Financial Institutions Management A Risk Management Approach 9th Edition by Saunders - Test Bank

Financial Institutions Management A Risk Management Approach 9th Edition by Saunders – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 05

Financial Services: Mutual Fund and Hedge Fund Companies

 

 

True / False Questions

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

 

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

 

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.
   TRUE

 

4. As of 2015, Commercial banks are not allowed to own or invest in mutual funds.
   FALSE

 

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

 

6. Short-term mutual funds invest solely in tax-exempt securities.
   FALSE

 

 

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

 

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

 

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.
   TRUE

 

10. Most individuals who invest in mutual funds for the first time realize that mutual fund investments carry some risk.
    TRUE

 

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.
    TRUE

 

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

 

13. In 1998, the SEC required that portions of mutual fund prospectuses must be written in easily understood “plain” English.
    TRUE

 

 

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

 

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.
    TRUE

 

16. The net asset value of a mutual fund is determined four times each business day.
    FALSE

 

17. When an investor purchases shares in an exchange traded fund (ETF), he or she is interacting directly with the fund.
    FALSE

 

18. Most exchange traded funds (ETFs) are long-term mutual funds designed to replicate a particular market index.
    TRUE

 

19. Although exchange traded funds (ETFs) can be traded throughout the day, they cannot be purchased on margin or sold short.
    FALSE

 

20. Mutual funds that are load funds use sales agents, and thus always have an up-front commission charge.
    FALSE

 

 

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

 

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

 

23. Mutual fund supermarkets often allow investors to purchase funds within large number of fund companies with no transaction fees.
    TRUE

 

24. The front-end or back-end loads charged by some mutual funds often are combined with 12b-1 fees.
    TRUE

 

25. Mutual funds often offer multiple share classes which differentiate between different methods of paying the sales loads and management fees.
    TRUE

 

26. Class B shares of a mutual fund are typically charged a back-end load when the shares are redeemed.
    TRUE

 

27. Class C shares of a mutual fund usually convert to Class A shares after some length of time which may be as long as 6 to 8 years.
    FALSE

 

 

28. All classes of mutual fund shares may legally charge an annual 12b-1 fee.
    TRUE

 

29. Historical evidence indicates that load funds perform better than no-load funds.
    FALSE

 

30. Historical evidence indicates that the benefits of greater management attention in load funds do not outweigh the disadvantages of the load fee.
    TRUE

 

31. As of 2015, the total investment in long-term mutual funds is less than the total investment in money market mutual funds.
    FALSE

 

32. The Securities Act of 1933 requires that a mutual fund furnish full and accurate information on all financial and corporate matters to prospective fund purchasers.
    FALSE

 

33. The Securities Exchange Act of 1934 requires a mutual fund to file a registration statement with the SEC.
    FALSE

 

34. The Securities Act of 1933 sets rules and procedures regarding a mutual fund’s prospectus sent to potential investors.
    TRUE

 

 

35. Exchange traded funds (ETFs) are registered as investment companies with the Securities Exchange Commission (SEC).
    TRUE

 

36. Mutual fund share distributions and transactions are supervised and cleared by the National Mutual Fund Association (NMFA).
    FALSE

 

37. The Investment Advisors Act of 1940 sets out rules to prevent conflicts of interest, fraud, and excessive fees or charges for mutual fund shares.
    TRUE

 

38. The National Securities Markets Improvement Act of 1996 exempts mutual funds from oversight by state securities regulators and reduced their regulatory burden.
    TRUE

 

39. Prior to 2010, all hedge funds were required to register with the SEC.
    FALSE

 

40. As of 2015, hedge fund managers with assets more than $100 million are required to register with the SEC.
    TRUE

 

41. Directed brokerage is a trading abuse where a mutual fund and a brokerage agree to promote sales of certain funds in exchange for orders of specific stocks and bonds.
    TRUE

 

 

42. As a result of trading and fee assignment abuses by the mutual fund industry, the SEC established new rules regarding fund governance and conflicts of interest in 2004 and 2005.
    TRUE

 

43. The SEC now requires mutual fund portfolio managers to report their personal trading in individual stocks, but not in the portfolios they manage.
    FALSE

 

