4. Use of Funds Like mutual funds, commercial banks and stock-owned savings inst
ID: 2738629 • Letter: 4
Question
4. Use of Funds 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.
5. Risk of Treasury Bond Funds Support or refute the following statement: Investors can avoid all types of risk by purchasing a mutual fund that contains only Treasury bonds.
6. Fund Selection Describe the ideal mutual fund for investors who wish to generate tax-free income and also maintain a low degree of interest rate risk.
7. Exposure to Exchange Rate Movements Explain how changing foreign currency values can affect the performance of international mutual funds.
8. Reform of Hedge Funds Explain how the Financial Reform Act of 2010 applies to hedge funds.
9. Tax Effects on Mutual Funds 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.
10. Performance 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.
11. Money Market Funds How do money market funds differ from other types of mutual funds in terms of how they use the money invested by shareholders? Which security 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?
12. Risk of Money Market Funds Explain the relative risk of the various types of securities in which a money market fund may invest.
13. Interest Rate Risk of Funds Is the value of a money market fund or a bond fund more susceptible to rising interest rates? Explain.
14. Diversification among Mutual Funds Explain why diversification across different types of mutual funds is highly recommended.
15. Impact of Credit Crisis on Hedge Funds Explain why some hedge funds failed as a result of the credit crisis.
16. REITs Explain the difference between equity REITs and mortgage REITs. Which type would likely be a better hedge against high inflation? Why?
Explanation / Answer
Answer 4
Use of Funds 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.
Answer: Mutual funds are the entities, which are incorporated to pull money from investors with identical objectives & invest such money as per predefined scheme of mutual fund. Commercial banks, financial institutions & stock-owned institutes do not collect money with an objective of investment as per predefined scheme, they can use collected money as per their decisions. Commercial banks, financial institutions & stock-owned institutes sell shares to build capital for landing activity where as fund collected by mutual funds are invested in an asset on behalf of investors by mutual funds.
5. Risk of Treasury Bond Funds Support or refute the following statement: Investors can avoid all types of risk by purchasing a mutual fund that contains only Treasury bonds.
Answer
The given statement is false, if investor invest in mutual fund that contains only Treasury bonds than also certain degree of interest rate risk remains i.e. if current interest rate of other corporate bonds increases, interest rate of treasury bonds will not increase simultaneously.
6. Fund Selection Describe the ideal mutual fund for investors who wish to generate tax-free income and also maintain a low degree of interest rate risk.
Answer
Ideal mutual funds for investors have following characteristics,
• Mutual fund should provide at least average market return
• Mutual fund return should exceed inflation rate
• Mutual fund return should provide tax free income
• Mutual fund return should mitigate interest rate risk
So, investor should select mutual fund after considering above characteristics.
7. Exposure to Exchange Rate Movements Explain how changing foreign currency values can affect the performance of international mutual funds.
Answer
International mutual funds invests their money in foreign country in the currency of that particular country. When Mutual funds invests money in foreign country or withdraws their money from that country they have to convert money from home currency to foreign currency and vice-versa. Return of mutual fund changes with appreciation or depreciation of foreign currency, so this is due to which performance of international mutual funds is affected due to foreign currency fluctuations.
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