Canadian Securities Course (CSC) Level 2 Practice Exam

How are closed-end funds distinct from open-ended mutual funds?

1. Shares are managed by a professional investment advisor.

2. They sell a fixed number of shares for capital, unlike open-end mutual funds.

3. Shares are not traded on a stock exchange like ordinary stocks.

4. Merge with open-end mutual funds for more diversity.

The correct answer is: They sell a fixed number of shares for capital, unlike open-end mutual funds.

Closed-end funds are distinct from open-ended mutual funds primarily because they issue a fixed number of shares when they are created. This characteristic means that once the initial shares are sold to investors at the fund's inception, no additional shares are created. Investors seeking to purchase shares after the initial offering can only do so by buying them from another investor on the secondary market. This creates a different trading dynamic compared to open-ended mutual funds, which continuously issue and redeem shares based on investor demand. In contrast to closed-end funds, open-ended mutual funds allow investors to buy and sell shares directly with the fund company at the fund's net asset value (NAV), resulting in a fluctuating number of shares outstanding. Open-ended mutual funds thus maintain liquidity for investors wanting to enter or exit the fund at any time based on their needs. The other options do not accurately highlight the key distinctions between closed-end and open-ended funds. While professional investment advisors manage both types of funds, this characteristic does not differentiate them. Regarding trading, closed-end funds are indeed traded on stock exchanges, just like individual stocks, which distinguishes them from mutual funds. Finally, merging with open-end mutual funds for diversity is not a typical feature or practice of closed-end funds.