44. The SEC requires mutual funds to disclose the risk to investors of frequent trading in fund shares.
    TRUE

 

45. Mutual funds are required to hire chief compliance officers whose job is to monitor whether the mutual fund company follows exchange and regulatory rules.
    TRUE

 

46. The chief compliance officer of a mutual fund reports directly to the senior executives of the fund management company.
    FALSE

 

47. Hedge funds offer a high degree of privacy for their investors.
    TRUE

 

48. Hedge funds are forbidden to sell a security short or to engage in arbitrage trading.
    FALSE

 

49. Most hedge funds rely on the specific expertise of the fund manager.
    TRUE

 

 

50. During the most recent financial crisis, almost 75 percent of hedge funds experienced losses.
    TRUE

 

51. Worldwide investments in mutual funds have grown at a rate faster than in the United States over the last decade.
    TRUE

 

52. The rate of investing in mutual funds tends to be positively correlated with economic activity in the U.S., but is negatively correlated with economic activity in other countries.
    FALSE

 

53. U.S. mutual fund companies have made significant progress in entering Japan and Europe.
    TRUE

 

 

Multiple Choice Questions

54. The first mutual fund was founded in this city in 1924.
    A.New York, New York
    B. San Francisco, California
    C. Boston, Massachusetts
    D. London, England
    E. Paris, France

 

 

55. The number of funds and assets size of the mutual fund industry have grown dramatically since 1970 because of the introduction of
    A.money market mutual funds in 1972.
    B. tax-exempt money market mutual funds in 1979.
    C. special-purpose equity, bond, and derivative funds.
    D. 401-k retirement plans sponsored by employers.
    E. All of the options.

 

56. Retirement funds under management of mutual funds are approximately what percentage of total mutual fund assets?
    A.One-tenth
    B. One-quarter
    C. One-half
    D. Three-quarters
    E. Zero

 

57. Approximately what percentage of retirement plan investments are held by institutional funds?
    A.20 percent
    B. 40 percent
    C. 60 percent
    D. 80 percent
    E. Zero percent

 

58. The long-term mutual fund sector includes
    A.money market mutual funds.
    B. equity funds.
    C. bond funds.
    D. equity funds and bond funds.
    E. All of the options.

 

 

59. The short-term mutual fund sector includes
    A.money market mutual funds.
    B. hybrid funds.
    C. equity funds.
    D. bond funds.
    E. tax-exempt municipal bond funds.

 

60. Open-end mutual funds guarantee
    A.investors a minimum rate of return.
    B. investors a minimum Net Asset Value (NAV).
    C. to redeem investors’ shares upon demand at the daily Net Asset Value (NAV).
    D. to earn the rate of return promised in the prospectus.
    E. that there will be no load charges.

 

61. As compared to purchasing an individual stock, a no-load mutual fund investor will usually get
    A.commission less reinvestment opportunities.
    B. better diversification.
    C. no-cost switching between funds within the same fund family.
    D. lower commission costs.
    E. All of the options

 

62. Regarding the relative asset size and asset growth rate of mutual fund sectors between 1980 and 2015,
    A.long-term funds had more assets at the end of 2015, but short-term funds had grown at a faster rate since 1980.
    B. long-term funds had more assets at the end of 2015, and long-term funds had grown at a faster rate since 1980.
    C. short-term funds had more assets at the end of 2015, but long-term funds had grown at a faster rate since 1980.
    D. short-term funds had more assets at the end of 2015, and short-term funds had grown at a faster rate since 1980.
    E. More than one of the above is correct.

 

 

63. Which of the following is one of the characteristics of household mutual fund owners as of 2015?
    A.The typical fund-owning household has $103,000 invested.
    B. 49 percent of the families are headed by someone without a college degree.
    C. The median age of mutual fund holders is 51.
    D. 80 percent have funds invested through an employer-sponsored retirement fund.
    E. All of the options.

 

64. The returns obtained by investors of mutual funds include the following except
    A.interest income earned on assets.
    B. dividend income earned on assets.
    C. capital gains on assets sold by the fund.
    D. capital appreciation in the underlying value of the assets held in the portfolio.
    E. refunds of load charges and management fees.

