Question

You are considering an investment in a mutual fund with a 4%
load and an expense ratio of 0.5%. You can invest instead in a bank
CD paying 6% interest.

**a.** 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. Round
your answer to 2 decimal places.)**

**b.** 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. Round
your answer to 2 decimal places.)**

**c.** Now suppose that instead of a front-end load
the fund assesses a 12b-1 fee of 0.75% 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. Round your answer to 2 decimal places.)**

Answer #1

Let us assume that amount of investment in mutual fund wiil be $100

Calculations

A) if investment in 2 years in mutual fund

100 *4%(-0.5%)*2=$7.96

If invested in bank CD rate wiil be 6%

$100*6%=6 *2=12

therfore invested in mutual fund gives less than ba k CD rate of return

B) if investment wiil be 6 years

100*4%(0.5%)*6=$23.88

Bank CD interest wiil be 6 *6 = 36

Again for 6 yeras also mutual fund investment yield less return than bank CD rate

C) for annually with additional fees of 0.75%

100*4%(0.5%+0.75%)*1=3.951

Bank CD interest wiil be 100*6=6

Therefore all the three cases invested in bank CD intrest gain more return than mutual fund investment.

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