Open-end Company

Class A mutual fund shares are generally best suited for:

1. A.Investors who want no feesClass A shares do carry the lowest ongoing 12b-1 expenses of the common share classes, so the instinct that they are cheap has something behind it. They are not free: the investor pays a front-end load at purchase, and a client who genuinely wants to pay nothing to buy belongs in a no-load fund.
2. B.Very short-term tradingPaying a front-end load and then exiting quickly is the worst possible use of Class A shares, because the entire charge is absorbed over a very short holding period. The load is justified only when it is spread across many years of lower annual expenses.
3. C.Day tradingMutual fund shares price once a day at the next computed NAV, so intraday trading is not even mechanically possible. Frequent in-and-out activity in a loaded fund also invites scrutiny as an abusive practice rather than a suitable strategy.
4. D.Large, long-term investments that qualify for breakpointsCorrect - front-load A shares reward size and time.

Why: Class A shares carry a front-end load but lower ongoing expenses, making them cost-effective for large, long-term investments that reach breakpoints.

An investor buys shares of a closed-end fund on an exchange from another investor. How much of the purchase price reaches the fund itself?

1. A.The full purchase price, because the fund issued those shares in the first place.Wrong. The fund was paid when the shares were first issued, and that transaction closed long ago.
2. B.None of it, because the money passes from one investor to another.Correct. Exchange purchases of closed-end shares are secondary market trades between two investors.
3. C.The purchase price less the broker's commission, which the fund retains.Wrong. The commission belongs to the executing firm, and none of the price reaches the fund in any case.
4. D.An amount equal to the fund's net asset value per share purchased.Wrong. Net asset value measures what the portfolio is worth; it is not a payment made to the fund.

Why: A closed-end fund raises capital once, in an offering of a fixed number of shares, and the money it received then is the money it invests. After that its shares trade among investors on an exchange, exactly like the shares of an operating company. Those trades are secondary market transactions, so the fund's asset base is untouched by them and its share price is set by supply and demand rather than by net asset value. Contrast an open-end fund, where every purchase sends new money to the fund itself.

Reinvested mutual fund distributions purchase additional shares at:

1. A.Net asset value, with no sales chargeCorrect - reinvestment is at NAV.
2. B.A premium to NAVTrading at a premium or discount to NAV is closed-end fund behavior, driven by supply and demand for a fixed pool of shares. Reinvested distributions in an open-end fund buy shares at NAV, with nothing added.
3. C.A fixed 8.5% markupThis has the relationship exactly backwards. Offering reinvestment at NAV is one of the conditions a fund must satisfy before it may charge the maximum load on new purchases, so the privilege exists precisely to spare reinvested distributions from any markup.
4. D.The public offering price plus loadThis double-counts, since the public offering price already includes the sales charge. Reinvestment does not use the offering price at all: additional shares are purchased at NAV with no load.

Why: Reinvested dividends and capital gains buy additional shares at NAV, with no sales charge.

A mutual fund prospectus must disclose:

1. A.Only the manager's salaryAdviser compensation does appear in fund disclosure documents, so this is not invented out of nothing. It is one line among many: the prospectus must set out the investment objective, principal risks, the full fee table, and past performance.
2. B.Nothing specificThe prospectus is the disclosure document a registered offering is built around, and its required contents are prescribed rather than left to the issuer. Objective, principal risks, fees, and performance history all must appear.
3. C.Each shareholder's nameA prospectus is written for prospective purchasers who do not yet own anything, so listing current holders would serve no purpose. Shareholder identities are confidential account information, not disclosure items.
4. D.The objective, risks, fees, and performanceCorrect - core prospectus disclosures.

Why: The prospectus must disclose the fund's objective, principal risks, fees, and past performance.