Q&A Hero

Q: Open-end mutual funds are more common than closed-end funds.

Q: Discussion Questions 1. Why did Lehman choose not to seek Chapter 11 protection for its subsidiaries? 2. How does Chapter 11 bankruptcy protect Lehman's creditors? How does it potentially hurt them? Explain your answers. 3. Do you believe the U.S. bankruptcy process was appropriate in this instance? Explain your answer. 4. Do you believe the U.S. government's failure to bail out Lehman, thereby forcing the firm to file for bankruptcy, exacerbated the global credit meltdown in October 2008? Explain your answer.

Q: Retirement funds account for about 31% Of all mutual fund assets.

Q: What alternative restructuring strategies do you believe may have been considered for GM? Of these, do you believe that the 363 sale in bankruptcy represented the best course of action? Explain your answers.

Q: The dollar amount invested in mutual funds is about the same as the total assets of all commercial banks at the beginning of 2004.

Q: The first round of government loans to GM occurred in December 2008. The firm did not file for bankruptcy until June 1, 2009. Discuss the advantages and disadvantages of the firm having filed for bankruptcy much earlier in 2009. Be specific.

Q: The increase in the number of defined contribution pension funds has slowed the growth of mutual funds.

Q: Identify what you believe to be the real benefits and costs of the bailout of General Motors? Be specific.

Q: The larger the number of shares traded in a stock transaction, the lower the transaction costs per share.

Q: Discuss the relative fairness to the various stakeholders in a bankruptcy of amore traditional Chapter 11 bankruptcy in which a firm emerges from the protection of the bankruptcy court following the development of a plan of reorganization versus an expedited sale under Section 363 of the federal bankruptcy law. Be specific.

Q: All ________ are open-end investment funds that invest only in money market securities. A) Stock funds B) Bond funds C) Money market mutual funds D) all of the above

Q: Do you agree or disagree that the taxpayer financed bankruptcy represented the best way to save jobs. Explain your answer.

Q: ________ bonds combine stocks into one fund. A) Hybrid B) Money market C) Municipal D) Equity

Q: How does Chapter 11 potentially affect adversely competitors of those firms emerging from bankruptcy? Explain your answer.

Q: Government bonds are essentially default risk-free, ________ returns. A) and will yield high B) and will yield the highest C) but will have relatively low D) none of the above

Q: In view of the substantial loss of jobs, as well as wage and benefit reductions, do you believe that firms should be allowed to reorganize in bankruptcy? Explain your answer.

Q: Equity funds can be placed in which class according to the Investment Company Institute? A) capital appreciation funds B) world funds C) total return funds D) all of the above

Q: Why would lenders be willing to lend to a firm emerging from Chapter 11? How did the lenders attempt to manage their risks? Be specific.

Q: Mutual fund companies frequently offer a number of separate mutual funds called ________. A) indexes B) complexes C) components D) actuaries

Q: Comment on the fairness of the bankruptcy process to shareholders, lenders, employees, communities, government, etc. Be specific.

Q: ________ means the investors can convert their investment into cash quickly at a low cost. A) Liquidity intermediation B) Denomination intermediation C) Diversification D) Managerial expertise

Q: To what extent do you believe the factors contributing to the airlines bankruptcy were beyond the control of management? To what extent do you believe past airline mismanagement may have contributed to the bankruptcy?

Q: Which of the following is not a proposal to deal with abuses in the mutual fund industry? A) Strictly enforce the 4:00 pm net asset value rule. B) Make redemption fees mandatory. C) Disclose compensation arrangements for investment advisers. D) Increase the number of dependent directors.

Q: All of the following are true of the bankruptcy process except for a. Creditors and the debtor-in-possession have considerable flexibility in working together. b. The purpose of creditor committees is to work with the debtor firm to develop an acceptable reorganization plan c. The bankruptcy judge may choose to ignore the objections of creditors and shareholders and accept a reorganization plan. d. The government is responsible for paying the expenses of all those who contributed to the formulation of a reorganization plan.

