Chapter 4 Mutual Funds and Other Investment Companies

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Studocu is not sponsored or endorsed by any college or university Chap004. Y - test bank International Business Finance (University of New South Wales) Studocu is not sponsored or endorsed by any college or university Chap004. Y - test bank International Business Finance (University of New South Wales) Downloaded by Johnny He (johnnyhe2017@gmail.com) lOMoARcPSD|7048616

Chapter 4 Mutual Funds and Other Investment Companies 68 Bodie, Investments, Sixth Edition Multiple Choice Questions 1. Which one of the following is not an objective of a stock mutual fund? A) Maximization of capital gains. B) growth C) growth and income D) income and security E) None of the above. Answer: E Difficulty: Easy Rationale: All of the above (A - D) may be objectives of different types of mutual funds. 2. Which one of the following statements regarding open-end mutual funds is false? A) The funds redeem shares at net asset value. B) The funds offer investors professional management. C) The funds offer investors a guaranteed rate of return. D) B and C. E) A and B. Answer: C Difficulty: Moderate Rationale: No investment offers a guaranteed rate of return. 3. Which one of the following statements regarding closed-end mutual funds is false? A) The funds invest in large volumes of several securities. B) The funds redeem shares at their net asset value. C) The funds offer investors professional management. D) A and B. E) None of the above. Answer: B Difficulty: Moderate Rationale: Closed-end funds are sold at the prevailing market price. Downloaded by Johnny He (johnnyhe2017@gmail.com) lOMoARcPSD|7048616

Chapter 4 Mutual Funds and Other Investment Companies Bodie, Investments, Sixth Edition 69 4. Which of the following functions do mutual fund companies perform for their investors? A) Record keeping and administration B) Diversification and divisibility C) Professional management D) Lower transaction costs E) All of the above. Answer: E Difficulty: Easy Rationale: Mutual funds are attractive to investors because they offer all of the listed services. 5. Multiple Mutual Funds had year-end assets of $457,000,000 and liabilities of $17,000,000. There were 24,300,000 shares in the fund at year-end. What was Multiple Mutual's Net Asset Value? A) $18.11 B) $18.81 C) $69.96 D) $7.00 E) $181.07 Answer: A Difficulty: Moderate Rationale: (457,000,000 - 17,000,000) / 24,300,000 = $18.11 6. Diversified Portfolios had year-end assets of $279,000,000 and liabilities of $43,000,000. If Diversified's NAV was $42.13, how many shares must have been held in the fund? A) 43,000,000 B) 6,488,372 C) 5,601,709 D) 1,182,203 E) None of the above. Answer: C Difficulty: Moderate Rationale: ($279,000,000 43,000,000) / $42.13 = 5,601,708.996. Downloaded by Johnny He (johnnyhe2017@gmail.com) lOMoARcPSD|7048616

Chapter 4 Mutual Funds and Other Investment Companies 70 Bodie, Investments, Sixth Edition 7. Most actively managed mutual funds, when compared to a market index such as the Wilshire 5000, A) beat the market return in all years. B) beat the market return in most years. C) exceed the return on index funds. D) do not outperform the market E) None of the above is a correct statement. Answer: D Difficulty: Easy Rationale: Most actively managed mutual funds fail to equal the return earned by index funds, possibly due to higher transactions costs. 8. Pools of money invested in a portfolio that is fixed for the life of the fund are called A) closed-end funds. B) open-end funds. C) unit investment trusts. D) REITS. E) redeemable trust certificates. Answer: C Difficulty: Easy Rationale: Unit investment trusts are funds that invest in a portfolio, often fixed-income securities, and hold it to maturity. 9. Investors in closed-end funds who wish to liquidate their positions must A) sell their shares through a broker. B) sell their shares to the issuer at a discount to Net Asset Value. C) sell their shares to the issuer at a premium to Net Asset Value. D) sell their shares to the issuer for Net Asset Value. E) hold their shares to maturity. Answer: A Difficulty: Moderate Rationale: Closed-end fund shares are sold on organized exchanges through a broker. Downloaded by Johnny He (johnnyhe2017@gmail.com) lOMoARcPSD|7048616

Chapter 4 Mutual Funds and Other Investment Companies Bodie, Investments, Sixth Edition 71 10. Closed end funds are frequently issued at a ______ to NAV and subsequently trade at a __________ to NAV. A) discount, discount B) discount, premium C) premium, premium D) premium, discount E) No consistent relationship has been observed. Answer: D Difficulty: Moderate Rationale: Closed-end funds are typically issued at a premium to Net Asset Value and subsequently trade at a discount. 11. At issue, offering prices of open-end funds will often be A) less than NAV due to loads and commissions. B) greater than NAV due to loads and commissions. C) less than NAV due to limited demand. D) greater than NAV due to excess demand. E) less than or greater than NAV with no apparent pattern. Answer: B Difficulty: Difficult Rationale: Open-end funds are redeemable on demand at NAV so they should never sell for less than NAV. However, loads and commissions can increase the price above NAV. 12. Which of the following statements about Real Estate Investment Trusts is true ? A) REITS invest in real estate or loans secured by real estate. B) REITS raise capital by borrowing from banks and issuing mortgages. C) REITS are similar to open-end funds, with shares redeemable at NAV. D) All of the above are true. E) Both A and B are true. Answer: E Difficulty: Moderate Rationale: Real Estate Investment Trusts invest in real estate or real-estate-secured loans. They may raise capital from banks and by issuing mortgages. They are similar to closed-end funds and shares are typically exchange traded. Downloaded by Johnny He (johnnyhe2017@gmail.com) lOMoARcPSD|7048616

Chapter 4 Mutual Funds and Other Investment Companies 72 Bodie, Investments, Sixth Edition 13. In 2001 the proportion of mutual funds specializing in common stocks was A) 21.7% B) 28.0% C) 49.0% D) 73.4% E) 63.5% Answer: C Difficulty: Moderate Rationale: See Table 4.1, page 114. 14. Management fees and other expenses of mutual funds may include A) front-end loads. B) back-end loads. C) 12b-1 charges. D) A and B only. E) A, B and C. Answer: E Difficulty: Easy Rationale: All of the listed expenses may be included in the cost of owning a mutual fund. 15. The Profitability Fund had NAV per share of $17.50 on January 1, 2003. On December 31 of the same year the fund's NAV was $19.47. Income distributions were $0.75 and the fund had capital gain distributions of $1.00. Without considering taxes and transactions costs, what rate of return did an investor receive on the Profitability fund last year? A) 11.26% B) 15.54% C) 16.97% D) 21.26% E) 9.83% Answer: D Difficulty: Moderate Rationale: R = ($19.47 - 17.50 + .75 + 1.00) / $17.50 = 21.26% Downloaded by Johnny He (johnnyhe2017@gmail.com) lOMoARcPSD|7048616

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