FI 412 Final Exam Questions and Answers Fully Solved Latest Update 2025-2026
What is an investment company? - Answers -"A company (corporation, business trust, partnership, or
limited liability company) that issues securities and is primarily engaged in the business of investing in
securities."
-They do so by pooling in capital from many small investors by selling them shares and using the
proceeds to buy securities.
-"Mutual Fund" is the most popular type of investment company in USA
5 benefits of mutual funds - Answers 1.Liquidity intermediation: investors can quickly convert
investments into cash.
2.Denomination intermediation: investors can participate in equity and debt offerings that, individually,
require more capital than they possess.
3.Diversification: investors immediately realize the benefits of diversification even for small investments.
4.Cost advantages: the mutual fund can negotiate lower transaction fees than would be available to the
individual investor.
5.Managerial expertise: many investors prefer to rely on professional money managers to select their
investments.
mutual fund structure: complexes - Answers •Investment companies usually offer a number ofdifferent
types of mutual funds, called "complexes"
•Investors can often move investments among these funds without penalty.
mutual fund structure: closed end vs open end fund - Answers •Closed-End Fund: a fixed number of
nonredeemable shares are sold through an initial offering and are then traded in the O T C market.
-Price for the shares is determined by supply and demand forces.
-The fund cannot raise more financing with current shares
-The investors cannot make withdrawals.
•Open-End Fund: investors may buy or redeem shares at any point, where the price is determined by
the net asset value of the fund.
-Investors can contribute anytime by increasing number of shares
-The fund can buy-back shares from investors anytime
-Very liquid
,-Grow unchecked;
mutual fund structure: shareholders - Answers •The shareholders, or owners, of the mutual fund are the
investors.
mutual fund structure: board of directors - Answers •The board of directors oversees the fund's
activities, hires the investment advisor, an underwriter, etc., to manage the day to day operations of the
fund.
mutual fund structure: fund managers - Answers •In theory, the board can fire the fund manager and
hire anyone they choose. For instance, the board for the Fidelity Magellan Fund can fire Fidelity. Of
course, if the board hires a non-Fidelity management team, the fund will probably lose its name, and
possibly its reputation along with it.
NAV - Answers Net Asset Value
Total value of the mutual fund's stocks, bonds, cash, and other assets minus any liabilities such as
accrued fees, divided by the number of shares outstanding
annual yield estimation FORMULA - Answers annual yield= (NAV1 - NAV0) / NAV0
Classes of mutual funds: - Answers stock (equity) funds, bond funds, hybrid funds, money market funds
stock funds characteristics - Answers -These funds invest in stock only. Subsequently, they have a variety
of objectives: growth, industry, P/E, etc
-Capital Appreciation Funds seek rapid increase in share price, not being concerned about dividends.
-Total Return Funds seek a balance of current income and capital appreciation.
-World Equity Funds invest primarily in foreign firms.
-Other types in Value, Growth, a particular industry, etc.
bond fund characteristics - Answers -Investment grade funds invest primarily in high quality, low-risk
U.S. corporate bonds. The returns are lower but also safer.
-Government Bond Funds invest in U.S. Treasury, as well as state and local government bonds.
-Others include World Bond Funds, etc.
•Bonds are relatively less risky than stocks, hence diversification of bond funds is not a concern.
hybrid characteristics - Answers -Combine stocks and bonds into a single fund.
Account for about 5% of all mutual fund accounts.
, money market characteristics - Answers -Open-end funds that invest only in money market securities.
▪Most funds do not charge fees
▪Yield depends on the yields of MM securities
-Offer check-writing privileges.
-Net assets have grown dramatically, as seen in the next slide.
-Although money market mutual funds offer higher returns than bank deposits, the funds are not
federally insured.
index fund: difference with actively managed mutual funds - Answers -A special class of mutual funds
with alternative investment style.
▪Market efficiency tells us paying investment managers for superior return is futile.
▪Index Funds avail most of the benefits of MF without incurring additional fees.
▪Index funds do not require money managers to pick securities
▪Far lower fees than actively managed MFs
-The fund contains the stock of the index it is mimicking. For example, an S&P 500 index fund would
hold the equities comprising the S&P 500.
fee structure: load vs unload - Answers •Load funds (class A shares) charge an upfront fee for buying the
shares. No-load funds do not charge this fee.
fee structure: other fees - Answers •Deferred load (class B shares) funds charge a fee when the shares
are redeemed.
•If the particular fund charges no front or back endfees, it is referred to as class C shares.
-contingent deferred sales charge: a back end fee that may disappear altogether after a specific period.
-redemption fee: another name for a back end load
-exchange fee: a fee (usually low) for transferring money between funds in the same family.
-account maintenance fee: charges if the account balance is too low.