 

65. Closed-end investment companies
    A.have a variable number of shares based on demand.
    B. can trade at a price that is greater than, equal to, or less than the NAV.
    C. will trade at a different price as the number of shares of the fund changes.
    D. issues shares that cannot be sold; hence the term “closed.”
    E. will repurchase shares when investors want to sell.

 

66. Open-end mutual funds
    A.require that NAV consider the amount of discount or premium in the share value.
    B. calculate the NAV several time each day based on the total value of assets held divided by the number of fund shares outstanding.
    C. may experience fluctuations in the number of shares outstanding on a daily basis.
    D. issues shares that can be traded among investors without involving the fund itself.
    E. None of the options is correct.

 

 

67. Benefits of investing in an exchange traded fund (ETFI) rather than an open-ended, no-load index mutual fund include all of the following EXCEPT.
    A.ability to buy or sell anytime during the trading day
    B. lower management fees
    C. ability to purchase on margin
    D. income tax-exempt status for capital gains
    E. ability to sell short

 

68. An open-ended fund has stocks of three companies: 200 shares of IBM currently valued at $50.00, 100 shares of GE currently values at $20 and 100 shares of Digital currently valued at $30. The fund has 500 shares outstanding. What is the net asset value (NAV) of the fund?
    A.$30.00.
    B. $60.00.
    C. $120.00.
    D. $12.00.
    E. $37.50.

Stock	Shares Held	Current Value per Share	Portfolio Value	Shares of mutual fund outstanding	Net Asset Value (NAV)
IBM	200	$50.00	$10,000
GE	100	$20.00	$2,000
Digital	100	$30.00	$3,000
TOTAL			$15,000	500	$30.00

The assets in the mutual fund are worth $15,000. With 500 shares of the mutual fund outstanding, the NAV is $15,000 ¸ 500 = $30.00

 

69. In 2015 there were approximately _______ exchange traded funds (ETFs) in existence with combined assets valued at _______.
    A.510; $1.20 trillion
    B. 1,550; 2.0 trillion
    C. 860; $294 billion
    D. 1,220; $960 billion
    E. 1,970; $1.64 trillion

 

 

70. A mutual fund that charges investors a fee similar to a commission charge is called a
    A.12b-1 fee.
    B. no-load fund.
    C. load fund.
    D. long-term fund.
    E. short-term fund.

 

71. The debate and research regarding the advantages of load funds versus no-load funds has revealed that
    A.the proportion of total assets invested in load funds has decreased over the last 20 years and became less than the assets in no-load funds in 2002.
    B. the cost of the load may not be worth the attention and advice given to investors.
    C. most mutual fund companies offer the majority of their funds as no-load funds.
    D. a load fee should be annualized over the holding period of the fund shares.
    E. All of the options.

 

72. 12b-1 fees
    A.are determined as a small percentage of the fund’s investable assets.
    B. are annual fees to cover distribution and marketing costs of the fund.
    C. have been approved by the SEC.
    D. are capped at a maximum 0.25 percent for no-load funds.
    E. All of the options.

 

73. Fees investors are charged to cover administration and shareholder services are called
    A.12b-1 fees.
    B. management fees.
    C. sales loads.
    D. preemptive taxes.
    E. transaction fees.

 

 

74. An investor invests $100,000 in a mutual fund that has a 5 percent front-end load, charges a management fee of 0.5 percent, and a 12b-1 fee of 0.25 percent. The investor plans to leave the investment for one year. What is the dollar amount of the total shareholder cost?
    A.$5,000.
    B. $5,500.
    C. $5,750.
    D. $750.
    E. $500.

Dollar cost = Principle invested ´ (front-end load + management fee + 12b-1 fee)
$5,750 = $100,000 ´ (0.05 + 0.005 + 0.0025).

 

75. Mutual fund shares that are offered for sale at the NAV without a front-end load, but which charge a combination of 12b-1 fees and a back-end load, and whose back-end load typically remains in effect for 6 to 8 years, are
    A.Class A shares.
    B. Class B shares.
    C. Class C shares.
    D. Class D shares.
    E. either Class A or Class C shares.