Q: The Bankruptcy Abuse Prevention and Creditor Protection Act of 2005 is intended to achieve all of the following except: a. To reduce the maximum length of time debtors have to submit a reorganization plan b. To give debtors more time to accept or reject leases c. To limit key employee compensation d. To enable the debtor to extend the lease indefinitely as long as lease payments are made on a timely basis e. B and D only

Q: Late trading and market timing A) allow large, favored investors in a mutual fund to profit at the expense of other investors in the fund. B) hurt ordinary investors by increasing the number of fund shares and diluting the fund's net asset value. C) are both A and B of the above. D) are none of the above.

Q: Market timing A) takes advantage of time differences between the east and west coasts of the United States. B) takes advantage of arbitrage opportunities in foreign stocks. C) takes advantage of the time lag between the receipt and execution of orders. D) is discouraged by the stiff fees mutual funds charge every investor for buying and then selling shares on the same day.

Q: All of the following are true about voluntary liquidations except for a. They can be conducted outside of court in a private auction. b. They can be done within the protection of the bankruptcy court. c. Creditors normally prefer liquidations to be conducted by the bankruptcy court.. d. A trustee is assigned to sell the debtor firms assets as quickly as possible while obtaining the best possible price. e. If the insolvent firm is willing to accept liquidation and all creditors agree, legal proceedings are not necessary.

Q: Late trading is the practice of allowing orders received ________ to trade at the ________ net asset value. A) before 4:00 pm; 4:00 pm B) after 4:00 pm; 4:00 pm C) after 4:00 pm; next day's D) before 4:00 pm; previous day's

Q: All of the following represent different forms of debt restructuring except for a. Debt extensions b. Debt compositions c. Share exchange ratios d. Debt for equity swaps e. A and D

Q: Conflicts arise in the mutual funds industry because ________ cannot effectively monitor ________. A) investment advisers; directors B) directors; shareholders C) shareholders; investment advisers D) investment advisers; stocks that will outperform the overall market

Q: All of the following are conditions most favorable for reaching settlement outside of bankruptcy court except for a. The debtor firm is willing to share all necessary information with its creditors b. Creditors have confidence in the debtor firms management. c. The debtor firm has relatively few creditors. d. The debtor firm has many creditors. e. The period of economic distress afflicting the firm is expected to be short-lived.

Q: The near collapse of Long Term Capital Management was caused by A) the high management fees charged by the fund's two Nobel Prize winners. B) the fund's high leverage ratio of 20 to 1. C) a sharp decrease in the spread between corporate bonds and Treasury bonds. D) a sharp increase in the spread between corporate bonds and Treasury bonds. E) the fund's shift away from a market-neutral investment strategy.

Q: Which of the following statements is not true? a. Technical insolvency arises when a firm is unable to meet its obligations when they come due. b. Legal insolvency occurs when a firms liabilities exceed the fair market value of its assets. c. A firm must be legally insolvent to enter bankruptcy. d. Bankruptcy is a legal proceeding which protects a debtor firm from its creditors. e. A firm is not considered bankrupt until its petition for bankruptcy is accepted by the court.

Q: Hedge funds are A) low risk because they are market-neutral. B) low risk if they buy Treasury bonds. C) low risk because they hedge their investments. D) high risk because they are market-neutral. E) high risk, even though they may be market-neutral.

Q: Moodys credit rating agency defines instances of default as which of the following: a. Missed or delayed payment of interest or principal b. Bankruptcy c. Receivership d. Any exchange (equity for debt) diminishing the value of what is owed to bondholders e. All of the above

Q: The largest share of total investment in mutual funds is in A) stock funds. B) hybrid funds C) bond funds. D) money market funds.

Q: The leading causes of business failure include which of the following: a. Recession b. Excessive operating expenses c. Excessive leverage d. Management inexperience e. All of the above

Q: The Securities Acts of 1933 and 1934 did not A) regulate the activities of investment funds. B) require funds to register with the SEC. C) include antifraud rules covering the purchase and sale of fund shares. D) apply to investment funds.

