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Unformatted text preview: Chapter 4: Mutual Funds and Other Investment Companies Investment Companies- Financial intermediaries that collect funds from individual investors and invest those funds in a potentially wide range of securities and assets- Perform several important functions o Record keeping and administration: investment companies issue status reports and keep track of what is happening with the money o Diversification and divisibility: pooling money lets investors hold fractional shares of many different securities o Professional management o Lower transaction costs: large blocks of securities allows for savings on brokerage fees and commissions- Net Asset Value: Value of each share in investment company o NAV = Market value of assets-liabilities / shares outstanding o $120 million in securities, $5 million owed for rent and 5 million shareholders; 120-5 / 5 Types of Investment Companies- Unit Investment Trusts o Pools of money invested in a portfolio that is fixed for the life of the fund; unmanaged o Formed usually when brokerage firm buys a portfolio of securities which are deposited into a trust and then sold to public shares/units in trusts called redeemable trust certificates o Tend to invest in relatively uniform types of assets like municipal and corporate bonds o Sponsors earn profit by selling shares in the trust at a premium to cost of acquiring underlying assets; $5 million of assets sell 5,000 shares for $1030/share- Managed Investment Companies o Two types: closed end and open end o Funds board of directors hires management company to manage the portfolio for an annual fee o Open-end Funds: Stand ready to redeem or issue shares at their NAV, investors sell back to the fund at NAV when they want to cash out o Closed-end Funds: Do not redeem or issue shares. Investors must sell their shares to other investors if they want to cash out. Shares can be purchased just like other common stock so price can differ from NAV Premium/Discount = (price-NAV) / NAV o Price of open end funds cant fall below NAV because they redeem shares at NAV o Load: sales charge which is paid to the sellers- Other Investment Organizations o Commingled Funds Partnerships of investors that pool their funds Management fund such as a band or insurance company that organizes the partnership manage the funds for a fee Typical partners could be trust or retirement accounts with portfolios much larger than most individual investors but too small to manage...
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- Spring '08