 

76. A mutual fund has the following share characteristics: Shares are offered at the NAV with no front-end load, a 12b-1 fee of 1 percent is charged, a back-end load of 1 percent is charged only if the shares are sold by the investor within one year of purchase, and the shares do not convert to any other class of shares. These shares would be classified as
    A.Class A shares.
    B. Class B shares.
    C. Class C shares.
    D. Class D shares.
    E. either Class A or Class C shares.

 

77. The largest proportion of assets of money market mutual funds in 2015 was
    A.security repos.
    B. time and savings deposits.
    C. checkable deposits and currency.
    D. credit market instruments.
    E. foreign deposits.

 

 

78. Mutual funds that purchase Treasury bills, bank negotiable certificates of deposit, commercial paper, and other short-term securities would be classified as
    A.contractual institutions.
    B. investment institutions.
    C. money market funds.
    D. securities dealers.
    E. PC insurance companies.

 

79. The largest asset category of mutual funds as of 2015 was
    A.corporate equities.
    B. credit market instruments.
    C. U.S. government securities.
    D. corporate and foreign bonds.
    E. municipal securities.

 

80. The type of abusive activity that involves cases where investors were able to buy or sell mutual fund shares long after the price had been set each day is
    A.market timing.
    B. late trading.
    C. directed brokerage.
    D. improper fee assessment.
    E. None of the options.

 

81. The type of abusive activity that involves arrangements between mutual fund companies and brokerage houses is
    A.market timing.
    B. late trading.
    C. directed brokerage.
    D. improper fee assessment.
    E. None of the options.

 

 

82. As a result of illegal and abusive activities in recent years, new rules and regulations were imposed on mutual fund companies in 2004. These rules were intended to
    A.close legal loopholes that some fund managers had abused.
    B. improve fund governance.
    C. give investors more information about conflicts of interest.
    D. ensure the accuracy of information given to regulators.
    E. All of the options.

 

83. Duties of a mutual fund chief compliance officer include
    A.policing the trading by non-fund managers.
    B. ensuring the accuracy of information provided to fund managers.
    C. reviewing fund business practices such as marketing and administration.
    D. reporting any wrongdoing directly to fund directors.
    E. All of the options.

 

84. New SEC rules call for shareholder reports to include
    A.clear information to investors on brokerage commissions and discounts.
    B. information on how the fund compares with industry averages on fees and loads.
    C. information on eligibility for breakpoint discounts.
    D. All of the options.
    E. Only two of the options.

 

85. For individual investors purchasing exchange traded funds (ETFs), which of the following is the most important entity that plays a key role in the primary market for ETF shares?
    A.Authorized participants (APs) that interact with the ETF directly
    B. Managers of the ETF assets
    C. Market exchange officials overseeing trading in the ETF
    D. The National Association of Securities Dealers (NASDs) that clears the trade
    E. The specialist that records the trade

 

 

86. The net asset value of a mutual fund is found by
    A.subtracting the daily market value of the fund’s asset portfolio from the previous days’ value.
    B. dividing the cumulative value of all asset positions held by the fund by the total number of asset shares held by the fund.
    C. computing the daily market value of the fund’s total asset portfolio and then dividing this amount by the number of mutual fund shares outstanding.
    D. comparing the daily market value of the fund’s total asset portfolio with that of its peers.
    E. subtracting expenses, commissions, and dividends from the fund’s total asset portfolio.

 

87. Which of the following observations is true of open-end mutual funds?
    A.They have a fixed number of shares outstanding.
    B. The value of shares changes with the demand for the fund by investors.
    C. Investors buy and sell shares on a stock exchange.
    D. The demand for shares determines the number outstanding.
    E. Shares may trade at a premium or discount.

 

88. The NAV of a closed-end investment company shares is determined at any point in time by
    A.the number of shares available.
    B. the value of the outstanding shares owned by investors.
    C. the supply of the investment company’s shares.
    D. the demand for the investment company’s shares.
    E. the value of the underlying assets and the number of the investment company shares issued.

 

89. Which of the following observations is true of a no-load fund?
    A.Purchase is subject to a sales charge.
    B. Sales charges may be as high as 8.5 percent.
    C. They market shares of the fund directly to investors.
    D. They use sales agents.
    E. They have up-front commission charges.

