Financial-Institutions--Markets--and-Money-11e-by-David-S.-Kidwell--TestBank--ch19.doc

CHAPTER 19TRUE/FALSE QUESTIONS1. (T) Balanced funds generate higher proportion of income than growth and income funds and are less volatile.2. (T) Market arbitrage by hedge funds is the simultaneous buying and selling of a security or derivative of the security to exploit market pricing differentials.3. (F) When purchasing load mutual fund, the NAV includes the load charge for purchasing the mutual funds. 4. (T) Money market mutual funds invest in commercial paper, large bank CDs, and short-term government securities.5. (T) Money market mutual funds are not subject to reserve requirements.6. (F) Unit investment trusts have a high security turnover rate, increasing their costs over equivalent mutual funds.7. (F) Income funds are made up of portfolios of mortgage-backed securities only.8. (T) Mutual funds offer diversification and professional investment management for the fees charged.9. (F) Closed-end investment companies stand ready to redeem their shares at their NAV.10. (F) Closed-end investment companies provide shareholders with maturity intermediation.11. (F) No-load mutual funds are commonly sold by security brokers and dealers.12. (T) Load mutual fund shares may be sold back to the fund.13. (T) Closed-end investment companies securities often sell at a discount to their NAV.14. (T) The major investment of mutual funds is common stock.15. (T) Hedge funds are typically organized as limited partnerships with the fund manager as the general partner.16. (F) Hedge funds have been popular diversification investments for small investors.17. (T) Arbitrage activities of hedge funds tend to increase capital market efficiency.18. (F) Short-selling activities of hedge funds look for high growth companies.19. (F) REITs are open-end investment companies that invest in real estate.20. (T) Total assets of mutual funds exceed those of commercial banks.21. (F) Due to the ability to hedge, the investors of hedge funds experienced very minor losses in subprime mortgage crisis from 2007 to 2009.22. (T) One of the benefits investing in hedging funds is some hedge funds are not subject to taxation on fund distributions nor to U.S. estate taxes.23. (T) Unlike mutual funds that their leverage is limited by regulation, hedge funds and REITs often have high leverages.MULTIPLE-CHOICE QUESTIONS1. (d) Mutual fund companies provide all but one of the following to their customers:a. diversificationb. payment servicesc. discount brokeraged. insurance2. (c) The key advantage of a family of mutual funds isa. the ability to diversify an investment portfolio.b. the ability to add funds on a regular basis such as with a 401K retirement plan.c. the ability to shift quickly from one type of mutual funds to another with little or no cost and without rolling over 401K monies.d. the ability to shift from one mutual fund management company to another.3. (b) Mutual fund management companies offering families of funds are attractive to pension-oriented investors becausea. they provide high return, low risk funds.b. they provide an opportunity to alter the investment portfolio without the paperwork of rolling over the pension monies.c. they provide significant load fees for customers.d. they are not regulated like most mutual funds are.4. (b) Mutual fund _ promote asset gathering by providing a variety of mutual funds for their investing clients.a. managersb. familiesc. salesmend. societies5. (c) Which one of the following services is not provided by closed-end investment companies?a. transaction cost economiesb. risk diversificationc. maturity intermediationd. shared costs of investment management6. (b) Which type of an investment company allows shareholders to cash in their shares at their present asset value?a. unit investment trustsb. open-end investment companiesc. closed-end investment companiesd. real estate investment trustse. none of the above7. (b) The commercial bankers response to the growth of retirement-oriented mutual funds was to seek authority toa. offer money market mutual funds.b. market a complete variety of mutual funds.c. enter investment banking.d. sell insurance services.8. (d) Load mutual funds are sold ata. the best price an underwriter can get.b. their present asset value.c. their present asset value less a discount.d. none of the above9. (d) Mutual funds that do not charge a front-end load can still impose a _ that must be paid by investors who redeem their shares.a. back-end loadb. contingent deferred sales chargec. redemption feed. all of the abovee. none of the above10. (d) One may find the shares of which of the following traded on the national exchanges?a. money market mutual fundb. open-end investment company.c. no-load mutual fund.d. closed-end investment company.11. (c) No-load mutual funds compensate investment managers and salespeople bya. charging a small fee for each purchase/sale.b. charging a fee based on the performance of the fund.c. charging a fee based on the value of the funds assets.d. charging brokers a fee to sell the shares.12. (b) Unit investment trusts are associated witha. actively managed, short-life, liquidity provided by market.b. not actively managed, long-life, liquidity provided by originator.c. not actively managed, long-life, very little liquidity.d. none of the above13. (c) Money market mutual funds compete mostly with banksa. demand deposits.b. time deposits.c. MMDAs.d. regular savings accounts.14. (e) Money market mutual funds do NOT invest in a. commercial paper and bankers acceptances.b. bank CDs.c. U.S. Treasury bills.d. repurchase agreements.e. U.S. Treasury notes and bonds.15. (c) The majority of securities owned