Finance Final Exam

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Investment company

Back 1

A firm that invests the pooled money of a number of investors in return for a fee

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Open-End Investment Company

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-A mutual fund that has the ability to issue as many shares as investors want.
-The value of all the investments that the fund holds determines how much each share in the mutual fund is worth.

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Net asset value (NAV)

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-The dollar value of a share in a mutual fund.
-Its the value of the funds holdings (minus any debt) divided by the number of shares outstanding.

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Closed-end investment company

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-A mutual fund that cant issue new shares.
-These funds raise money only once by issuing a fixed number of shares, and thereafter the shares can be traded between investors.
-The value of each share is determined both by the value of the investments the fund holds and investor demand for shares in the fund.

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Unit investment trust

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-a fixed pool of securities, generally municipal bonds.
-each share represents a proportionate ownership interest in that pool.
-The bonds are purchased and then held until maturity, at which time the trust is dissolved

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Real estate investment trust or REIT

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An investment vehicle similar to a mutual fund that specializes in real estate investments, such as shopping centers or rental property, or that makes real estate loans

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Hedge fund

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-An investment fund that is private, largely unregulated, and very risky
-charges very high fees
-only allows wealthy investors to invest.

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Load

Back 8

A sales commission charged on a mutual fund

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Load fund

Back 9

A mutual fund on which a load or sales commission is charged

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Back-end load

Back 10

A commission that's charge only when the investor liquidates his or her holdings

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No-load fund

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A mutual fund that doesn't charge a commission

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Expense ratio

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the ratio of a mutual funds expenses to its total assets

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Turnover rate

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A measure of the level of a funds trading activity, indicating what percentage of the funds investments are turned over during the year

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12b-1 fee

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-An annual fee, generally ranging from 0.25 to 1 percent of a funds assets.
-the mutual fund charges its shareholders for marketing costs

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Money market mutual funds

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-Mutual funds that invest in treasury bills, certificates of deposit, commercial paper, and other short term notes
-generally with a maturity of less than 30 days

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Tax-exempt money market mutual fund

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A money market mutual fund that invests only in very short term municipal debt

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Government securities money market mutual fund

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a money market mutual fund that invests solely in U.S. government securities in order to avoid any risk whatsoever

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Stock mutual funds

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Mutual funds that invest primarily in common stock.

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Aggressive growth fund

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-a fund that tries to maximize capital appreciation while ignoring income. In other words, these funds tend to go for stocks whose prices could rise dramatically, even though these stocks tend to pay very small dividends.
-The dividend yield on stocks in funds of this type tends to be quite low.
-They can gain big, but lose big too.
-tend to experience wider price swings, both up and down, than do the share prices of other funds.

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Small company growth funds

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-similar to aggressive growth funds except they limit their investments to small companies.
-Their purpose is to uncover and invest in undiscovered companies with unlimited future growth.
-Again, these are very risky funds with a good deal of price volatility.

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Growth funds

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-generally pay more attention to strong firms that pay dividends.
-Still, these funds are looking for the potential big gainers.
-less risky than their aggressive growth cousins, though.
-Bc of the stable dividends, their shares tend to bounce around less
-When compared to aggressive growth funds, the differences are small

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Growth and income funds

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-Tries to invest in a portfolio that will provide the investor with a steady stream of income in addition to having the potential for increasing value.
-Focus on everything from well established blue chip companies with strong stable dividends and growth opportunities to stocks with low P/E ratios and above average dividends.
-Bc of the steady income these funds provide, the shares tend to fluctuate in price less than the market as a whole.

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Sector funds

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-a specialized mutual fund that generally invests at least 65% of its assets in securities from a specific industry.
-For example, there are funds dealing with the chemicals, computer, financial services, health/biotechnology, automobile, environmental, utilities, and natural resources industries, to name a few.
-The idea behind a this fund is to limit the degree of diversification by limiting investment to a specific industry

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Index funds

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-one that tries to track a market index, such as the S&P 500.
-It does so by buying the stocks that make up the S&P 500.
-Much of the value comes from its low expense ratio, which can be anywhere from 0.15 to 1.35% lower than those of other funds. These funds are great for those who don't want to try to "beat the market" and want the diversification of a mutual fund with costs as low as possible

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International funds

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-concentrates its investments in securities from other countries.
-In fact, 2/3 of the funds assets must be invested outside the US.
-Some international funds focus on general world regions--The Pacific Basin, Latin America, or other emerging markets.
-Some focus on specific countries

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Advantages of mutual fund investing:

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-diversification
-professional management
-minimal transaction costs
-liquidity
-flexibility
-service
-avoidance of bad brokers

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Disadvantages of mutual fund investing:

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-lower than market performance
-costs
-risks
-you cant diversify away a market crash
-taxes

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Balanced mutual fund

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-A mutual fund that tries to "balance" the objectives of long term growth, income, and stability.
-To do this, these funds invest in a mix of common stock and bonds, as well as preferred stock in some cases
-aimed at those needing income to live on and moderate stability in their investment
-less volatile than stock mutual funds

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Asset allocation fund

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-A mutual fund that invests in a mix of stocks, bonds, and money market securities
-Move money between stocks and bonds to outperform the market
-balanced funds that practice market timing

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Life cycle funds

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-Mutual funds that try to tailor their holdings to the investors individual characteristics, such as age and risk tolerance.

