Suppose an individual invests $10,000 in a load mutual fund for
two years. The load fee entails an up-front commission charge of 3
percent of the amount invested and is deducted from the original
funds invested. In addition, annual fund operating expenses (or
12b-1 fees) are 0.80 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 fund over the two-year investment period.
(Do not round intermediate calculations. Round your answer
to 3 decimal places. (e.g., 32.161))
Annual return=?
Amount invested after front end loan = (1 - 0.03)(10,000)
Amount invested after front end loan =$9,700
Value after 1 year = (1.08)(9,700) = $10,476
12b-1 fee in year 1 = 0.008(9700 + 10476)/2
12b-1 fee in year 1 = 80.70
Value after fee in year 1 = 10,476 - 80.70 = $10,395.30
Value at the end of year 2 = 1.08(10,395.30) = $11,226.92
12b-1 fee in year 2 = 0.008(10,395.30 + 11,226.92)/2 = $86.49
Value after fee in year 2 = $11,140.43
HPR = (11,140.43 - 10,000)/10,000
HPR = 11.40%
Annual Rate = (1.1140)1/2 - 1
Annual Rate = 5.546%
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