Chapter Five Financial Services Mutual Funds

Chapter Five

The Financial Services Industry: Mutual Funds

Chapter Outline

Introduction

Size, Structure, and Composition of the Industry

• Historical Trends

• Different Types of Mutual Funds

• Mutual Fund Objectives

• Investor Returns from Mutual Fund Ownership

• Mutual Fund Costs

Balance Sheet and Recent Trends

• Money Market Funds

• Long-Term Funds

Regulation

Global Issues

Summary

Appendix 5A – Hedge Funds

Solutions for End-of-Chapter Questions and Problems: Chapter Five

1. What is a mutual fund? In what sense is it a financial intermediary?

A mutual fund represents a pool of financial resources obtained from individuals and companies, which is invested in the money and capital markets. This process represents another method for economic savers to channel funds to companies and government units that need extra funds.

2. What are money market mutual funds? In what assets do these funds typically invest? What factors have caused the strong growth in this type of fund since the late 1970s?

Money market mutual funds (MMMFs) invest in assets that have maturities of less than one year. These assets primarily are Treasury bills, negotiable certificates of deposit, repurchase agreements, and commercial paper. The growth in MMMFs since the late 1970s initially occurred because of rising interest rates in the money markets, while Reg Q restricted interest rates on accounts in depository institutions. Many investors moved their short-term savings from the depository institutions to the MMMFs as the spread in the earnings rate reached double digits. A result of this activity was to introduce many investors to the capital markets for the first time.

3. What are long-term mutual funds? In what assets do these funds usually invest? What factors caused the strong growth in this type of fund during the 1990s?

Long-term mutual funds primarily invest in assets that have maturities of more than one year. The most...