated Investment Company
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.
See Section 4.4.
Blooms: Knowledge
Jordan - Chapter 04 #22
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.4
Topic: Open-End Fund
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
See Section 4.4.
Blooms: Knowledge
Jordan - Chapter 04 #23
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.4
Topic: Mutual Fund Fees
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
See Section 4.4.
Blooms: Knowledge
Jordan - Chapter 04 #24
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.4
Topic: Shareholder Fees
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
See Section 4.4.
Blooms: Knowledge
Jordan - Chapter 04 #25
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.4
Topic: Shareholder Fees
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.
See Section 4.4.
Blooms: Knowledge
Jordan - Chapter 04 #26
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.4
Topic: Shareholder Fees
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.
See Section 4.4.
Blooms: Knowledge
Jordan - Chapter 04 #27
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.4
Topic: Trading Costs
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
See Section 4.4.
Blooms: Knowledge
Jordan - Chapter 04 #28
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.4
Topic: Expense Reporting
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
See Section 4.4.
Blooms: Knowledge
Jordan - Chapter 04 #29
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.4
Topic: Load Funds
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
See Section 4.5.
Blooms: Knowledge
Jordan - Chapter 04 #30
Learning Objective: 04-02 How mutual funds operate.
Level of Difficulty: Core
Section: 4.5
Topic: Money Market Mutual Fund
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.