 

 

90. The front-end load on these type of shares is charged on new sales and is not generally incurred when these shares are exchanged for another mutual fund within the same fund family.
    A.Class A shares.
    B. Class B shares.
    C. Class C shares.
    D. Class D shares.
    E. Either Class A or Class C shares.

 

91. Which of the following is the primary regulator (s) of mutual funds?
    A.Federal Reserve.
    B. SEC.
    C. NASD.
    D. State regulators.
    E. Stock exchanges.

 

92. What agency acts as the distributor or “clearinghouse” for mutual fund transactions?
    A.SEC.
    B. NASD.
    C. FedWire.
    D. NYSE.
    E. U.S. Treasury.

 

93. Which of the following is the regulation that allowed the SEC to restrict program trading when it deems necessary?
    A.Securities Exchange Act.
    B. Investment Advisers Act.
    C. Investment Company Act.
    D. Insider Trading and Securities Fraud Enforcement Act.
    E. Market Reform Act.

 

 

94. The practice that involves short-term trading of mutual funds seeking to take advantage of short-term discrepancies between the price of a mutual fund’s shares and out-of-date values on the securities in the fund’s portfolio is called
    A.Market timing.
    B. Insider trading.
    C. Late trading.
    D. Directed brokerage.
    E. Spinning.

 

95. This practice is especially common in international funds as traders can exploit differences in time zones.
    A.Directed brokerage.
    B. Insider trading.
    C. Late trading.
    D. Market timing.
    E. Spinning.

 

96. The process used to determine the value of mutual fund shares each per day is known as
    A.Directed brokerage.
    B. Marking-to-market.
    C. Late trading.
    D. Market timing.
    E. Spinning.

 

97. Which of the following laws appointed the National Association of Securities Dealers (NASDs) to supervise mutual fund share distributions?
    A.Securities Act of 1933.
    B. Securities Exchange Act of 1934.
    C. Investment Advisers Act.
    D. Investment Company Act.
    E. Market Reform Act of 1990.

 

 

98. Which of the following is true about the values of most money market mutual fund shares?
    A.They fluctuate heavily.
    B. Values are fixed at $1.
    C. Values are fixed at $100.
    D. They depend on market demand.
    E. They are considered closed-end funds.

 

99. An investor purchases fund shares with a 3 percent front-end load and expects to hold the shares for 10 years. The annualized sales load incurred by the investor is _______ per year.
    A.3 percent
    B. 30 percent
    C. 0.3 percent
    D. 1.3 percent
    E. 1 percent

0.3 annualized load = (3.00 percent load ¸ 10 year holding period).

 

100. An investor purchases fund shares with a 3 percent front-end load and expects to hold the shares for 10 years. The fund has a total fund expense ratio (including 12b-1 fees) of 1 percent per year. The annual total shareholder cost for this fund is _______ per year.
     A.3 percent
     B. 30 percent
     C. 0.3 percent
     D. 1.3 percent
     E. 1 percent

0.3 annualized load + 1.0 percent annual fund expenses = (3.00 percent front-end load ¸ 10 year holding period) + 1.0 = 1.3 percent.

 

101. For mutual funds outside the United States, total amounts invested in this fund category topped the list in 2015.
     A.Equity funds.
     B. Bond funds.
     C. Hybrid funds.
     D. Money market funds.
     E. Hedge funds.

 

 

102. Which of the following observations concerning hedge funds is NOT true?
     A.They are pooled investment vehicles.
     B. Historically, they were not required to register with the SEC.
     C. Historically, they were subject to virtually no regulatory oversight.
     D. They usually take significant risk.
     E. They have to disclose their activities to third parties.

 

103. To be deemed “accredited” and able to invest in a hedge fund, an investor must have
     A.a net worth of over $2 million.
     B. an annual income of at least $200,000.
     C. an annual income of at least $500,000 if married.
     D. a net worth of over $4 million.
     E. a retirement savings plan and over $1 million in net worth.

 

104. The hedge fund industry is built on the theory that
     A.a profit can always be made if each investment has an off-setting position to cover any losses.
     B. proper diversification can be attained with larger sums of money and fewer assets.
     C. wealthy individuals should be expected to make more informed investment decisions and can take on higher levels of risk.
     D. strategies such as program trading and arbitrage are only successful if leverage (borrowed funds) are used.
     E. it takes money to make money.

