Suppose an individual invests $20,000 in a load mutual fund for two years. The l

Question

Suppose an individual invests $20,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 3.0 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 1.0 percent. The annual fees are charged on the average net asset value invested in the fund and are recorded at the end of each year. Investments in the fund return 15 percent each year paid on the last day of the year. If the investor reinvests the annual returns paid on the investment, calculate the annual return on the mutual funds over the two-year investment period.

A. The individuals actual investment, after the load fee is deducted:

B. Annual operating expenses:

C. Value of investment at end of year 1:

D. The investors return on the mutual fund investment after 1 year:

E. Value of investment at end of year 2:

F. Thus the investors annual return on the mutual fund over a 2 year period:

Explanation / Answer

A. The individuals actual investment, after the load fee is deducted:

Individuals actual investment, after the load fee is deducted = Amount Invested - 3%*amount invested

Individuals actual investment, after the load fee is deducted = 20000-3%*20000

Individuals actual investment, after the load fee is deducted = $ 19400

B. Annual operating expenses:

Annual operating expenses = 19400*1% = 194

C. Value of investment at end of year 1:

Value of investment at end of year 1 = 19400 + 15%*19400 - 194

Value of investment at end of year 1 = $ 22,116

D. The investors return on the mutual fund investment after 1 year:

Investors return on the mutual fund investment = ( Value of investment at end of year 1 -  Individuals actual investment,)/ Individuals actual investment

Investors return on the mutual fund investment = (22116-20000)/20000

Investors return on the mutual fund investment = 10.58%

E. Value of investment at end of year 2:

Annual operating expenses in year 2 = 22116*1% = 221.16

Value of investment at end of year 2 = 22116 + 15%*22116 - 221.16

Value of investment at end of year 2 = $ 25,212.24

F. Thus the investors annual return on the mutual fund over a 2 year period:

Investors annual return on the mutual fund investment = ( Value of investment at end of year 2 -  Individuals actual investment,)/ Individuals actual investment

Investors annual return on the mutual fund investment = (25212.24-20000)/20000 *1/2

Investors annual return on the mutual fund investment = 13.03%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.