MBA 621 FINAL EXAM QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE

MBA 621 FINAL EXAM QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE How do open end mutual funds differ from closed end mutual funds? - Answers Shares of open end mutual funds can be sold back to the sponsoring investment company whereas shares of closed end mutual funds can not. How can mutual funds generate returns to their shareholders? - Answers Mutual funds can provide dividends or capital gain distributions to investors. In addition, investors also benefit from share price appreciation. They may be able to sell the shares at a higher price than they paid. Support or refute the following statement: Investors can avoid all types of risk by purchasing a mutual fund that contains only treasury bonds. - Answers A mutual fund containing treasury bonds is susceptible to interest rate risk. If interest rates rise, the market value of the treasury bonds contained in the mutual fund will decline. According to recent research, have mutual funds outperformed the market? Would mutual funds be attractive to some investors even if they are not expected to outperform the market? - Answers Mutual funds have not outperformed the market. Mutual funds might be attractive to some investors because they allow some diversification which they could not afford to achieve on their own (purchasing hundreds of stocks). How do money market funds differ from other types of mutual funds? - Answers Money market funds are composed of money market securities, such as Treasury bills, commercial paper, Eurodollar deposits, bankers acceptances, repurchase agreements, or CDS. Conversely, mutual funds are composed of stocks and bonds. How is whole life insurance a form of savings to policy holders? - Answers Whole life insurance is permanent as it protects the policy holder until death or as long as premiums are promptly paid. It is a form of savings as it builds a cash value the policy holder is entitled to even if the policy is cancelled. How do whole life and term insurance differ? - Answers Term insurance provides insurance only over a specified term, it is not permanent like whole life insurance. Term insurance does not build a cash value so it is not a savings mechanism. Term insurance is less expensive then whole life. Identify the characteristics of Universal Life Insurance? - Answers Universal life insurance specifies a time period over which the policy exists. It builds a cash value over the term of the policy. What are the main assets of life insurance companies? - Answers Life insurance companies invest in government securities, corporate securities, mortgages, real estate, and policy loans. What is a policy loan? When is it usually used? - Answers A policy loan occurs as insurance companies lend funds to whole life policy holders based upon their cash value of the policy. They are popular during times of rising interest rates as they have a guaranteed rate of interest, so are less expensive sources of funds during these times. What is the main use of funds by life insurance companies? - Answers Corporate bonds. What is reinsurance? - Answers Reinsurance permits companies to write large policies by allocating a portion of the risk to other insurance companies, but they then must share the return. Describe a defined benefit plan and a defined contribution plan. - Answers For a defined benefit plan, contributions are dictated by the benefits that will eventually be provided. The benefits provided by the defined contribution plan are determined by the accumulated contributions and the return on the funds investment performance. This plan allows a firm to know with certainty the amount of funds to contribute. Explain the general difference in the composition of pension portfolios managed by trusts versus insurance companies. - Answers Pension portfolios managed by trusts offer potentially higher returns than insured plans and have a higher degree of risk. This difference occurs because assets managed by insurance companies (insured plans) are owned by insurance companies and are designed to create annuities. Mutual funds - Answers investment companies that sell shares and use the proceeds to manage a portfolio of securities. compare mutual funds to depository institutions - Answers Like depository institutions, mutual funds repackage proceeds from individuals to make investments Unlike bank deposits, mutual funds represents partial ownership Mutual funds adhere to a variety of federal and state regulations - Answers MF's must register with SEC Funds must provide a prospectus to investors Disclosure since 1993 of manager's name and length of time employed in that position Must disclose performance Information contained in a prospectus - Answers The minimum amount of investment required The investment objective of the fund The return on the fund over the past year, the past three years and the the past five years The exposure of the fund to various types of risk Services the fund offers The fees incurred and passed on to investors Estimating the net asset value - Answers Net asset value is the value per share Estimated daily Determine the market value of all the securities in the fund Any interest or dividends added in Expenses subtracted Divide by the number of shares Distributions to shareholders or returns to stockholders can take three forms - Answers Pass on any earned income from dividend or coupon payments as a dividend Distribute the capital gains from the sale of securities in the fund Mutual fund price appreciation