Chapter 23
1. Mutual funds are attractive to small investors because they are able to diversify their portfolio for a minimum investment of $250 to $2,500 (p. 609). The investors must rely on the fund’s portfolio manager to make the investment decisions though. Mutual funds generate returns in three ways: through dividend payments to shareholders, distribute capital gains resulting from the sale of securities within the fund, and through mutual fund share price appreciation (p. 611).
2. Open-end mutual funds differ in the fact that they are open to investors which means they will sell shares to investors at any time (p. 609). They also allow investors to sell the shares back to the fund at any time which closed-end cannot (p. 609).
3. Load funds are promoted by registered representatives of brokerage firm, who earn a sales charge upon the investments in the fund between 3 and 8.5 percent (p. 615). No-load funds are promoted strictly by the mutual fund of concern, thereby avoiding an intermediary (p.615).
6. The ideal mutual fund for investors who wish to generate tax-free income and a low degree of risk would be a short-term municipal bond fund (p.620).
9. If the mutual fund distributes at least 90 percent of its income to its shareholders, the fund itself is exempt from federal taxation (p.625).
11. Money market funds differ from other types of mutual funds based on the composition, maturity, and risk of their assets (p. 625). The most common money market funds are commercial paper (which is the most invested in), CD’s, repurchase agreements, and treasury securities. Mutual funds are mainly issued stocks and corporate bonds (p.609). When the sales of shares is less than the amount needed the company can sell some of the assets contained in the MMF portfolios to cover the redemptions (p. 625).
18. Knowing myself I would probably invest in a tax-free fund