Loaded-Up Fund charges a 12b-1 fee of 1.0% and maintains an expense ratio of 0.7
ID: 2814185 • Letter: L
Question
Loaded-Up Fund charges a 12b-1 fee of 1.0% and maintains an expense ratio of 0.75%. Economy Fund charges a front-end load of 2% but has no 12b-1 fee and an expense ratio of 0.25%. Assume the rate of return on both funds’ portfolios (before any fees) is 6% per year. How much will an investment of $1,000 in each fund grow to after: (Round your answers to 2 decimal places. Omit the "$" sign in your response.)
Loaded-Up Fund Economy Fund
a. 1 year: Loaded-Up Fund $_____ Economy Fund $_______
b. 3 years: Loaded-Up Fund $_____ Economy Fund $_______
c. 10 years: Loaded-Up Fund $_____ Economy Fund $_______
Explanation / Answer
Loaded Up Fund:
Loaded Up Fund has 12-b1 fees along with an expense ratio of 0.75 %. 12-b1 which is actually a marketing and distribution charge at the end of the year is considered to be a part of the fund's operating expenses. Hence, actual expense ratio = 12-b1 fee + quoted expense ratio = 1 + 0.75 = 1.75 %
(a) Investment Amount = $ 1000, Tenure = 1 year and Rate of Return = 6 %
Final Investment Value = 1000 x 1.06 = $ 1060
LESS: Total Operating Expenses = Actual Expense Ratio x Final Investment Value = (1060 x 0.0175) = $ 18.55
Net Investment Value = 1060 - 18.55 = $ 1041.45
(b) Investment Amount = $ 1000, Tenure = 3 year and Rate of Return = 6 %
Final Investment Value = 1000 x (1.06)^(3) = $ 1262.48
LESS: Total Operating Expenses = Actual Expense Ratio x Final Investment Value = (1262.48 x 0.0175) = $ 22.093
Net Investment Value = 1262.48 - 22.093 = $ 1240.38 approximately.
(c)
Investment Amount = $ 1000, Tenure = 10 year and Rate of Return = 6 %
Final Investment Value = 1000 x (1.06)^(10) = $ 1790.85
LESS: Total Operating Expenses = Actual Expense Ratio x Final Investment Value = (1790.85 x 0.0175) = $ 31.34
Net Investment Value = 1790.85 - 31.34 = $ 1759.51
Economy Fund:
The economy fund has a front-end load which essentially implies an upfront sales charge levied upon the initial investment amount, which lowers the initial investment amount. The operating expense is calculated on the final investment value.
(a) Initial Investment = $ 1000 and Investment Tenure = 1 year
LESS: Front End Load = 0.02 x 1000 = $ 20
Net Initial Investment = $ 980
Final Investment Value = 980 x 1.06 = $ 1038.8
LESS: Operating Expenses = 0.0025 x 1038.8 = $ 2.597
Net Final Investment Value = $ 1036.203
(b)
Initial Investment = $ 1000 and Investment Tenure = 3 year
LESS: Front End Load = 0.02 x 1000 = $ 20
Net Initial Investment = $ 980
Final Investment Value = 980 x (1.06)^(3) = $ 1167.196
LESS: Operating Expenses = 0.0025 x 11167.196 = $ 2.918
Net Final Investment Value = $ 1164.278
(c)
Initial Investment = $ 1000 and Investment Tenure = 10 year
LESS: Front End Load = 0.02 x 1000 = $ 20
Net Initial Investment = $ 980
Final Investment Value = 980 x (1.06)^(10) = $ 1755.031
LESS: Operating Expenses = 0.0025 x 1755.031 = $ 4.388
Net Final Investment Value = $ 1750.643
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.