by open-end mutual funds are:a. real, physical assets.b. money market securities.c. capital market securities.d. safe, low-risk government securities.16. (d) Open-end investment companies are also called _ and are called open-end becausea. high risk funds; they are able to assume high levels of risk.b. venture capitalists; they invest in the stock of firms.c. mutual funds; they can buy an unlimited number of corporate shares.d. mutual funds; they can issue an unlimited number of shares to investors.17. (c) The price of a mutual fund share isa. the total value of mutual fund shares divided by the number of corporate shares held.b. the net asset value or the number of shares issued divided by the number of corporate shares owned.c. the net asset value or the value of assets divided by shares issued.d. the net asset value or the number of shares of corporate stock held divided into the total value of the stock portfolio.18. (e) The market value per share of closed-end investment companiesa. can exceed the net asset value per share.b. is determined by the market.c. can be less than the net asset value per share.d. both b and ce. all of the above19. (b) A mutual fund load refers toa. the operating expenses charged against the assets.b. the sales commissions.c. the sum of the commissions paid for buying and selling the assets of the fund.d. the fees for the investment manager.20. (a) As interest rates _, stock mutual funds tend to hold more _ assets.a. increase; liquidb. increase; common stockc. decrease; liquidd. fluctuate; common stock 21. (c) The capital gains and earnings of mutual fundsa. are taxed at a lower rate than individuals, a major aspect of their popularity.b. are taxed only on the interest income, not the capital gains, a major aspect of their popularity.c. are not taxed as long as they distribute a very high proportion of earnings to shareholders who pay taxes on gains and income.d. are not taxed only as long as they invest in tax-free municipal securities.22. (c) Real estate investment trusts are _ investment companies that tend to prosper whena. open-end; interest rates are low.b. open-end; interest rates are high.c. closed-end; interest rates are low.d. closed-end; interest rates are high23. (d) The rapid growth of real estate investment trusts seems to be associated witha. low interest rates.b. favorable tax sheltering.c. an expanding economy.d. all of the above24. (c) Money market funds are included in definitions of the money supply becausea. they are invested in high quality assets.b. they are invested in short-term assets.c. they provide investors opportunities to access their MMMF accounts very quickly via wire transfers and debit cards.d. of all of the above.25. (d) Which of the following is associated with money market mutual funds?a. Short-term money market investmentsb. Provide excellent liquidity for investorsc. High quality and relatively high yield when the yield curve is inversed. all of the above 26. (c) Mutual fund managers can keep their cash balances low by all but one of the following:a. maintaining lines of credit at commercial banksb. increasing redemption feesc. working to maintain low NAVd. redeeming shares with stock27. (b) Which of the following is not associated with the growth of mutual funds in recent years?a. an increasing number of retiring baby boomersb. a widespread shift from defined contribution to defined benefit retirement plansc. the increased variety of mutual funds offeredd. the attractive rates of return on common stocke. All of the above are associated with the growth of mutual funds in recent years.28. (b) The largest investments of mutual funds are _, followed by_.a. bonds; common stocksb. common stocks; bondsc. common stocks; preferred stocksd. money market securities; common stocks29. (a) Which of the following mutual fund types is likely to have the lowest expense ratios?a. index fundsb. aggressive growth fundsc. growth and income fundsd. international and global equity funds30. (b) Which of the following mutual fund types is likely to have the highest risk exposure?a. growth and income fundsb. aggressive growth fundsc. balanced fundsd. income-equity fundse. money market funds31. (d) A back-end load fund will likely have an initial cost ofa. the NAV less the load.b. the NAV plus the 12b-1 fees.c. the NAV plus the back-end loadd. the NAV.32. (a) The major regulatory body representing investors interest is thea. Securities and Exchange Commissionb. Security Investors Protection Commissionc. Federal Reserve Systemd. Federal Trade Commission33. (c) An investment in a 3% front-end load mutual fund with a $20 NAV would cost the investor:a. $20.00b. $19.40c. $20.60d. $23.00e. $17.0034. (c) You consider investing $10,000 in a stock mutual fund and you are choosing between Fund A, which has a front-end load of 3%, and Fund B, which has a back-end load of 3%. Expected returns and fees of the two funds are identical. Which fund would you choose?a. Fund Ab. Fund Bc. You are indifferent (total expected returns are the same after accounting for the loads)d. More information is needed to make the choice.35. (c) Which of the following is best associated with hedge fund investors?a. employees in a 401k pension plan.b. commercial banksc. high net worth individuals and institutions.d. investors seeking to hedge their business price risk.36. (a) Hedge funds are typically organized as:a. limited partnershipsb. corporationsc. proprietorshipsd. any of the above37. (c) Hedge funds would provide investor portfolio diversification benefits if:a. the correlation of returns from the hedge fund and the investors portfolio is close to +1.b. the hedge fund and the portfolio are investing in the same