Chapter 20 The Mutual Fund Industry: Financial Markets and Institutions, 7e (Mishkin)

Financial Markets and Institutions, 7e (Mishkin)
Chapter 20 The Mutual Fund Industry
20.1 Multiple Choice
1) Mutual funds hold about ________ of financial intermediaries' total assets.

A) one-sixth
B) one-fourth
C) one-half
D) two-thirds
Answer: A
Question Status: Previous Edition
2) ________ 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
Answer: C
3) 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.
Answer: A
4) 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.
Answer: D
5) ________ 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
Answer: D
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6) 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
Answer: B
Question Status: Updated from Previous Edition
7) 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
Answer: B
8) 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.
Answer: C
9) 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.
Answer: A
10) ________ funds are the simplest type of investment funds to manage.
A) Balanced
B) Global equity
C) Growth
D) Index
Answer: D
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11) The majority of mutual fund assets are now owned by
A) individual investors.
B) institutional investors.
C) fiduciaries.
D) business organizations.
E) retirees.
Answer: A
12) 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
Answer: C
13) 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.
Answer: B
14) 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
Answer: B
15) 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
Answer: B
16) 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.
Answer: C
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17) 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.
Answer: D
18) 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.
Answer: D
19) 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
Answer: A
20) 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
Answer: D
21) 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.
Answer: C
22) 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.
Answer: B
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23) The largest share of total investment in mutual funds is in
A) stock funds.
B) hybrid funds
C) bond funds.
D) money market funds.
Answer: A
24) 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.
Answer: E
25) 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.
Answer: D
26) 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
Answer: C
27) 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
Answer: B
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28) 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.
Answer: B
29) 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.
Answer: C
30) 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.
Answer: D
31) ________ 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
Answer: A
32) Mutual fund companies frequently offer a number of separate mutual funds called ________.
A) indexes
B) complexes
C) components
D) actuaries
Answer: B
33) 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
Answer: D
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34) 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
Answer: C
35) ________ bonds combine stocks into one fund.

A) Hybrid
B) Money market
C) Municipal
D) Equity
Answer: A
36) 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
Answer: C
20.2 True/False
1) The larger the number of shares traded in a stock transaction, the lower the transaction costs per
share.
Answer: TRUE
2) The increase in the number of defined contribution pension funds has slowed the growth of mutual
funds.
Answer: FALSE
3) The dollar amount invested in mutual funds is about the same as the total assets of all commercial
banks at the beginning of 2004.
Answer: TRUE
4) Retirement funds account for about 31% Of all mutual fund assets.
Answer: FALSE
5) Open-end mutual funds are more common than closed-end funds.

Answer: TRUE
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6) The net asset value of a mutual fund is the average market price of the stocks, bonds, and other assets
the fund owns.
Answer: FALSE
7) A mutual fund's board of directors picks the securities that will be held and makes buy and sell
decisions.
Answer: FALSE
8) Money market mutual funds originated when the brokerage firm Merrill Lynch offered its customers
an account from which funds could be taken to purchase securities and into which funds could be
deposited when securities were sold.
Answer: TRUE
9) A deferred load is a fee charged when shares in a mutual fund are redeemed.
Answer: TRUE
10) SEC research suggests that about three-fourths of mutual funds let privileged shareholders engage in
market timing.
Answer: TRUE
11) One factor explaining the rapid growth in mutual funds is that they are financial intermediaries that
are not regulated by the federal government.
Answer: FALSE
12) Whether a fund is organized as a closed- or an open-end fund, is will have the same basic
organizational structure.
Answer: TRUE
13) The primary purpose of loads is to provide compensation for sales brokers.
Answer: TRUE
14) Mutual funds are regulated under four federal laws designed to protect investors.
Answer: TRUE
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20.3 Essay
1) What benefits do mutual funds offer investors?

2) How is a mutual fund's net asset value calculated?

3) How did money market mutual funds originate and why did they become especially popular in the
late 1970s and early 1980s?
4) How does the governance structure of mutual funds lead to asymmetric information and conflicts of
interest?
5) Describe the practices of late trading and market timing and explain how these practices harm a
mutual fund's shareholders.
6) Discuss the proposals that have been made to reduce the conflict of interest abuses in the mutual
funds industry.
7) Discuss the four primary classes of mutual funds available to investors.

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Chapter 20 The Mutual Fund Industry: Financial Markets and Institutions, 7e (Mishkin)

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Chapter 20 The Mutual Fund Industry: Financial Markets and Institutions, 7e (Mishkin)

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Financial Markets and Institutions, 7e (Mishkin)

Chapter 20 The Mutual Fund Industry

20.1 Multiple Choice

1) Mutual funds hold about ________ of financial intermediaries' total assets.

3) Mutual funds offer investors all of the following except

8) Which of the following is an advantage to investors of an open-end mutual fund?

9) The net asset value of a mutual fund is

18) A deferred-load mutual fund charges a commission

20) Which of the following is most likely to be a no-load fund?

22) The Securities Acts of 1933 and 1934 did not

24) Hedge funds are

29) Late trading and market timing

35) ________ bonds combine stocks into one fund.

5) Open-end mutual funds are more common than closed-end funds.

1) What benefits do mutual funds offer investors?

2) How is a mutual fund's net asset value calculated?

7) Discuss the four primary classes of mutual funds available to investors.

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