Question

Suppose an individual invests $28,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 3.2 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 0.63 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 8 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. (Do not round intermediate calculations. Round your answer to 2 decimal places.(e.g., 32.16))

Answer 1

initial Investment = $28000

less: Front End Load 3.2% = 896

Total Investable Fund = $27104

Invetment value after year one =$27104 * 1.08 = $29272.32

Operating Expenses based on Average NAV= 27552 x 0.0063 = $173.58

value of investment =$29098.74

Investment value after year two = 29098.74 x 1.08 = $31426.64

Operating Expenses based on Average NAV= 30262.69 x 0.0063 = $190.66

investment value = $31235.98

Average Annual Compounded Return =

$31235.98 = $28000(1+g)^2

so g = 5.62%