Q: Financially distressed firms often are characterized by all of the following except for: a. Underinvestment in operations b. Employee layoffs c. High levels of research and development spending d. Declining product quality e. Slower payments to suppliers

Q: When investors switch between funds within the same fund family, mutual funds may charge A) a contingent deferred sales charge. B) a redemption fee. C) an exchange fee. D) 12b-1 fees. E) an account maintenance fee.

Q: To determine which strategy to pursue, the failing firms management needs to estimate which of the following: a. Going concern value b. Liquidation value c. Selling price of the firm d. A and B only e. A, B, and C

Q: Which of the following is most likely to be a no-load fund? A) value funds B) hedge funds C) growth funds D) index funds

Q: Which of the following are commonly used strategic alternatives for failing firms? a. Merge with another firm b. Reach out of court voluntary settlement with creditors c. File for protection from creditors from the U.S. bankruptcy court d. A, B, and C e. A and B only

Q: Over the past twenty years, mutual fund fees have ________, largely because ________. A) fallen; SEC fee disclosure rules have led to greater competition B) risen; investors have learned that funds with high fees provide better performance C) risen; there has been collusion between large mutual fund companies D) fallen; advances in information technology have lowered transaction costs

Q: All of the following are true except for Chapter 15 deals with international or cross-border bankruptcies. Chapter 11 deals with reorganizing the firm. Chapter 7 defines the process and priorities of the liquidation process for commercial businesses. Chapter 11 also addresses issues pertaining to personal bankruptcy. A and B

Q: A deferred-load mutual fund charges a commission A) when shares are purchased. B) when shares are sold. C) both when shares are purchased and when they are sold. D) when shares are redeemed.

Q: All of the following are true of the bankruptcy process except for a. The debtor firm may seek protection from its creditors by initiating bankruptcy or may be forced into bankruptcy by its creditors. b. When creditors file for bankruptcy on behalf of the debtor firm, the action is said to be involuntary bankruptcy. c. Once either a voluntary or involuntary petition is filed, the debtor firm is protected from any further legal action related to its debts until the bankruptcy proceedings are completed. d. The filing of a petition triggers an automatic stay even before the court accepts the request. e. An automatic stay suspends all judgments, collection activities, foreclosures, and repossessions of property by the creditors on any debt or claim that arose before the filing of the bankruptcy petition

Q: Which of the following is a feature of index funds? A) They have lower fees. B) They select and hold stocks to match the performance of a stock index. C) They do not require managers to select stocks and decide when to buy and sell. D) All of the above.

Q: Why would creditors be willing to give a portion of what they are owed by the debtor firm for equity in the reorganized firm? a. They are legally obligated to do so under U.S. bankruptcy law. b. Ownership in a firm is inherently more valuable than being a creditor. c. The value of the stock may in the long run far exceed the amount of debt the creditors were willing to forgive. d. Creditors understand that they can sue the firm at a later date for what they are owed. e. None of the above.

Q: The largest share of assets held by money market mutual funds is A) Treasury bills. B) certificates of deposit. C) commercial paper. D) repurchase agreements.

Q: Debt restructuring of a bankrupt firm is usually accomplished in which of the following ways: a. An extension b. A composition c. A debt for equity swap d. Some combination of a, b, or c e. All of the above

Q: People who take their money out of insured bank deposits to invest in uninsured money market mutual funds have ________ risk because money market funds invest in ________ assets. A) high; long-term B) low; short-term C) high; short-term D) low; long-term

Q: Chapter 11 reorganization may involve a corporation, sole proprietorship, or partnership. True or False

Q: Measured by assets, the most popular type of bond fund is the ________ bond fund. A) state municipal B) strategic income C) government D) high-yield

Q: Economic distress arises when a firms growth and investment prospects deteriorate, causing a reduction in the value of the business due to the deteriorating outlook for the firms cash flow.

Q: From largest to smallest in terms of total assets, the four classes of mutual funds are A) equity funds, bond funds, hybrid funds, money market funds. B) equity funds, money market funds, bond funds, hybrid funds. C) money market funds, equity funds, hybrid funds, bond funds. D) bond funds, money market funds, equity funds, hybrid funds.

