Chapter 1 Practice Question Answers
1. Answer: B. Shares of open-end funds (mutual funds) are purchased and redeemed through the issuer, while closed-end funds are bought and sold on the secondary market. Shares of open-end funds are priced at the next calculated NAV, whereas the prices of shares of closed-end funds are influenced by supply and demand (supply and demand has no effect on the price of open-end funds). Shares of open-end funds are priced once a day, whereas closed-end funds are priced continually throughout the day.
2. Answer: B. Shares of mutual funds are purchased through the issuer. When an investor purchases shares in a mutual fund, he is charged the net asset value (NAV) of those shares plus any front-end sales charge. The NAV is calculated once per day at the close of the market. When a buyer places an order to purchase shares of a mutual fund, the price he pays is the next calculated NAV. That means if he places his order before the close of the market, he will pay the NAV that was calculated that day. If he places his order after the close of the market, he will pay the next business day’s NAV.
3. Answer: A. When interest rates rise, bond prices fall, causing the NAV of a bond fund to decrease in the short-term and cause a short-term decrease in the bond fund’s yield. The rising interest rates will also allow the bond fund manager to reinvest in bonds that pay higher rates as older bonds mature, however. This will result in the bond fund paying higher yields to its investors in the longer term.
4. Answer: D. A straight growth fund will occupy the top spot in the volatility list. A growth and income fund will blend growth companies and dividend-producing companies. Equity income funds generally focus more closely on dividend-paying companies, and balanced funds will often own bonds, which are more stable than stocks.
5. Answer: B. According to the Investment Company Act of 1940, for 75% of its assets, a diversified mutual