-12b-1 fee: fee to pay marketing, advertising, and commissions.
fee structure: Purpose of loads - Answers -Provide compensation for the brokers
-Discourage withdrawal of deposits
What is an investment company? - Answers -"A company (corporation, business trust, partnership, or
limited liability company) that issues securities and is primarily engaged in the business of investing in
securities."
-They do so by pooling in capital from many small investors by selling them shares and using the
proceeds to buy securities.
-"Mutual Fund" is the most popular type of investment company in USA
5 benefits of mutual funds - Answers 1.Liquidity intermediation: investors can quickly convert
investments into cash.
2.Denomination intermediation: investors can participate in equity and debt offerings that, individually,
require more capital than they possess.
3.Diversification: investors immediately realize the benefits of diversification even for small investments.
4.Cost advantages: the mutual fund can negotiate lower transaction fees than would be available to the
individual investor.
5.Managerial expertise: many investors prefer to rely on professional money managers to select their
investments.
mutual fund structure: complexes - Answers •Investment companies usually offer a number ofdifferent
types of mutual funds, called "complexes"
•Investors can often move investments among these funds without penalty.
mutual fund structure: closed end vs open end fund - Answers •Closed-End Fund: a fixed number of
nonredeemable shares are sold through an initial offering and are then traded in the O T C market.
-Price for the shares is determined by supply and demand forces.
-The fund cannot raise more financing with current shares
-The investors cannot make withdrawals.
•Open-End Fund: investors may buy or redeem shares at any point, where the price is determined by
the net asset value of the fund.
-Investors can contribute anytime by increasing number of shares
-The fund can buy-back shares from investors anytime
-Very liquid
,-Grow unchecked;
mutual fund structure: shareholders - Answers •The shareholders, or owners, of the mutual fund are the
investors.
mutual fund structure: board of directors - Answers •The board of directors oversees the fund's
activities, hires the investment advisor, an underwriter, etc., to manage the day to day operations of the
fund.
mutual fund structure: fund managers - Answers •In theory, the board can fire the fund manager and
hire anyone they choose. For instance, the board for the Fidelity Magellan Fund can fire Fidelity. Of
course, if the board hires a non-Fidelity management team, the fund will probably lose its name, and
possibly its reputation along with it.
NAV - Answers Net Asset Value
Total value of the mutual fund's stocks, bonds, cash, and other assets minus any liabilities such as
accrued fees, divided by the number of shares outstanding
annual yield estimation FORMULA - Answers annual yield= (NAV1 - NAV0) / NAV0
Classes of mutual funds: - Answers stock (equity) funds, bond funds, hybrid funds, money market funds
stock funds characteristics - Answers -These funds invest in stock only. Subsequently, they have a variety
of objectives: growth, industry, P/E, etc
-Capital Appreciation Funds seek rapid increase in share price, not being concerned about dividends.
-Total Return Funds seek a balance of current income and capital appreciation.
-World Equity Funds invest primarily in foreign firms.
-Other types in Value, Growth, a particular industry, etc.
bond fund characteristics - Answers -Investment grade funds invest primarily in high quality, low-risk
U.S. corporate bonds. The returns are lower but also safer.
-Government Bond Funds invest in U.S. Treasury, as well as state and local government bonds.
-Others include World Bond Funds, etc.
•Bonds are relatively less risky than stocks, hence diversification of bond funds is not a concern.
hybrid characteristics - Answers -Combine stocks and bonds into a single fund.
Account for about 5% of all mutual fund accounts.
, money market characteristics - Answers -Open-end funds that invest only in money market securities.
▪Most funds do not charge fees
▪Yield depends on the yields of MM securities
-Offer check-writing privileges.
-Net assets have grown dramatically, as seen in the next slide.
-Although money market mutual funds offer higher returns than bank deposits, the funds are not
federally insured.
index fund: difference with actively managed mutual funds - Answers -A special class of mutual funds
with alternative investment style.
▪Market efficiency tells us paying investment managers for superior return is futile.
▪Index Funds avail most of the benefits of MF without incurring additional fees.
▪Index funds do not require money managers to pick securities
▪Far lower fees than actively managed MFs
-The fund contains the stock of the index it is mimicking. For example, an S&P 500 index fund would
hold the equities comprising the S&P 500.
fee structure: load vs unload - Answers •Load funds (class A shares) charge an upfront fee for buying the
shares. No-load funds do not charge this fee.
fee structure: other fees - Answers •Deferred load (class B shares) funds charge a fee when the shares
are redeemed.
•If the particular fund charges no front or back endfees, it is referred to as class C shares.
-contingent deferred sales charge: a back end fee that may disappear altogether after a specific period.
-redemption fee: another name for a back end load
-exchange fee: a fee (usually low) for transferring money between funds in the same family.
-account maintenance fee: charges if the account balance is too low.
-12b-1 fee: fee to pay marketing, advertising, and commissions.
fee structure: Purpose of loads - Answers -Provide compensation for the brokers
-Discourage withdrawal of deposits
