You are considering an investment in a mutual fund with a 3% front-end load and

Question

You are considering an investment in a mutual fund with a 3% front-end load and an expense ratio of 1.2%. You can invest instead in a bank CD paying 5% interest.

If you plan to invest for two years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns. (Do not round intermediate calculations. Enter your answer as a percentage rounded to two decimal places.)

If you plan to invest for six years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns. (Do not round intermediate calculations. Enter your answer as a percentage rounded to two decimal places.)

Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of 1.45% per year. What annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? (Do not round intermediate calculations. Enter your answer as a percentage rounded to two decimal places.)

You are considering an investment in a mutual fund with a 3% front-end load and an expense ratio of 1.2%. You can invest instead in a bank CD paying 5% interest.

Explanation / Answer

Q.1

Year 1 Front end load 3% Investment in mutual fund 97 Bank interest@5% 4.85 Total 101.85 Less:Expenses Ratio @1.2% 1.2222 Valu of Mutual Fund after 1 year 100.6278 Year 2 Fund Value 100.6278 Add:Interest earnings @5% 5.03139 Total 105.65919 Less: Expenses @1.2% 1.2679103 Net Value after 2 year 104.39128 Net Gain after 2 years 4.39128 Annual return (4.39128/2) 2.19564 Answer: 2.20%

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