 

105. Hedge fund data such as assets held and trading activity
     A.are primarily self-reported by the hedge fund.
     B. can be independently tracked by a regulatory agency.
     C. can be obtained from SEC filings.
     D. can be obtained from research agencies.
     E. All of the options.

 

 

106. Which of the following hedge fund objectives would be classified under the “more risky” category?
     A.Distressed securities funds.
     B. Fund of funds.
     C. Opportunistic funds.
     D. Emerging markets funds.
     E. Special situations funds.

 

107. Which of the following hedge fund objectives would be classified under the “moderate risk” category?
     A.Distressed securities funds.
     B. Market neutral-arbitrage funds.
     C. Value funds.
     D. Short selling funds.
     E. Market timing funds.

 

108. Which of the following hedge fund objectives would be classified under the “risk avoidance” category?
     A.Special situations funds.
     B. Opportunistic funds.
     C. Fund of funds.
     D. Market timing funds.
     E. Value funds.

 

109. These “more risky” hedge funds aim to profit from changes in global economies, typically brought about by shifts in government policy that impact interest rates.
     A.Distressed securities funds.
     B. Macro funds.
     C. Value funds.
     D. Opportunistic funds.
     E. Market timing funds.

 

 

110. These types of funds mix hedge funds and other pooled investment vehicles.
     A.Distressed securities funds.
     B. Macro funds.
     C. Value funds.
     D. Opportunistic funds.
     E. Fund of funds.

 

111. It is estimated that 75 percent of all hedge funds are located in
     A.Bermuda.
     B. Hong Kong.
     C. Cayman Islands.
     D. Luxembourg.
     E. San Marino.

 

112. Which of the following is common to both hedge funds and mutual funds?
     A.SEC Registration.
     B. Disclosure rules.
     C. Management fees.
     D. Performance fees.
     E. Investor profiles.

 

113. What does a hurdle rate specified by a hedge fund indicate?
     A.The maximum number of investors possible in the fund that would allow it to avoid regulations.
     B. The minimum amount required to be invested in the fund.
     C. The net worth criterion for an individual to be deemed an “accredited investor.”
     D. The highest net asset value that the fund has previously achieved, above which the manager receives a performance fee.
     E. The minimum annualized performance benchmark that must be realized before a performance fee can be assessed.

 

 

114. Which of the following is the term used to link the hedge fund manager’s incentives more closely to those of the fund investors and to reduce the manager’s incentive to increase the risk of trades?
     A.High-water marks.
     B. Discount rates.
     C. Trade limits.
     D. Management fees.
     E. Low hurdle rates.

 

115. As a result of the Wall Street Reform and Consumer Protection Act of 2010,
     A.hedge fund advisers of pools greater than $100 million must register with the SEC.
     B. hedge funds with assets greater than $100 are subject to provisions of the Investment Company Act of 1940.
     C. hedge fund advisers of pools less than $100 are overseen by state regulators.
     D. it is possible that a large, risky hedge fund may be forced to be regulated by the Federal Reserve.
     E. All of the options are true.

 

Eveningstar open-end fund has 1,000 shares outstanding and has the following assets in its portfolio: 100 shares of Procter & Gamble (P&G) priced at $30.00, 300 shares of Intel priced at $50.00 and 200 shares of Microsoft priced at $60.00. The Morningstar closed-end fund has the following stocks in its portfolio: 300 shares of P&G and 300 shares of Microsoft. It has a total of 500 shares outstanding.

 

 

116. What is the NAV of both funds?
     A.$30.33 and $13.50.
     B. $60.00 and $27.00.
     C. $30.00 and $54.00.
     D. $40.00 and $27.00.
     E. $15.00 and $54.00.

Morningstar

Stock	Shares Held	Current Value per Share	Portfolio Value	Shares of mutual fund outstanding	Net Asset Value (NAV)
P&G	100	$30.00	3,000
Intel	300	$50.00	15,000
Microsoft	200	$60.00	12,000
			30,000	1,000	$30.00

Eveningstar

Stock	Shares Held	Current Value per Share	Portfolio Value	Shares of mutual fund outstanding	Net Asset Value (NAV)
P&G	300	$30.00	$9,000
Microsoft	300	$60.00	$18,000
Total			$27,000	500	$54.00

The net asset values (NAVs) are $30.00 and $54.00 respectively

 

 

117. To what level should the price of Microsoft shares decline in order for the NAV of Morningstar fund to remain constant if the price of P&G rises to $40?
     A.$60.
     B. $55.
     C. $50.
     D. $45.
     E. $40.

