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54 Cards in this Set
- Front
- Back
What is an open-end/mutual fund investment company?
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1. open-ended/mutual funds- investors own pro-rata shares of overall portfolio; investment manager buys and sells securities; calculate NAV each day when market closes; new investments into fund + withdrawals during day are priced into NAV; number of shares increases when more investments than withdrawals
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What is NAV?
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net asset value:
NAV= (market value of portfolio - liabilities)/number of shares outstanding |
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What is a close-end fund?
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like common stock of company; underwriter of fund issues shares, number remains constant; no buying and selling; sold on secondary market; prices determined by supply and demand; must pay brokerage fee at purchase and time of sale
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Why might a share's price of a close-end fund be below NAV?
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fund has large built-in tax liabilities; is fund leveraged?; does the company invest abroad
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what are "lifeboat" provisions?
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if fund is too discounted, can force them to buy back shares or convert to an open-end fund?
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What are the negatives of a close-end fund?
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they trade like stocks incurring transactions costs; high commissions; bid/offer spread of the market on which the stock is traded is also a cost
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What are the main differences between open-end funds and close-end funds?
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open-end funds much larger; close-end funds high commissions + mostly bond funds
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What is a unit trust?
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number of shares fixed, typically invest in bonds, investor holds bonds until redeemed bu issuer; operation costs very low; fixed termination unlike open-end/close-end; portfolio stays the same; not popular in US; sales commission
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What is the difference between indirect investment and direct investment?
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indirect- mutual funds
direct- stock; bonds |
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What factors have led to the strong growth of mutual funds?
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people being able to invest pensions, IRAs, annuities outside of company; tax deferral
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What are the costs of a mutual fund?
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1. shareholder fee/sales charge- 1-time fee for specific transaction (purchase, redemption, exchange)
2. expense ratio- annual fund operating expense |
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What are the two different ways of mutual fund distribution?
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1. sales force (wholesale) distribution- intermediary buys and sells for you
2. direct- passive approach, just deposit money into mutual fund |
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What is a load?
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sales charge for the agent-distributed fund
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What is a front-end loan?
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load is deducted initially from the amount invested by the client and paid to distributor
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What is a no-load fund?
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no sales charge; no sales agent; buying the fund at NAV
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Why are load funds still around?
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1. people depend on counsel
2. ingenuity in how fee is charged- back-end loads, level loads |
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What are level loads?
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loads imposed uniformly each year
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What is a CDSC?
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contingent deferred sales charge (CDSC)- gradually declining back-end loan; "3,3,2,2,1,1,0"
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What is the difference between A, B and C mutual fund shares?
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A- front-end
B- back-end C- level loads |
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What is a breakpoint?
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amount of investment needed to earn a reduction in sales charge
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What falls into a mutual funds operating expense/expense ratio?
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1. management fee; investment advisory fee
2. distribution fee- 12b-1 fee; agent compensation, advertising fee, manufacturer marketing others custody/holding cash, transferring cash, independent-public accountant fees, director's fees |
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What is a 12b-1 fee?
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fee for maintaining a fund; cannot exceed 1%; not for directly sold mutual funds; incentive to keep manager servicing/maintaining accounts after recieving front end load; max .75% distribution fee, max .25% service fee
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What are the 3 largest funds?
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Fidelity Magellan Fund
Vanguard S&P 500 Index Fund American Income Fund of America Fund |
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Why do funds have multiple share classes?
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more efficient and less costly than setting up 2 separate funds
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What are the economic functions of financial intermediaries?
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1. risk reduction via diversification
2. lower contract costs, processing information costs 3. professional portfolio management 4. liquidity 5. variety 6. payment mechanism |
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What are the different types of funds?
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different caps; growth/value/blend; sector
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What are growth stocks?
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high price to book or P/E ratios
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What are value stocks?
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low price to value and P/E ratios
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What differentiates bonds?
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1. creditworthiness of issuer
2. maturity (duration) 3. municipal bonds- coupon interest is tax exempt |
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What do asset allocation, hybridm or balanced funds hold?
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both stocks and bonds
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What are money market funds?
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maturities of one year or less; protect against inflation rate fluctuations
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What are index funds?
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they passively replicate an index
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What are funds of funds?
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invest in other mutual funds
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What are the two most popular organizations that provide data on mutual funds?
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Morningstar and Lipper
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What are family of funds?
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group of funds; people can change funds with little or no cost except if taxable
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What does it mean when a fund is a Regulated Investment Company (RIC)?
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must distribute 90% of net investment income earned; RIC companies are exempt from taxation on gains
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Who pays taxes on funds?
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investors pay capital gains/income taxes
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What is a major negative of mutual funds?
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lack of control over when capital gains tax is paid; even if only with fund for one day, must pay taxes on full year's worth of dividends and capital gains distributions
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What did the Securities Act of '33 stipulate?
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provides buyer information about issuer
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What did the '34 Act stipulate?
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must compy with transaction regulations; later extended to include: no false advertising, no insider trading
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What did the '40 Act stipulate?
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investment companies with 100+ shareholders must register with SEC; companies must provide periodice financial reports, disclose policies; cannot change policies w/o investor's approval; regulates companies + individuals who provide investment advice
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What sort of fee regulations are there?
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8.5% if max fee on total- front-end, back-end, as well as expenses like advertising
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What does "prospectus simplification" mean?
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prospectus must be readable
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What are the structural components of a fund?
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1. board of directors
2. mutual fund 3. investment advisor 4. distributor 5. external (accountant)/internal (marketing) departments |
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What are the types of 3rd party/intermediary mutual fund distribution are there?
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supermarkets; mutual fund wrap-account programs; fee-based advisors; variable annuities; employer-sponsored pension plans, bank trust department
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What are supermarkets?
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types: Charles Schwab, TD, Fidelity
-offer no-load mutual funds from a number of different mutual fund companies |
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What are Wrap Programs?
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service provided is asset allocation counsel; advice on a number of managed funds; asset-based fee
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What are fee-based advisors?
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independent financial planners who select investor's portfolio
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What are variable annuities?
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"mutual funds in an insurance wrapper"; sold through insurance agents
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Why have US and international asset managers agressively aquired US funds?
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rapid growth of US mutual fund business; deregulation; general regulatory framework in US
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What are the alternatives to mutual funds?
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1. Exchange-Traded Funds (ETFs)
2. Segregated Accounts 3. "folios" |
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What are ETFs?
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portfolio that replicates the index and its returns;similar to close-end funds; trade like stocks on exchange; can trade ETFs at current prices throughout the day unlike mutual funds; also flexibile- can place limit orders, stop orders, orders to short sell and buy on margin; ETFs only subject to tax only when ETF sold at price higher than purchase price
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What are Segregated Accounts?
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for high-net worth individuals; allows investor to control taxes; managers earn higher fees because service costs are higher
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What are folios?
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portfolio with a particular investment strategy
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