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CHAPTER 20 INVESTMENT COMPANIES CHAPTER OBJECTIVES 1. To describe and analyze different types of closed-end funds and open-end mutual funds. 2. To discuss other types of investment companies, such as hedge funds, money market mutual funds, and REITs. CHANGES FROM THE LAST EDITION 1. Tables and statistics have been updated. 2. “Mutual Funds” is the new title of the section previously titled “Composition of Mutual funds”. The beginning of this section has been revised. 3. Two new exhibits have been added: Exhibit 20.7, Portfolio Holdings of Long-Term U.S. Mutual Funds, and Exhibit 20.12, Performance of REITs vs. Selected Stock Market Indexes (December 1989 – February 2007). 4. The section titled “Real Estate Investment Trusts” has been expanded to include the discussion of the newly added Exhibit 20.12. CHAPTER KEY POINTS 1. Investment funds provide cost reduction and diversification benefits for the investing public. As tax and economic conditions have changed, fund managers have brought forth a variety of funds to serve the investing public. This chapter discusses the basic attributes of both open-end and closed-end funds and traces their recent developments. The chapter also reviews specialty funds, such as unit investment trust, exchange-traded funds, hedge funds and real estate investment trusts. 2. Investment companies, dominated by mutual funds, have been the primary means for individuals’ defined contribution pension plans in the last few years. Here we will study the terms, types of funds, expenses and valuation of funds. 3. Make sure that your students differentiate between open-end, mutual funds, and closed- end funds. 4. Note the growth in capital market intermediation for individual investors through pension funds and investment funds relative to direct financial investment in the past, and the revival of varied direct financial investment issues in the bull financial markets of the 1980s and 1990's. 5. Investment funds have been responsive to the investment needs of the individual investor 1
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as the business cycle, inflation, tax law, and regulation has changed. 6. Technology and competition have made exchange-traded funds popular in the last few years. 7. Differentiate hedge funds from mutual funds. 8. Emphasize the role of money market mutual funds. Discuss how and why MMMFs emerged and how their emergence influenced commercial banks and bank regulation. 9. Discuss the operations of REITs. ANSWERS TO END-OF-CHAPTER QUESTIONS 1. How can the pricing of closed-end funds possibly indicate that market inefficiencies exist? What are the pros and cons of that argument? If market inefficiencies exist, how can they be exploited to make money? Explain, and think of any possible problems that might occur. The price per share of a closed-end funds is often below the NAV per share.
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This note was uploaded on 02/23/2011 for the course FINA 4090 taught by Professor S during the Spring '11 term at Toledo.

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