Morningstar

Stock	Shares Held	Current Value per Share	Portfolio Value	Shares of mutual fund outstanding	Net Asset Value (NAV)
P&G	100	$40.00	4,000
Intel	300	$50.00	15,000
Microsoft	200	$??.??	11,000
			30,000	1,000	$30.00

 

If P&G increases to $40.00, the value of holdings in Microsoft must decrease by $1,000.
$1,000 ¸ 200 shares = $5.00 decrease from its current price of $60.00
Also, total value of Microsoft in the portfolio must decrease by $1,000 to $11,000:
$11,000 ¸ 200 shares = $55.00

 

 

118. If the price of P&G shares rises to $35 and the price of Microsoft falls to $40.00, what is the new NAV of both funds?
     A.$26.50 and $45.00.
     B. $13.25 and $13.00.
     C. $39.75 and $22.50.
     D. $53.00 and $45.00.
     E. $26.50 and $22.50.

Morningstar

Stock	Shares Held	Value per Share	Portfolio Value	Shares of mutual fund outstanding	Net Asset Value (NAV)
P&G	100	$35.00	3,500
Intel	300	$50.00	15,000
Microsoft	200	$40.00	8,000
			26,500	1,000	$26.50

Eveningstar

Stock	Shares Held	Value per Share	Portfolio Value	Shares of mutual fund outstanding	Net Asset Value (NAV)
P&G	300	$35.00	$10,500
Microsoft	300	$40.00	$12,000
Total			$22,500	500	$45.00

The net asset values (NAVs) are $26.50 and $45.00 respectively

 

 

119. Suppose Morningstar issues another 250 shares and purchases shares of Intel with the funds. What is its new NAV of Morningstar? (Assume the NAV found before the price change in P&G and Microsoft in the previous question).
     A.$39.20.
     B. $55.20.
     C. $34.40.
     D. $30.00.
     E. $34.00.

Morningstar

Stock	Shares Held	Value per Share	Portfolio Value	Shares of mutual fund outstanding	Net Asset Value (NAV)
P&G	100	$30.00	3,000
Intel	450	$50.00	22,250
Microsoft	200	$60.00	12,000
			37,250	1,250	$30.00

Morningstar issues 250 shares and collects: $30 (NAV) ´ 250 shares = $7,500
Shares of Intel purchased: $7,500 ¸ 50 per share = 150

New net asset value = $30.00

Since issuing new shares brings dollar-for-dollar new investment funds into the portfolio, the Net Asset Value will not change immediately because of the choice of asset to purchase.

 

 

Short Answer Questions
Match the following pieces of legislation with the function achieved by each regulation as stated in the question.

A. Securities Act of 1933
B. Securities Exchange Act of 1934
C. Investment Advisers Act of 1940
D. Investment Company Act of 1940
E. Insider Trading and Securities Fraud Enforcement Act of 1988
F. Market Reform Act of 1990
G. National Securities Markets Improvement Act of 1996

 

 

120. Requires mutual funds to develop mechanisms and procedures to avoid insider trading abuses.

E

 

121. Requires a mutual fund to file a registration statement with the SEC.

A

 

122. Allows the SEC to introduce circuit breakers to halt trading on exchanges.

F

 

123. Requires a mutual fund to furnish full and accurate information on all financial and corporate matters to prospective fund purchasers.

B

 

124. Regulates the activities of mutual fund advisors.

C

 

125. Exempts mutual fund sellers from oversight by state securities regulators.

G

 

 

126. Provides for the supervision of mutual fund share distributions.

B

127. Sets rules to prevent conflicts of interest, fraud, and excessive fees or charges for fund shares.

D

 

128. Requires a mutual fund to set rules and procedures regarding the fund’s prospectus sent to investors.

A

 

129. Makes the purchase and sale of mutual fund shares subject to various antifraud provisions.

B