Question 1

How are hedge fund expenses different from mutual fund expenses?
 What are hurdle rates and high water marks at a hedge fund?
 Why are these used?

Accepted Answer

Hedge funds charge the normal annual management expenses similar to mutual funds,but hedge funds also charge performance fees. Performance fees give the fund managers a percentage of any positive returns on the fund. These fees average 20 percent and have been as high as 50 percent! Because these fees are so large and because having them might tempt managers to seek exorbitant risk levels,fund investors require a hurdle rate,which is a minimum rate of return the fund must earn before the performance fee can be assessed. Likewise,many funds have a requirement that the hedge fund NAV must be at an all-time high before the performance fee can be assessed.

Question 2

Which one of the following fund types is likely to have the lowest annual expense ratio?

Accepted Answer

A) Index funds 
B) Equity funds 
C) Bond funds 
D) Balanced funds 
E) Hybrid funds 
A) Index funds 
B) Equity funds 
C) Bond funds 
D) Balanced funds 
E) Hybrid funds A

Question 3

You have $10,000 to invest and you are considering investing in a fund. The fund charges a front-end load of 5.75 percent and an annual expense fee of 1.25 percent of the average asset value over the year. You believe the fund's gross rate of return will be 11 percent per year. If you make the investment,what should your investment be worth in one year?

Accepted Answer

A) $10,135.48 
B) $10,337.46 
C) $10,461.75 
D) $10,556.23 
E) $10,578.92 
A) $10,135.48 
B) $10,337.46 
C) $10,461.75 
D) $10,556.23 
E) $10,578.92 B

Question 4

As the economy weakens,one would expect investment in ____________ funds to increase and investment in _____________ funds to decrease,ceteris paribus.

Accepted Answer

A) money market mutual; equity 
B) equity; bond 
C) municipal bond; money market mutual 
D) corporate bond; municipal bond 
E) long-term; short-term 
A) money market mutual; equity 
B) equity; bond 
C) municipal bond; money market mutual 
D) corporate bond; municipal bond 
E) long-term; short-term

Question 5

One of the recent trading abuses in the mutual fund industry was allowing selected investors to rapidly trade in and out of a mutual fund in order to profit on stale prices. This practice is called

Accepted Answer

A) diluted brokerage. 
B) front running. 
C) directed order flow. 
D) soft dollar commissions. 
E) market timing. 
A) diluted brokerage. 
B) front running. 
C) directed order flow. 
D) soft dollar commissions. 
E) market timing.

Question 6

How do closed-end investment companies differ from open-end mutual funds?

Accepted Answer

Open-end funds create new fund shares wh

Question 7

The shares of a closed-end fund with market value assets of $200 million and two million shares outstanding will always trade at a market value of $100 per share.

Accepted Answer

A) True 
 B)False

Question 8

Load funds typically provide investors with higher rates of return and offer more services such as check writing,transfers between funds,and so forth,than no load funds.

Accepted Answer

A) True 
 B)False

Question 9

Open-end fund shares often trade at a discount or premium relative to NAV.

Accepted Answer

A) True 
 B)False

Question 10

Offshore hedge funds are not subject to taxation on fund distributions nor to U.S. estate taxes.

Accepted Answer

A) True 
 B)False

Question 11

You are considering purchasing shares in a typical mutual fund that has three classes of shares outstanding: Class A,Class B,and Class C. If you purchase Class C shares,you will pay

Accepted Answer

A) a back-end load and no 12b-1 fees. 
B) a front-end load and a small 12b-1 fee,but eventually your shares will be converted to Class A shares. 
C) no front-end load but a back-end load. 
D) a back-end load and full 12b-1 fees. 
A) a back-end load and no 12b-1 fees. 
B) a front-end load and a small 12b-1 fee,but eventually your shares will be converted to Class A shares. 
C) no front-end load but a back-end load. 
D) a back-end load and full 12b-1 fees.

Question 12

ETFs are a direct competitor to ___________.

