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Chapter 13 - ANSWERS TO CONCEPT QUESTIONS

Chapter 13 - ANSWERS TO CONCEPT QUESTIONS - ANSWERS TO...

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ANSWERS TO CONCEPT QUESTIONS, FINANCIAL PLANNING PROBLEMS AND QUESTIONS AND CASES CONCEPT QUESTIONS Concept Check 13-1 (p. 362) 1. In what ways could mutual funds help you obtain your investment goals? While each student must answer this question, you may want to use the question to reinforce the fact that the major reasons why investors purchase mutual funds are professional management and diversification. (pp. 356-357) 2. Closed end, exchange-traded, or open ended mutual funds are available today. Describe the differences between each type of fund. A closed-end fund is a mutual fund whose shares are issued by an investment company only when the fund is organized. After all the shares originally issued have been sold, an investor can purchase shares only from another investor who is willing to sell them. An exchange- traded fund (ETF) is a fund that invests in the stocks contained in a specific stock index. Although most closed-end funds are actively managed, ETF managers are more passive. Shares for both closed-end and exchange-trade funds are traded on organized exchanges or in the over-the-counter market. An open-end fund is a mutual fund whose shares are issued and redeemed by the investment company at the request of investors. Investors are free to buy and sell shares at the net asset value. (pp. 358) 3. What is the net asset value (NAV) for a mutual fund that has assets totaling $365 million, liabilities totaling $5 million, and 12 million shares outstanding? (p.358) The net asset value (NAV) is $30 $365 million (assets) - $5 million (liabilities) = $360 million $360 million ÷ 12,000,000 (shares) = $30 4. In the table below, indicate the typical charges for each type of mutual fund fee and how the fee is assessed. (pp. 359-362) Fee Typical Charge How Often Assessed? Front-end sales load Contingent deferred sales load Management fee 12b-1 fee Fee Typical Charge How Often Assessed? Front-end sales load Up to 8½ percent of the purchase When shares are purchased Contingent deferred sales load 1 to 5 percent of withdrawal amount depending on how long you own shares before making a withdrawal Usually the fee is charged when investor withdraws money during the first five years Management fee 0.25 to 2 percent per year A predetermined date each year 12b-1 fee Approximately 1 percent a year Once a year 5. What is an expense ratio? Why is it important?
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An expense ratio is the amount that investors pay for all of a mutual fund’s management fees and operating costs. It is important because it is an ongoing fee—year after year. Many financial planners recommend that you choose a mutual fund with an expense ratio of 1 percent or less. (p. 360) Concept Check 13-2 (p. 365) 1. How important is the investment objective as stated in the fund’s prospectus? The managers of mutual funds tailor their investment portfolios to the investment objectives of their customers. As such, investors must make sure that their objectives and a prospective mutual fund’s objectives match. While discussing the answer to this question, you may want to review the objective for the Fundamental Investors Mutual Fund in this section.
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