CFS CFS Mutual Funds & ETFs 1 — Questions and Answers
Question 1: What is the primary difference between an open-end mutual fund and a closed-end fund?
- Open-end funds issue new shares on demand; closed-end funds have a fixed share count traded on exchanges (Correct answer)
- Closed-end funds are only available to institutional investors
- Open-end funds can only hold equities; closed-end funds hold bonds
- Closed-end funds are priced continuously; open-end funds trade at a premium
Correct answer: Open-end funds issue new shares on demand; closed-end funds have a fixed share count traded on exchanges
Open-end funds continuously issue and redeem shares at NAV, while closed-end funds issue a fixed number of shares that trade on stock exchanges at market prices.
Question 2: The Net Asset Value (NAV) of a mutual fund is calculated as:
- (Total assets minus total liabilities) divided by total shares outstanding (Correct answer)
- Total assets divided by total liabilities
- Market price of the fund divided by earnings per share
- Total assets minus management fees
Correct answer: (Total assets minus total liabilities) divided by total shares outstanding
NAV equals the fund's total assets minus its liabilities, divided by the number of outstanding shares, calculated at the close of each trading day.
Question 3: Which share class of a mutual fund typically charges a front-end sales load at the time of purchase?
- Class A shares (Correct answer)
- Class B shares
- Class C shares
- Class I shares
Correct answer: Class A shares
Class A shares charge an upfront sales load (typically 3–5.75%) deducted from the initial investment, but usually have lower ongoing expenses.
Question 4: What is a 12b-1 fee in a mutual fund?
- An annual fee charged to fund assets for marketing and distribution expenses (Correct answer)
- A fee charged when purchasing fund shares
- A redemption fee charged upon selling fund shares
- An annual management fee paid to the fund's investment advisor
Correct answer: An annual fee charged to fund assets for marketing and distribution expenses
The 12b-1 fee, named after the SEC rule that permits it, is an annual charge (up to 1%) deducted from fund assets to cover distribution and marketing costs.
Question 5: An ETF differs from a traditional mutual fund primarily in that ETFs:
- Trade on stock exchanges throughout the day at market prices (Correct answer)
- Are priced only once per day at NAV
- Cannot be used in tax-deferred retirement accounts
- Charge higher expense ratios on average
Correct answer: Trade on stock exchanges throughout the day at market prices
ETFs trade on exchanges throughout the trading day like stocks, with prices fluctuating based on supply and demand, unlike mutual funds priced once at day's end.
Question 6: Which type of mutual fund seeks to replicate the performance of a specific market index?
- Index fund (Correct answer)
- Actively managed fund
- Hedge fund
- Closed-end fund
Correct answer: Index fund
Index funds passively track a benchmark index like the S&P 500 by holding the same securities in the same proportions as the index.
CFS CFS Mutual Funds & ETFs 1
What is the primary difference between an open-end mutual fund and a closed-end fund?