Accepted Answer

A) hedge funds 
B) money market mutual funds 
C) REITS 
D) index funds 
E) market neutral funds 
A) hedge funds 
B) money market mutual funds 
C) REITS 
D) index funds 
E) market neutral funds

Question 13

Investors pay load charges to receive

Accepted Answer

A) higher returns on their investments. 
B) additional services from funds. 
C) voting shares of stock. 
D) advice on which fund to buy. 
E) 12b-1 remunerations. 
A) higher returns on their investments. 
B) additional services from funds. 
C) voting shares of stock. 
D) advice on which fund to buy. 
E) 12b-1 remunerations.

Question 14

Rank the following in asset size from largest to smallest in 2013.
I. Mutual funds
II. Insurance companies
III. Depository institutions

Accepted Answer

A) I,II,III 
B) I,III,II 
C) II,III,I 
D) III,II,I 
E) III,I,II 
A) I,II,III 
B) I,III,II 
C) II,III,I 
D) III,II,I 
E) III,I,II

Question 15

In what ways are hedge funds different from mutual funds?

Accepted Answer

The primary differences are as follows:

Question 16

Why do many mutual funds now offer three different classes of shares?
 What are the differences and what should you consider in choosing the classes?

Accepted Answer

Class A shares pay a front-end load and

Question 17

What are the four main categories of mutual fund trading abuses mentioned in the text?
 Explain the problem with each.

Accepted Answer

1. Market timing: Allowing selected trad

Question 18

You have $15,000 to invest in a mutual fund. You choose a fund with a 3.5 percent front load,a 1.75 percent management fee,and a 0.5 percent 12b-1 fee. Assume,for simplicity,that the management and 12b-1 fees are charged on year-end assets. The gross annual return on the fund's shares was 12.50 percent. What was your net annual rate of return to the nearest basis point?

Accepted Answer

A) 9.97 percent 
B) 6.12 percent 
C) 9.25 percent 
D) 5.42 percent 
E) 8.56 percent 
A) 9.97 percent 
B) 6.12 percent 
C) 9.25 percent 
D) 5.42 percent 
E) 8.56 percent

Question 19

The primary regulator of mutual funds is the

Accepted Answer

A) NASD. 
B) CFTC. 
C) NYSE. 
D) SEC. 
E) NSMIA. 
A) NASD. 
B) CFTC. 
C) NYSE. 
D) SEC. 
E) NSMIA.

Question 20

A 12b-1 fee is an implicit load charge.

Accepted Answer

A) True 
 B)False

Exam 17: Investment Companies

How are hedge fund expenses different from mutual fund expenses? What are hurdle rates and high water marks at a hedge fund? Why are these used?

Which one of the following fund types is likely to have the lowest annual expense ratio?

As the economy weakens,one would expect investment in ____________ funds to increase and investment in _____________ funds to decrease,ceteris paribus.

One of the recent trading abuses in the mutual fund industry was allowing selected investors to rapidly trade in and out of a mutual fund in order to profit on stale prices. This practice is called

How do closed-end investment companies differ from open-end mutual funds?

The shares of a closed-end fund with market value assets of $200 million and two million shares outstanding will always trade at a market value of $100 per share.

Load funds typically provide investors with higher rates of return and offer more services such as check writing,transfers between funds,and so forth,than no load funds.

Open-end fund shares often trade at a discount or premium relative to NAV.

Offshore hedge funds are not subject to taxation on fund distributions nor to U.S. estate taxes.

You are considering purchasing shares in a typical mutual fund that has three classes of shares outstanding: Class A,Class B,and Class C. If you purchase Class C shares,you will pay

ETFs are a direct competitor to ___________.

Investors pay load charges to receive

Rank the following in asset size from largest to smallest in 2013. I. Mutual funds II. Insurance companies III. Depository institutions

In what ways are hedge funds different from mutual funds?

Why do many mutual funds now offer three different classes of shares? What are the differences and what should you consider in choosing the classes?

What are the four main categories of mutual fund trading abuses mentioned in the text? Explain the problem with each.

The primary regulator of mutual funds is the

A 12b-1 fee is an implicit load charge.

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, Monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, Credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters

As the economy weakens,one would expect investment in funds to increase and investment in _ funds to decrease,ceteris paribus.