Q&A Hero

Q: Investment company managers seek to increase the size of the funds being managed since the cost of overseeing additional amounts of money rises less than the revenue rate.

Q: You would expect a value fund to buy stock based on a sound earnings record while growth funds might invest in companies with no earnings record at all.

Q: Approximately 85 percent of money market assets are in non-taxable funds.

Q: Loaded funds generally outperform the no-load funds.

Q: Investors desiring no-load funds must generally seek them out since there is no sales force.

Q: A 12b-1 fee is used to cover a fund's cost of distribution.

Q: Both open-end and closed-end investment company shares may sell at a discount from NAV.

Q: The net asset value of a mutual fund does not consider unrealized capital gains.

Q: Total return for a mutual fund includes capital gains less any reinvested dividends.

Q: No-load funds charge a one-time expense fee to cover all operating expenses.

Q: Index funds tend to have lower expenses than other funds because they don 't incur the costs of professional portfolio management.

Q: Survivorship bias occurs when mutual funds are merged or liquidated and only surviving funds' performance is reported.

Q: It is possible under the new Morningstar ratings that one class of shares of a mutual fund can have a different rating that another class of shares of the same mutual fund.

Q: Under its new system, Morningstar ranks funds against comparable funds in approximately 50 categories.

Q: Global funds tend to hold a higher percentage of their portfolio in U.S. securities than do international funds.

Q: Hedge funds typically require a large initial investment and may have restrictions on how quickly investors can withdraw their funds.

Q: The major advantage of Separately Managed Accounts (SMA) is control and the direct owner may be able to specify investment restrictions.

Q: Briefly explain the fees charged by funds.

Q: Would one expect to find higher P/E ratios in an aggressive growth fund or in growth and income fund?

Q: What are the main differences between a closed-end and an open-end investment company?

Q: Would you recommend a 65-year old retiree to invest all of his/her retirement assets in an income fund?

Q: What is the difference between the insurance offered by the Securities Investor Protection Corporation (SIPC) and that offered by the Federal Deposit Insurance Corporation (FDIC)?

Q: You have decided to invest in an aggressive growth fund for long-run future needs. You have a publication listing a number of such funds with their most recent 12-month total returns. Is this a good predictor of future performance?

Q: How is the individual investor 's income tax position affected by owning investment companies compared to owning securities directly?

Q: Does one mutual fund provide all the diversification that an investor needs?

Q: The ___________________________________ requires most investment companies to register with the Securities and Exchange Commission (SEC), the primary federal agency regulating investment companies.

Q: List the four basic types of mutual funds: _______________________________, ______________________________, _______________________________, and ____________________________________.

Q: List the four distinct types of investment companies: _____________________, _______________________________, _____________________________, and _______________________________.

Q: Three common characteristics of Class A shares are: ______________________, ____________________________________, and _____________________________ .

Q: Is an investor able to achieve significant diversification by purchasing a single-country fund?

Q: An investor who buys shares in a closed fund for less than the net asset value per share of the fund is said to be buying shares at a _____________________.

Q: What are some of the advantages individual investors seek by buying mutual funds or closed-end investment company shares rather than through purchasing securities directly?

Q: An environmentally-friendly balanced mutual fund began the year with a net asset value (NAV) of $12.25 per share. During the year it received $00 dividend and interest income, $0.25 in realized capital gains, and $0.50 in unrealized capital gains. Ninety percent of the income and all of the realized capital gain were distributed to shareholders. Calculate the year-end NAV.

Q: An aggressive equity mutual fund began the year with a net asset value (NAV) of $6.50 per share. During the year it received $0.15 dividend income, $1.25 in realized capital losses, and $0.50 in unrealized capital gains. Ninety percent of the income was distributed to shareholders. Calculate the year-end NAV.

Q: You invested $10,000 10 years ago into Fly-By-Night Fund which has reported performance (average annual total return) of 11.12% over this 10-year period. What would your ending wealth position be?

Q: The par value of Inferno, Inc. common stock is $0.50, the earnings per share is $6, and it trades at a P/E of 15. What is Inferno, Inc.'s stock price?