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Target retirement fund

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-a mutual fund professionally managed for an investors stage of retirement with the investments in the fund automatically growing more conservative as the investors retirement date nears
-the decision as to how much to invest in stocks, bonds and money market instruments is made for you, and the only decision you have to make is when you plan to retire.

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Bond funds

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-mutual funds that invest primarily in bonds
-fluctuate in value with market interest rates
-use for small amounts of money, to keep investments liquid.
-otherwise, use individual bonds where there is no professional management or fees.

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U.S. government bond funds

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-they invest in securities issued by the federal government or its agencies.
-Ex: U.S. treasury bond funds specialize in Treasury securities.
-no default risk associated with these funds.

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Municipal bond funds

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-the interest is generally exempt from federal taxes.

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Corporate bond funds

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-invest in various corporate bonds.
-some corporate bond funds focus mainly on high quality, highly rated bonds, but others, usually called HIGH YIELD corporate bond funds, focus on the much lower rated and much riskier junk bonds.

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ETF's or Exchange traded funds

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A hybrid between a mutual fund and an individually traded stock or bond that trade on an exchange just as individual securities do and can be bought and sold throughout the trading day

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Advantages of Exchange traded funds (ETF's):

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-trade on an exchange just as individuals securities do and can be bought and sold throughout the trading day
-can be sold short or bought on margin
-allow you to take an instant position in a sector or country that you may not otherwise have access to, for example, biotechnology or Taiwan
-have very low annual expenses
-are more tax efficient than most mutual funds

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Disadvantages of Exchange traded funds (ETF's):

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-trade as common stocks do, you pay commissions
-don't necessarily trade at their net asset value
-you buy the ETF from another investor, so you also have the bid-ask spread to deal with. For example, you might be able to buy the ETF at $25,000, but only be able to sell it later for $24.85
-investors who trade frequently, ETF's can be more expensive than typical mutual funds. That's because you incur brokerage costs each time you buy or sell ETF shares

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Mutual fund prospectus

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A description of the mutual fund, including the funds objectives and risks, its historical performance, its expenses, the managers history, and other information

Front 40

Mutual funds eliminate the systematic risk through diversification: True or False?

Back 40

False

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Why is it important to determine what investment goals you are trying to achieve before you invest in a mutual fund?

A.) the mutual fund company may attempt to change your goals to meet their fund offerings
B.)You must provide the mutual fund company with your defined goals before they allow you to purchase shares
C.) you must look for a mutual fund with the same or similar investment goals that you have in order to find an appropriate fund
D.) all of the above
E.) only A and B are correct

Back 41

C.) you must look for a mutual fund with the same or similar investment goals that you have in order to find an appropriate fund

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Tabitha is just beginning to develop her financial portfolio. She does not want to pay commissions to purchase shares in her mutual funds, as her friend you would advise her to invest her dollars in ________ funds.

A.) load B.) side-load
C.) back-load D.) no-load
E.) front-load

Back 42

D.) no-load

Front 43

One type of mutual fund does not endeavor to achieve the goals of a balance of bonds and stock or growth, income and stability. Instead, it focuses on personal characteristics, such as age, and risk tolerance, and your position in the financial life cycle. This is the ______.

A.) index fund B.) life cycle fund
C.) balanced fund D.) sector fund E.) growth and income fund

Back 43

B.) life cycle fund

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Exchange traded funds are mutual funds that trade on an exchange just like individual securities and can be bought or sold throughout the trading day.
True or False?

Back 44

True

Front 45

Which of the following is a disadvantage to mutual fund investing?

A.) on average they under perform the market returns
B.) costs may be high and vary dramatically from fund to fund
C.) you cannot diversify away systematic risk
D.) not all mutual funds are truly safe
E.) all of the above

Back 45

E.) all of the above

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The mutual fund that invests in treasury bills and very short term notes and is considered practically risk free is the:

A.) bond fund B.) money market fund C.) life cycle fund D.)stock fund E.) balanced fund

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B.) money market fund

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Which of the following funds protect you from systematic risk?

A.) balanced fund B.) growth fund C.) S and P 500 index fund
D.) all of the above E.) none of the above

Back 47

E.) None of the above

Front 48

The process of buying a mutual fund involves determining your investment goals, identifying funds that meet your objectives, and evaluating those funds. True or False?

Back 48

True

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Money market mutual funds invest primarily in the stocks of publicly traded companies. True or False?

Back 49

False

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Social Security

Back 50

-primary source of retirement income for many senior citizens
-younger workers who wont retire for another 40 years, social security may no longer be there.

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Defined-benefit plan
(know difference in relation to Defined-contribution plan)

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-a traditional pension plan in which you receive a promised or "defined" pension payout at retirement. The payout is based on a formula that takes into account your age at retirement, salary level, and years of service.

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Defined-contribution plan
(know difference in relation to Defined-benefit plan)

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-a pension plan in which you and your employer or your employer alone contributes directly to a retirement account set aside specifically for you.
-can be thought of as a savings account for retirement.
-what you get depends on the performance (return) of what you put in!

