Tuesday, May 17, 2011

Open and Closed-End Funds

Wow. Didn't mean to neglect the Pass the 7 blog, but I haven't posted since flippin' February. Not accpetable. Let's start making up for it right now with a fun practice question . . .

Open- and closed-end funds share none of the following characteristics except that:
A. open-end funds must be "diversified" according to the 75/5/10 rule
B. closed-end funds must be "diversified" according to GAAP accounting rules
C. closed-end funds are non-redeemable investment company securities
D. open-end funds may issue preferred shares

EXPLANATION: once again, a mildly confusing topic can become massively confusing if the question is written a certain way. Oh well. Take a deep breath, look at the question from a different angle, and proceed to kick its butt. Do open-end funds have to be diversified? Heck no--it's just that if they want to call themselves "diversified," they have to follow the SEC rule. Closed-end funds don't have to be diversified, either, and even if they did "GAAP Accounting" is nonsense . . . so you can now eliminate the first two answer choices. Boom. See anything wrong with Choice C? Me neither, but let's not make our move too soon. What about D? Isn't it the CLOSED-end fund that might issue preferred shares to use leverage? Yes. D is false. The answer must be . . .


No comments:

Post a Comment