Q: The par value of Blaze, Inc. common stock is $0.50, the earnings per share is $4, the market price is $60, the dividend per share is $1. Calculate the payout ratio.

Q: The par value of Blaze, Inc. common stock is $0.50, the earnings per share is $4, the market price is $60, the dividend per share is $1. Calculate the dividend yield.

Q: A corporate investor in a 34% marginal income tax bracket can buy bonds issued by a petroleum exploration company yielding 10.606%. The investor should be willing to buy tax-exempt municipal bonds of similar quality yielding what percent or higher?

Q: What stated coupon rate would a taxable corporate bond have to have to be comparable to a municipal bond with a coupon rate of 7 percent if the investor is in the 28 percent tax bracket?

Q: How do asset-backed securities improve the flow of funds from savers to borrowers?

Q: Do the stock options markets help stabilize or destabilize the stock markets? Explain.

Q: Who benefits from a futures contract, a call contract, and a put contract, if prices fall?

Q: What are some advantages of asset-backed securities to investors?

Q: Rank (lowest to highest) the following securities in terms of the risk-expected return tradeoff from the investors' viewpoint: common stock, corporate bonds, U. S. Treasury bonds, options, preferred stock..

Q: Explain how writing option contracts (both puts and calls) can generate income for owners of the underlying stock.

Q: What are two direct and one indirect method for individuals to invest in foreign stocks?

Q: In what sense is a stock selling for 12 times earnings 'cheaper' than a stock with a P/E ratio of 20?

Q: How is the total book value of equity affected by stock splits?

Q: How is the earnings retention rate related to the dividend payout rate?

Q: Compare the cash flows an investor expects from coupon bonds, zero-coupon bonds, and preferred stock.

Q: Distinguish between direct and indirect investing.

Q: The par value on common stock sets the value that stockholders will receive in case of bankruptcy.

Q: LEAPS have maturities dates up to 10 years.

Q: The earnings retention rate is calculated as 1 - dividend yield.

Q: The major bond rating service is Dun & Bradstreet.

Q: Bond ratings are primarily used to assess interest rate risk.

Q: In the case of a corporate bankruptcy, bondholders are paid before any distributions are paid to preferred or common stockholders.

Q: Investors in high tax brackets would be unlikely to invest in municipal bonds.

Q: The major attraction of municipal bonds is their extremely low risk.

Q: TIPS adjust for inflation by adjusting the rate of interest paid on the bond.

Q: Callable bonds attract investors because they can be redeemed early.

Q: If a bond has a coupon greater than the current market yield, it should be selling at a premium.

Q: The deeper the discount on a zero-coupon bond, the lower the effective return.

Q: The return on a zero-coupon bond is derived from the difference between the purchase price of the bond and its par value.

Q: Term bonds have a single maturity.

Q: The capital market includes both fixed-income and equity securities.

Q: Treasury notes represent the nontraded debt of the U.S. government.

Q: The rate spreads between the different money market securities of the same term tend to be quite large.

Q: The money market security most often used a benchmark for the risk-free rate is money market deposit account rate.

Q: Money market securities generally carry a low chance of default.

Q: All U. S. government securities are considered marketable securities.

Q: Marketable securities all fall into the category of capital market securities.

Q: Nonmarketable investments would include savings accounts at banks and Treasury bills.

Q: An example of indirect investing would be buying shares in a mutual fund.

Q: Direct investing involves trades made by directly purchasing shares of a financial intermediary.

Q: If a call option has a $10 strike price, and the underlying stock is trading at $11, then the option is considered: a. in the money. b. at the money. c. out of the money. d. worthless.

Q: The premium on an option is the: a. par value of the option. b. price of the option. c. book value of the option. d. price at which a security may be bought or sold using the option.

Q: What is the biggest difference between an option and a futures contract? a. Options are traded on exchanges whereas futures are not b. Options give investors a way to manage portfolio risk while futures do not c. Options can be used by speculators to profit from price fluctuations while futures cannot d. Options give their holders the right to buy or sell whereas futures contract are obligations to buy or sell

Q: Which of the following statements is true regarding asset-backed securities (ASB)? a. They offer relatively high yields b. They have relatively long maturities c. They generally have low credit ratings d. Each traunche has the same risk