Comprehensive Guide to Investment, Pension Funds, and Fintech Innovations

What is the primary function of investment companies?

They pool financial resources from individuals and companies to invest in diversified portfolios of assets.

How do open-end mutual funds operate regarding share issuance and redemption?

They sell new shares to investors and redeem outstanding shares on demand at their fair market value.

What are the two main sectors of mutual funds?

Short-term funds (money market mutual funds) and long-term funds (equity, bond, and hybrid funds).

Who is the primary regulator of mutual funds?

The Securities and Exchange Commission (SEC).

How do hedge funds differ from mutual funds regarding regulation?

Hedge funds are not subject to the same strict regulations as mutual funds and do not have to disclose their activities to third parties.

What are some aggressive investment strategies used by hedge funds that are typically unavailable to mutual funds?

Short selling, leveraging, program trading, arbitrage, and derivatives trading.

What are the three risk categories of hedge funds mentioned in the study guide?

Market directional (high risk), market neutral/value orientation (moderate risk), and market neutral (risk avoidance).

What is the primary tax benefit of pension funds?

Savings are tax-deferred; contributions are exempt from current taxation and are only taxed upon withdrawal in retirement.

What is the difference between private and public pension funds?

Private pension funds are administered by private corporations, while public pension funds are administered by federal, state, or local governments.

How does a defined benefit pension plan work?

The employer agrees to provide a specific cash benefit upon retirement based on a formula considering factors like years of service and salary.

What is the primary characteristic of a defined contribution pension plan?

The employer agrees to make a specified contribution to the fund, but does not guarantee a specific retirement income amount.

What is the main risk difference for employees between defined benefit and defined contribution plans?

In defined contribution plans, employees accept the risk of uncertain payouts and market performance.

What is the difference between 401(k) and 403(b) plans?

401(k) plans are offered by taxable firms, while 403(b) plans are offered by certain tax-exempt employers.

What is the purpose of an IRA?

It is a self-directed retirement account for employees or self-employed individuals to save for retirement with tax advantages.

What is a Keogh account?

A tax-deferred retirement account specifically available to self-employed individuals.

What is the major piece of legislation governing private pension funds?

The Employee Retirement Income Security Act (ERISA) of 1974.

What five areas does ERISA regulate regarding pension funds?

Pension plan funding, vesting of benefits, fiduciary responsibility, transferability, and pension fund insurance.

How does the Financial Stability Board define fintech?

Technology-enabled innovation in financial services that could result in new business models, applications, processes, or products.

What were the two primary supply-side factors driving fintech growth?

The 2008 financial crisis (causing banks to pull back) and the low interest rate environment (pressuring profits).

What were the two primary demand-side factors driving fintech growth?

Increasing prevalence of mobile technology/smartphones and changing demographics (Millennials becoming the largest labor force generation).

What is a mobile wallet?

An app on a mobile device that stores payment information from a credit or debit card (e.g., Apple Pay, Google Pay).

What is the function of P2P payment services?

They allow customers to use bank accounts or cards to pay friends and family directly from mobile phones (e.g., Venmo, PayPal).

How is a cryptocurrency defined?

A digital currency that uses encryption techniques to regulate unit generation and verify fund transfers, operating independently of a central bank.

What is a Central Bank Digital Currency (CBDC)?

A digital form of central bank money that serves as a liability of the Federal Reserve rather than a commercial bank.

What regulatory changes have helped facilitate the growth of fintech?

Regulators have lowered barriers through the introduction of virtual bank licenses, fintech charters, and e-money licenses.