Chapter 4 Mutual Funds and Other Investment Companies Multiple Choice Questions1.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.2.Which one of the following statements regarding closed-end mutual funds is false? A)The funds always trade at a discount from NAV. 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: D Difficulty: Moderate Rationale: Closed-end funds are sold at the prevailing market price.3.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.4.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 Mutuals 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 = $18.115.Growth Fund had year-end assets of $862,000,000 and liabilities of $12,000,000. There were 32,675,254 shares in the fund at year-end. What was Growth Funds Net Asset Value? A)$28.17 B)$25.24 C)$19.62 D)$26.01 E)$21.56 Answer: D Difficulty: Moderate Rationale: (862,000,000 - 12,000,000) / 32,675,254 = $26.016.Diversified Portfolios had year-end assets of $279,000,000 and liabilities of $43,000,000. If Diversifieds 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 = 5,601,708.996.7.Pinnacle Fund had year-end assets of $825,000,000 and liabilities of $25,000,000. If Pinnacles NAV was $32.18, how many shares must have been held in the fund? A)21,619,346,92 B)22,930,546.28 C)24,860,161.59 D)25,693,645.25 E)None of the above. Answer: C Difficulty: Moderate Rationale: ($825,000,000 - 25,000,000) / $32.18 = 24,860,161.59.8.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.9.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.10.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.11.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.12.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