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Noncontributory retirement plan

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-a retirement plan in which the employer provides all the funds and the employee need not contribute.

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Contributory retirement plan

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-a retirement plan in which the employee, possibly with the help of the employer, provides the funds for the plan.

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Portability

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-a pension fund provision that allows employees to retain and transfer any pension benefits already earned to another pension plan if they leave the company

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Vested

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-to gain the right to the retirement contributions made by your employer in your name. In the case of a pension plan, employees become vested when they've worked for a specified period of time and, thus, gained the right to pension benefits.

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Funded pension plan

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-a pension plan in which the employer makes pension contributions directly to a trustee who holds and invests the employees' retirement funds.

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Unfunded pension plan

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-a pension fund in which the benefits are paid out of current earnings on a pay-as-you-go basis.

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401 (k) plan

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-a tax-deferred retirement savings plan in which employees of private corporations may contribute a portion of their wages up to a maximum amount set by law ($15,500 in 2008 and thereafter these limits will rise with inflation in $500 increments). Employers may contribute a full or partially matching amount, and may limit the proportion of the annual salary contributed (typically to 15 percent)

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403 (b) plan

Back 60

-a U.S. tax advantaged retirement savings plan, available for public education organizations, some non-profit employers, cooperative hospital service organizations, and self employed ministers in the U.S. It has tax treatment similar to 401 (k) plan, especially after the Economic growth and tax relief reconciliation act of 2001.
-employee salary deferrals into a 403(b) plan are made before income tax is paid and allowed to grow tax-deferred until the money is taxed as income when withdrawn from the plan.
-also referred to as tax-sheltered annuity.

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IRA (individual retirement account)

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-a tax advantaged retirement account. The contribution may or may not be tax deductible, depending on the individuals income level and whether he or she, or his or her spouse, is covered by a company retirement plan.
-restrictions on timing and amount of withdrawals, but can rollover a distribution
-savers tax credit

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Roth IRA

Back 62

-contributions are not tax deductible, but made out of after tax income.
-money grows tax free and withdrawals are tax free
-no withdrawal restrictions or tax penalty like traditional IRA, but can also rollover

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A 401(k) plan is a tax-deferred retirement plan in which both the employees contributions to the plan and the earnings on those contributions are tax deductible, with all the taxes being deferred until retirement withdrawals are made. True or False?

Back 63

True

Front 64

If your pension fund contained a provision that allowed employees who were leaving the company to retain and transfer any pension benefits earned to another pension plan, it would be said to have ________.

A.) releasability B.) transference
C.) transportance D.) portability
E.) none of the above

Back 64

D.) portability

Front 65

Frank is considering a new job. However, he is concerned about his pension fund. He knows that _______ which is the requirement that he must work for his firm for a specified period of time prior to gaining ownership of the retirement contributions made by his employer has to be met first.

A.) validating B.) tenuring
C.) vesting D.) certifying
E.) none of the above

Back 65

C.) vesting

Front 66

Suppose that you have estimated that, to provide for your retirement income, you will need $2,250,000 on deposit in your retirement account when you retire. You believe that you will earn an average of 11% on your retirement investments until you retire in 35 years. What must your annual deposits be to accumulate this total?

A.) $6,586.85 B.) $6,878.77
C.) $21,991.14 D.) $5,904.84
E.) none of the above

Back 66

A.) $6,586.85

1 pmt per year
-FV: $2,250,000
-PV: $0
-N: 35
-I/yr: 11
Looking for PMT

Front 67

Under a defined benefit plan you receive a promised or "defined" benefit payout at retirement. True or False?

Back 67

True

Front 68

You have determined that you will need to accumulate $1,000,000 in your retirement account in order to cover your inflation-adjusted shortfall. Which of the following is closest to the amount of money you would need to put into a tax-deffered retirement account every year if you plan on retiring in 40 yrs? Assume an 8% average return on this account, and that it is empty today.

A.) $1,458 B.) $3,860
C.) $5,957 D.) $8,444

Back 68

B.) $3,860

1 pmt per year
-FV: $1,000,000
-PV: $0
-N: 40
-I/yr: 8
Looking for PMT

Front 69

For most people, there is really no reason to save for retirement since social security will provide retirement benefits until you die. True or False?

Back 69

False

Front 70

One of the best things about retirement is that retirees don't have to pay income taxes once they retire. True or False?

Back 70

False

Front 71

Because inflation makes goods and services cost more over time, one would be wise to always control for inflation when planning ones retirement. True or False?

Back 71

True

Front 72

The typical American worker will receive a defined-benefit retirement plan from their employees. True or False?

Back 72

False

Front 73

Bonds and their maturities

Back 73

Short term: 1-5 years
Intermediate term: 5-10 years
long term: 10-30 years

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Steps in buying a mutual fund

Back 74

1.) determining your goals
-goals and time horizon
-why are you investing?
-tax-deferred investments?
-risk tolerance
2.) Meeting your objectives
3.) Evaluating the fund
-Where do look
-screening the internet to find the right mutual fund