Long Term Investing Part Two Mutual Funds

Key Vocabulary mutual fund Definition A mutual fund is a fund that pools money from multiple investors and invests it into a variety of stocks, bonds, and other securities. Example Investment Company of America

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Why do some people consider mutual funds a more convenient investment than stocks or bonds?

A mutual fund has a group of people in charge of making big decisions on the stocks, bonds, and securities in the fund. This group of people have college degrees and extensive experience in stocks, bonds, and other securities. A person investing in a mutual fund doesn’t need to monitor their fund, because they have the board of consultants to make those big decisions.

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Closure Why Mutual Funds: experience, education, decision, monitor, consult important concepts for mutual funds

Example Problem 1 A mutual fund has net assets of $294,000 and 16,800 shares, then each share has a net asset value of $17.50. Please select the best answer from the choices provided T F

Problem 2 Which of the following expressions is equal to the total investment of a no-load mutual fund? a. net assets ÷ number of shares b. net asset value ÷ number of shares c. net asset value x number of shares d. offer price x number of shares Please select the best answer from the choices provided C

Problem 3 NAV, Offer Price Upton Group $18.47 $18.96 Green Energy $17.29 $18.01 TJH Small-Cap $18.43 $19.05 WHI Health $20.96 NL Phillip buys 50 shares of Green Energy and 120 shares of TJH Small-Cap. What is Phillipe’s total investment? a. $3,076.10 b. $3,112.10 c. $3,150.50 d. $3,186.50 D

Problem 4 Nyromi redeemed 250 shares of stock she owned in the fund shown below. Name of Fund NAV Offer Price Upton Group $18.47 $18.96 What were Nyromi’s proceeds? a. $4,617.50 b. $4,685.00 c. $4,470.50 d. $4,740.00 A

Problem 5 Salazar made an investment in 140 shares of stock in a no-load fund for $2,993.20. After one year the stock had a net asset value of $24.53 per share. If Salazar redeems all 140 shares, which of the following is a correct statement? a. Salazar will have a loss of $441. b. Salazar will have a profit of $441. c. Salazar will have a profit of $3,434.20. d. There is not enough information to calculate profit or loss. B

Problem 6 Nezzie invests in 300 shares of stock in the fund shown below. Name of Fund NAV Offer Price LKIT Mid-Cap $16.58 $16.99 Nezzie plans to sell all of her shares when she can profit $5,000. What must the net asset value be in order for Nezzie to sell? a. $16.67 b. $33.25 c. $33.57 $33.66 D

Problem 7 An investor buys 400 shares of stock in a fund when the net asset value is $23.79 and the offer price is $23.89. The investor sells these shares when the net asset value is $50.34 and the offer price is $50.46. Determine the amount of profit the investor earns. a. $10,580 b. $10,620 c. $10,628 d. $20,136 A

Why? When purchasing load mutual funds, you are charged a fee, or commission, which is added to the fund’s net asset value. The total of the net asset value and the commission, called the offer price, is the price you actually pay for each share of the fund.

Why? You are a financial advisor with a client who purchased 100 shares of stock in a fund with a net asset value of $21.30 and an offer price of $21.45. Your client wants to make $20 per share on the stock when it is sold. The client calls you to find out why you have not sold the shares today, because they saw the stock listed with a net asset value of $41.30 and an offer price of $41.45. Explain to your client why you have not sold the shares You paid the offer price of $21.45 per share for your stock, and you can sell it for its net asset value of $41.30 per share. That is a profit of only $19.85 per share, which is not the $20 per share you want to get