Question & Answer

Compare the management of a closed-end fund with that of an open-end fund. Given the differences in the funds’ characteristics, explain why the management of liquidity is different in the open-end fund as compared with the closed-end fund. Assume that the funds are the same size and have the same goal to invest in stocks and to earn a very high return. Which portfolio manager do you think will achieve a larger increase in the fund’s net asset value? Explain. (LO1, LO5)

Explain the difference between equity REITs and mortgage REITs. Which type would likely be a better hedge against high inflation? Why? (LO5)

Explain why some hedge funds failed as a result of the credit crisis of 2008–2009. (LO4) 

Explain why diversification across different types of mutual funds is highly recommended. (LO2)

Is the value of a money market fund or a bond fund more susceptible to rising interest rates? Explain. (LO3)

Explain the relative risk of the various types of securities in which a money market fund may invest. (LO3)

How do money market funds differ from other types of mutual funds in terms of how they use the money invested by shareholders? Which securities do MMFs invest in most often? How can an MMF accommodate shareholders who wish to sell their shares when the amount of proceeds received from selling new shares is less than the amount needed to cover the withdrawals? (LO3)

According to research, have mutual funds outperformed the market? Explain. Would mutual funds be attractive to some investors even if they are not expected to outperform the market? Explain. (LO6)

Explain how the income generated by a mutual fund is taxed when the fund distributes at least 90 percent of its taxable income to shareholders. (LO1)

Explain how the Financial Reform Act of 2010 applies to hedge funds. (LO4)

Explain how changes in foreign currency values can affect the performance of international mutual funds. (LO2)

Describe the ideal mutual fund for investors who wish to generate tax-free income but also maintain a low degree of interest rate risk. (LO2)

Support or refute the following statement: Investors can avoid all types of risk by purchasing a mutual fund that contains only Treasury bonds. (LO2)

Like mutual funds, commercial banks and stock-owned savings institutions sell shares, but the proceeds received by mutual funds are used in a different way. Explain. (LO1)

 Explain the difference between load and no-load mutual funds. (LO1)

How do open-end mutual funds differ from closed-end funds? (LO1, LO5)

Explain why mutual funds are attractive to small investors. How can mutual funds generate returns to their shareholders? (LO1)

Write a short essay on the future of finance company operations. Should finance companies be merged into the banking industry, or should they remain distinctly different from commercial banks? 

Explain how the credit risk of finance companies differs from that of other lending financial institutions. (LO5) 

Explain how the interest rate risk of finance companies differs from that of savings institutions. (LO5)

Explain how the liquidity position of finance companies differs from that of depository institutions such as commercial banks. (LO5)

Describe the kinds of regulations that are imposed on finance companies. (LO1)

Explain how finance companies provide financing through leasing. (LO2)

Explain how finance companies benefit from offering consumers a credit card. (LO2)

Describe the major uses of funds by finance companies. (LO2)