Q: Smaller creditors have little incentive to attempt to hold up the agreement unless they receive special treatment.

Q: Capital appreciation funds select stocks of ________ and tend to be ________ risky than total return funds. A) large, established companies that pay dividends regularly; more B) large, established companies that pay dividends regularly; less C) companies expected to grow rapidly; more D) companies expected to grow rapidly; less

Q: Sales within the protection of Chapter 11 reorganization may be accomplished either by a negotiated private sale to a particular purchaser or through a public auction. True or False

Q: The majority of mutual fund assets are now owned by A) individual investors. B) institutional investors. C) fiduciaries. D) business organizations. E) retirees.

Q: ________ funds are the simplest type of investment funds to manage. A) Balanced B) Global equity C) Growth D) Index

Q: If the going concern value is less than the selling or liquidation price, the firm should seek the protection of the bankruptcy court.

Q: The net asset value of a mutual fund is A) determined by subtracting the fund's liabilities from its assets and dividing by the number of shares outstanding. B) determined by calculating the net price of the assets owned by the fund. C) calculated every 15 minutes and used for transactions occurring during the next 15-minute interval. D) calculated as the difference between the fund's assets and its liabilities.

Q: If the selling price of the failing firm is less than the going concern and liquidation value, the firm should sell the firm to another party.

Q: Which of the following is an advantage to investors of an open-end mutual fund? A) Once all the shares have been sold, the investor does not have to put in more money. B) The investors can sell their shares in the over-the-counter market with low transaction fees. C) The fund agrees to redeem shares at any time. D) The market value of the fund's shares may be higher than the value of the assets held by the fund.

Q: While bankrupt firms generally are unable to meet the listing requirements of the major stock exchanges, their shares may trade in the over-the-counter market. True or False

Q: Most mutual funds are structured in two ways. The most common structure is a(n) ________ fund, from which shares can be redeemed at any time at a price that is tied to the asset value of the fund. A(n) ________ fund has a fixed number of nonredeemable shares that are traded in the over-the-counter market. A) closed-end; open-end B) open-end; closed-end C) no-load; closed-end D) no-load; load E) load; no-load

Q: Federal law prohibits trading in a bankrupt firms securities. True or False

Q: If a firm enters into a workout in which a voluntary negotiated agreement with debtors is achieved, the firm may lose its right to claim NOLs in its tax filing. True or False

Q: At the end of 2009 there were over ________ separate mutual funds with total assets over ________. A) 800; $10 trillion B) 7,000; $11 trillion C) 10,000; $10 trillion D) 1,000; $7 trillion

Q: Prepackaged bankruptcies are less common today than in years past. True or False

Q: ________ enables mutual funds to consistently outperform a randomly selected group of stocks. A) Managerial expertise B) Diversification C) Denomination intermediation D) None of the above

Q: Under a prepackaged bankruptcy, the debtor negotiates with creditors well in advance of filing for a Chapter 7 bankruptcy. True or False

Q: Mutual funds A) pool the resources of many small investors by selling these investors shares and using the proceeds to buy securities. B) allow small investors to obtain the benefits of lower transaction costs in purchasing securities. C) provide small investors a diversified portfolio that reduces risk. D) do all of the above. E) do only A and B of the above.

Q: Empirical studies show that company size (measured by assets), case duration (measured in days), and the number of parties involved in the proceedings (measured in terms of the numbers of professional firms working) explain most of the case-to-case variation in professional fees. True or False

Q: Mutual funds offer investors all of the following except A) greater-than-average returns. B) diversified portfolios. C) lower transaction costs. D) professional investment management.

Q: ________ intermediation means that small investors can pool their funds with other investors to purchase high face value securities. A) Liquidity B) Financial C) Denomination D) Share

Q: In liquidation, bankruptcy professionals, including attorneys, accountants, and trustees, often end up with the majority of the proceeds generated by selling the assets of the failing firm. True or False

Q: Mutual funds hold about ________ of financial intermediaries' total assets. A) one-sixth B) one-fourth C) one-half D) two-thirds