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Investments Chapter 4 Exam Questions With
Verified Answers.
What are the benefits to small investors of investing via mutual funds? What are the
disadvantages? - answer✔Mutual funds offer many benefits. Some of those benefits include: the
ability to invest with small amounts of money, diversification, professional management, low
transaction costs, tax benefits, and the ability to reduce administrative functions. The costs
associated with investing in mutual funds are generally operating expenses, marketing,
distribution charges, and loads. Loads are fees paid when investors purchase or sell the shares.
Why can closed-end funds sell at prices that differ from net value while open-end funds do not? -
answer✔Close-end funds trade on the open market and are thus subject to market pricing. Open-
end funds are sold by the mutual fund and must reflect the NAV of the investments.
What is a 12b-1 fee? - answer✔12b-1 fees are annual fees charged by a mutual fund to pay for
marketing and distribution costs.
What are the advantages and disadvantages of exchange-traded funds versus mutual funds? -
answer✔Exchange-traded funds can be traded during the day, just as the stocks they represent.
They are most tax effective, in that they do not have as many distributions. They have much
lower transaction costs. They also do not require load charges, management fees, and minimum
investment amounts. The disadvantage is that ETFs must be purchased from brokers for a fee.
Moreover, investors may incur a bid-ask spread when purchasing an ETF.
An open-end fund has a NAV of $10.70/share. It is sold with a front-end load of 6%. What is the
offering price? - answer✔The offering price includes a 6% front-end load, or sales commission,
meaning that every dollar paid results in only $0.94 going toward the purchase of shares.
Therefore:
Offering price = (10.70 / (1-.06) = $11.38
If the offering price of an open-end fund is $12.30 per share and the fund is sold with a front-end
load of 5%, what is its net asset value? - answer✔NAV = Offering price * (1 - load) =
$12.30*.95 = $11.69
Investments Chapter 4 Exam Questions With
Verified Answers.
What are the benefits to small investors of investing via mutual funds? What are the
disadvantages? - answer✔Mutual funds offer many benefits. Some of those benefits include: the
ability to invest with small amounts of money, diversification, professional management, low
transaction costs, tax benefits, and the ability to reduce administrative functions. The costs
associated with investing in mutual funds are generally operating expenses, marketing,
distribution charges, and loads. Loads are fees paid when investors purchase or sell the shares.
Why can closed-end funds sell at prices that differ from net value while open-end funds do not? -
answer✔Close-end funds trade on the open market and are thus subject to market pricing. Open-
end funds are sold by the mutual fund and must reflect the NAV of the investments.
What is a 12b-1 fee? - answer✔12b-1 fees are annual fees charged by a mutual fund to pay for
marketing and distribution costs.
What are the advantages and disadvantages of exchange-traded funds versus mutual funds? -
answer✔Exchange-traded funds can be traded during the day, just as the stocks they represent.
They are most tax effective, in that they do not have as many distributions. They have much
lower transaction costs. They also do not require load charges, management fees, and minimum
investment amounts. The disadvantage is that ETFs must be purchased from brokers for a fee.
Moreover, investors may incur a bid-ask spread when purchasing an ETF.
An open-end fund has a NAV of $10.70/share. It is sold with a front-end load of 6%. What is the
offering price? - answer✔The offering price includes a 6% front-end load, or sales commission,
meaning that every dollar paid results in only $0.94 going toward the purchase of shares.
Therefore:
Offering price = (10.70 / (1-.06) = $11.38
If the offering price of an open-end fund is $12.30 per share and the fund is sold with a front-end
load of 5%, what is its net asset value? - answer✔NAV = Offering price * (1 - load) =
$12.30*.95 = $11.69
