FIN 420 ALL TIPS SET ANSWERS AND QUESTIONS
SET A+
✔✔Guaranteed Investment Contracts (GICs) - ✔✔Issued by insurance companies Rate
of return guaranteed for a fixed period Not FDIC insured Employers are main
purchasers for the company's retirement plans Proceeds are invested in commercial
mortgages or investment-grade bonds Participating contract returns fluctuate; non-
participating contract returns are fixed If interest rates are projected to increase, a
participating contract is preferred If interest rates are projected to decrease, a non-
participating contract is preferred
✔✔Hedge Funds - ✔✔Pools capital Unregistered, privately offered, managed pool of
capital Unique investment strategy attempts to capture market inefficiencies
✔✔Front-end load (Class A shares) - - ✔✔Commission is paid upfront often 5% +/-
✔✔Back-end load (Class B shares) - - ✔✔Commission is deferred for a certain time
period
✔✔Level-load (Class C shares) - - ✔✔A 12b-1 fee is charged annually
✔✔Institution/Investor (I share) - - ✔✔No load, lower expense ratios for institutional
buyers
✔✔Mutual Fund Operating Expenses - ✔✔Management fee - Fees paid for fund
management 12b-1 fees - Marketing and advertising costs, advisor compensation Other
expenses - Administrative and outside services
✔✔Where can I find operating expense information for a fund? - ✔✔Look for the
prospectus: - Investment company's website - SEC Edgar - ASU library resources
✔✔Expense ratio - ✔✔The expense ratio is the fund's annual operating expenses
divided by the fund's average annual assets. For example, a mutual fund has
, $10,000,000 in assets and its operating expenses equal 150,000. The expense ratio is
150,,000,000 = .015 = 1.50%
✔✔Mutual Fund Operating Expenses - ✔✔The London Company Income EquitySource:
12/29/20 Prospectus
✔✔Investment Horizon: If the investor plans to hold the mutual fund long term (>5
years) -
If the holding period is short term (< 5 years) - - ✔✔Class A is generally more cost
effective.
Class C is generally more cost effective.
✔✔Fiduciary Duty: If the investor wants the advisor to watch over the fund performance,
consider the lowest expense mutual fund available with annual advisory fees. - ✔✔If the
investor wants to retain the responsibility of overseeing the performance of the mutual
fund without paying advisory fees, consider the lowest expense share class available for
direct purchase given the investor's time horizon.
✔✔Taxable Bond Fund Investment Objective: - ✔✔Provide current income to
shareholders. Short-term: 1 to 5 years maturity Intermediate-term: 5 - 10 years maturity
Long-term: 10+ years maturity
✔✔Government bond funds: - ✔✔Maximum safety of principal. Interest rate sensitive,
but not credit quality sensitive.
✔✔GNMA funds: At least 80% of the portfolio is mortgage-backed securities
guaranteed by Ginnie Mae. Income is considered safe - ✔✔because the interest and
principal payments are considered an obligation of the US government. They have
principal repayment uncertainty.
✔✔Taxable Bond Fund - ✔✔Investment-grade: Corporate bonds with the highest bond
ratings, less default risk. Higher income than a Treasury, higher risk than a Treasury.
✔✔S&P bond ratings - - ✔✔AAA, AA, A, BBB
✔✔Moody's bond ratings - - ✔✔Aaa, Aa, A, Baa
✔✔High-yield fund: - ✔✔Corporate bonds also known as junk bond funds. Higher
income than investment-grade, higher risk.
✔✔S&P bond ratings - - ✔✔Lower than BBB
✔✔Moody's bond rating - - ✔✔Lower than Baa ; Nonrated bonds
SET A+
✔✔Guaranteed Investment Contracts (GICs) - ✔✔Issued by insurance companies Rate
of return guaranteed for a fixed period Not FDIC insured Employers are main
purchasers for the company's retirement plans Proceeds are invested in commercial
mortgages or investment-grade bonds Participating contract returns fluctuate; non-
participating contract returns are fixed If interest rates are projected to increase, a
participating contract is preferred If interest rates are projected to decrease, a non-
participating contract is preferred
✔✔Hedge Funds - ✔✔Pools capital Unregistered, privately offered, managed pool of
capital Unique investment strategy attempts to capture market inefficiencies
✔✔Front-end load (Class A shares) - - ✔✔Commission is paid upfront often 5% +/-
✔✔Back-end load (Class B shares) - - ✔✔Commission is deferred for a certain time
period
✔✔Level-load (Class C shares) - - ✔✔A 12b-1 fee is charged annually
✔✔Institution/Investor (I share) - - ✔✔No load, lower expense ratios for institutional
buyers
✔✔Mutual Fund Operating Expenses - ✔✔Management fee - Fees paid for fund
management 12b-1 fees - Marketing and advertising costs, advisor compensation Other
expenses - Administrative and outside services
✔✔Where can I find operating expense information for a fund? - ✔✔Look for the
prospectus: - Investment company's website - SEC Edgar - ASU library resources
✔✔Expense ratio - ✔✔The expense ratio is the fund's annual operating expenses
divided by the fund's average annual assets. For example, a mutual fund has
, $10,000,000 in assets and its operating expenses equal 150,000. The expense ratio is
150,,000,000 = .015 = 1.50%
✔✔Mutual Fund Operating Expenses - ✔✔The London Company Income EquitySource:
12/29/20 Prospectus
✔✔Investment Horizon: If the investor plans to hold the mutual fund long term (>5
years) -
If the holding period is short term (< 5 years) - - ✔✔Class A is generally more cost
effective.
Class C is generally more cost effective.
✔✔Fiduciary Duty: If the investor wants the advisor to watch over the fund performance,
consider the lowest expense mutual fund available with annual advisory fees. - ✔✔If the
investor wants to retain the responsibility of overseeing the performance of the mutual
fund without paying advisory fees, consider the lowest expense share class available for
direct purchase given the investor's time horizon.
✔✔Taxable Bond Fund Investment Objective: - ✔✔Provide current income to
shareholders. Short-term: 1 to 5 years maturity Intermediate-term: 5 - 10 years maturity
Long-term: 10+ years maturity
✔✔Government bond funds: - ✔✔Maximum safety of principal. Interest rate sensitive,
but not credit quality sensitive.
✔✔GNMA funds: At least 80% of the portfolio is mortgage-backed securities
guaranteed by Ginnie Mae. Income is considered safe - ✔✔because the interest and
principal payments are considered an obligation of the US government. They have
principal repayment uncertainty.
✔✔Taxable Bond Fund - ✔✔Investment-grade: Corporate bonds with the highest bond
ratings, less default risk. Higher income than a Treasury, higher risk than a Treasury.
✔✔S&P bond ratings - - ✔✔AAA, AA, A, BBB
✔✔Moody's bond ratings - - ✔✔Aaa, Aa, A, Baa
✔✔High-yield fund: - ✔✔Corporate bonds also known as junk bond funds. Higher
income than investment-grade, higher risk.
✔✔S&P bond ratings - - ✔✔Lower than BBB
✔✔Moody's bond rating - - ✔✔Lower than Baa ; Nonrated bonds
