FINA4320 chapter 5 - Class 5 Mutual Funds and Other...

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Class 5 Mutual Funds and Other Investment Companies
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Investment Companies Financial Intermediaries Collect funds from investors; invest in wide range of securities ( pooling of assets ) Create portfolio Each investor has a claim to portfolio (proportional to his/her investment) Therefore: small investors obtain benefits of large-scale investing
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Services of Investment Companies periodic reports keeping track of capital gains distribution dividends distribution, etc Pooling of money Professional management Reduced transaction costs Trading large blocks – reduction of brokerage fees, LQ discounts, etc.
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Net Asset Value (NAV) Used as a basis for valuation of investment company shares Selling new shares Redeeming existing shares Calculation of NAV: (Market Value of Assets – Liabilities)/Shares Outstanding
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Q: NAV=? Assets: portfolio worth $120m Liabilities: $5m 5 million shares outstanding NAV=? Answer: NAV = (120 - 5)/5 = $23
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Managed & Unmanaged Investment Organizations Unmanaged: Unit Trusts - portfolio is fixed Uniform groups of assets Profit: sell shares in the trust at a premium Managed: Open-End (Mutual Funds) Closed-End
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Types of Investment Organizations Unit Trusts: portfolio is fixed ( unmanaged ) Uniform groups of assets Managed Investment Companies Open-End (Mutual Funds) Closed-End Other investment organizations Commingled funds REITs (Real Estate Investment Trusts) Hedge Funds
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REIT (01/30/08)
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Mutual Funds Board of Directors elected by shareholders Hires management company most manage several funds Annual fee: 0.2% – 1.5% of assets
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Open-End and Closed-End Funds Open-end Issues or redeems assets at NAV (there may be sales charges) Investor wants to cash out the shares – sells them back to the fund at NAV Close-end: Does not issue or redeem shares Investor wants to cash out – sells to other investors ; price differs from NAV Why price is not NAV? -- is still a puzzle
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Open-End and Closed-End Funds: Key Differences Shares Outstanding Closed-end: no change unless new stock is offered Open-end: changes when new shares are sold or old shares are redeemed Pricing Open-end: Net Asset Value (NAV) Closed-end: Premium or discount to NAV
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This note was uploaded on 02/16/2009 for the course BUSINES 4320 taught by Professor Alexeiboulatov during the Spring '09 term at Houston Baptist.

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FINA4320 chapter 5 - Class 5 Mutual Funds and Other...

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