things.c. the correlation of returns from the hedge fund and the investors portfolio is negative.d. the hedge fund portfolio includes none of the investments of the investors portfolio.38. (d) Which of the following is not the difference between hedge funds and mutual funds?a. Mutual funds are registered with the SEC, while hedge funds are not.b. Unlike mutual funds, hedge funds borrow significant amounts of their capital.c. Unlike mutual funds, hedge funds concentrate their investment in very few areas.d. Unlike mutual funds, hedge funds are managed by professional fund managers.39. (d) If a hedge fund manager focused on short-selling of stocks, he/she woulda. invest in company stock for short-term profits.b. invest in companies with high future growth prospects.c. borrow money to invest in stocks.d. select companies where the future supply of securities might exceed demand.40. (b) The arbitrage activities of hedge funds seeks to:a. estimate what stocks will appreciate in the near future.b. capitalize on capital market inefficiencies.c. estimate the future price of derivative securities.d. make significant gains from underwriting securities.41. (b) Investment funds provide investors all of the following except:a. diversification.b. contractual rate of return.c. professional advice.d. small minimum investment.42. (d) Unit investment trusts provide all of the following advantages to investors except:a. diversificationb. professional organization and investment selectionc. regular income from securities in the trustd. frequent portfolio rebalancing43. (b) Hedge funds often seek to take advantage of market inefficiencies such as:a. high transaction costs.b. pricing differentials between derivative contracts and the underlying security.c. technological developments aiding informational efficiencies.d. similar prices in different geographic locations.44. (b) Which of the following is not an advantage of exchange-traded funds?a. tax advantageb. high return; low riskc. low expense ratiod. ease of buying and selling45. (a) 12b-1 fees help mutual funds pay fora. marketing expensesb. costs of trading securitiesc. management salariesd. account maintenance costs46. (d) Which one of the following is true about marketing expenses or “12b-1” fees?a. are subtracted from funds assets each year.b. can be a maximum of 1% of average net assets per year.c. increase with higher portfolio turnover (commissions)d. All of the above is true.47. (a) Which of the following is not true of REITs?a. REITs total assets started growing in 1974 and peaked in 1984.b. FREITs have a fixed life.c. A real estate recession caused many REIT failures.d. REITs rebounded with low interest rates and real estate revival of 1984 and low interest rate periods.48. (d) Closed-end funds can sell at a discount to their NAV for which of the following reasons?a. poor managementb. tax considerationsc. market demandd. both b and ce. all of the above49. (e) Which one of the following is true about bond income funds?a. They invest in bonds that provide steady coupon cash flows and are quite varied in their risk level. b. They could be made up of a portfolio of entirely corporate bonds (risky) or a portfolio of entirely Treasury issues (no default risk) or of mortgage-backed securities.c. They may be exposed not only to default risk, but also to interest rate risk.d. They are attractive to investors close to retirement age as the income stream of funds instruments provides them with necessary income.e. All of the above are true.50. (a) Which one of the following is not true about balanced funds?a. Such funds are portfolios of mortgage securities and preferred stock.b. The proportions of stocks and bonds determine the level of return for each fund. c. They typically generate a higher proportion of income than growth and income funds and are less volatile.d. Investors who have a few more years to retirement and are typically in their early 50s are attracted to such funds.51. (d) Which one of the following is true about growth funds?a. The objective of growth funds is to invest in industries and companies that are not mature and are still experiencing sizable growth. b. Investors looking for a higher return and a moderate risk are attracted to such funds. c. Focus is on capital appreciation rather than steady income, so investors outlook needs to be long-term.d. All of the above are true.52. (d) Which of the following is true about growth & income funds?a. They seek a balance between capital gains and current income.b. They mostly invest in highly rated companies stock.c. They are ideal for investors who are looking for some income, but would also want to invest in growth stocks.d. All of the above is true.53. (d) Which of the following can trade on national exchanges?a. MMMFb. open-end investment companyc. no-load mutual fundd. Exchange-Traded Funds(ETF)54. (b) Money market mutual funds (MMMFs) became popular in the 1970s becausea. MMMF balances were insured by FDIC, unlike bank depositsb. MMMF were allowed to pay market rates on their balances, while commercial banks faced interest rate ceilings.c. MMMF balances were more liquid than any bank deposits.d. All of the above55. (c ) An open end mutual fund owns 1500 share of Crispy Creme priced at $12. The fund also owns 1000 shares of Bem & Jarrys priced at $43, and 2000 shares of Pepsi priced at $50. The fund itself has 3500 of its own shares outstanding. What is the NAV of a funds share? a. $66 b. $56c. $46d. $36 e. $2656. (a ) You have $200,000 to invest in a mutual fund with a NAV = $70. This fund has a 4% of front load, a 1% of management fee and a 0.25% of 12b-1 fee. Assume that the management and 12b-1 fees are charged based on year-en