SIE Investment Companies and Packaged Products 1 — Questions and Answers
Question 1: What is the key difference between open-end and closed-end mutual funds?
- Open-end funds invest only in stocks; closed-end invest in bonds
- Open-end funds continuously issue new shares; closed-end have a fixed number of shares (Correct answer)
- Closed-end funds are only sold to institutions
- Open-end funds trade on stock exchanges; closed-end do not
Correct answer: Open-end funds continuously issue new shares; closed-end have a fixed number of shares
Open-end funds (traditional mutual funds) create and redeem shares continuously, while closed-end funds issue a fixed number of shares traded on exchanges.
Question 2: At what price are open-end mutual fund shares bought and sold?
- At the current market trading price
- At the next calculated Net Asset Value (NAV) (Correct answer)
- At a price set by the broker
- At a fixed price set at fund launch
Correct answer: At the next calculated Net Asset Value (NAV)
Open-end mutual funds transact at the NAV calculated after the trading day ends (forward pricing rule).
Question 3: What is a 12b-1 fee?
- A redemption fee charged when selling fund shares
- An annual fee charged by mutual funds to cover marketing and distribution costs (Correct answer)
- A transaction fee for buying ETF shares
- A penalty for early withdrawal from an annuity
Correct answer: An annual fee charged by mutual funds to cover marketing and distribution costs
A 12b-1 fee is an annual fund expense used for marketing and distribution, included in the fund's expense ratio.
Question 4: Which type of mutual fund share class typically has a front-end sales load?
- Class B shares
- Class C shares
- Class A shares (Correct answer)
- Class I shares
Correct answer: Class A shares
Class A shares typically charge a front-end sales load, deducted from the initial investment at the time of purchase.
Question 5: An Exchange-Traded Fund (ETF) differs from a mutual fund primarily because:
- ETFs actively manage their portfolios
- ETFs trade on exchanges throughout the day like stocks (Correct answer)
- ETFs are only available to institutional investors
- ETFs cannot hold stocks
Correct answer: ETFs trade on exchanges throughout the day like stocks
ETFs trade on exchanges continuously throughout the trading day at market prices, unlike mutual funds priced once at end of day.
Question 6: Net Asset Value (NAV) per share is calculated as:
- Total liabilities divided by shares outstanding
- (Total assets minus total liabilities) divided by shares outstanding (Correct answer)
- Total assets divided by total shares outstanding
- Market price minus book value per share
Correct answer: (Total assets minus total liabilities) divided by shares outstanding
NAV per share equals the fund's total assets minus its liabilities, divided by the number of outstanding shares.
SIE Investment Companies and Packaged Products 1
What is the key difference between open-end and closed-end mutual funds?