Chapter 5 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 (net asset value), 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: C. 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, he pays the next calculated NAV. That means if he places his order before the close of the market, he will pay the NAV that is 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: B. While mutual funds continually offer new shares for sale, closed-end funds offer shares only once, at their IPO. After that, purchases are made on the secondary market at a discount or premium to the NAV.
4. Answer: C. Rights of accumulation allow an investor to combine purchases and NAV growth over an extended period of time for the sake of calculating breakpoints.
5. Answer: A. Public offering price is a factor with only those shares sold with a front-end sales charge—A shares. B and C shares are sold at NAV.
6. Answer: D. Investors seeking ease of diversification are likely to purchase shares in a mutual fund. However, mutual funds, regardless of the underlying investments, do not carry a guarantee of principal and are subject to taxes. Also, since a mutual fund is actively managed by a portfolio manager,