Fin Investment Class help

BKM_Ess_10e_Ch04_Student.xlsx

4-18

	Loaded-Up Fund charges a 12b-1 fee of 1% and maintains an expense ratio of .75%. Economy Fund charges a front-end load of 2%, but has no 12b-1 fee and an expense ratio of .25%. Assume the rate of return on both funds’ portfolios (before any fees) is 6% per year. How much will an investment in each fund grow to after: a. 1 year? b. 3 years? c. 10 years?
	Loaded up fund
	12b-1 fee
	Expense ratio
	Front end load
	Economy fund
	12b-1 fee
	Expense ratio
	Front end load
	Rate of return
	$$ Invested		$ 100.00
Solution
	a. 1 year value
		Loaded up fund		$ 100.00
		Economy fund		$ 100.00
	b. 3 year value
		Loaded up fund		$ 100.00
		Economy fund		$ 100.00
	c. 10 year value
		Loaded up fund		$ 100.00
		Economy fund		$ 100.00

	Consider a mutual fund with $200 million in assets at the start of the year and with 10 million shares outstanding. The fund invests in a portfolio of stocks that provides dividend income at the end of the year of $2 million. The stocks included in the fund’s portfolio increase in price by 8%, but no securities are sold, and there are no capital gains distributions. The fund charges 12b-1 fees of 1%, which are deducted from portfolio assets at year-end. What is net asset value at the start and end of the year? What is the rate of return for an investor in the fund?
	Start assets		million
	Start shares		million
	Dividend		million
	Price increase
	12b-1 fees
Solution
	Start NAV	ERROR:#DIV/0!
	End NAV	ERROR:#DIV/0!
	Rate of return	ERROR:#DIV/0!

	The Investments Fund sells Class A shares with a front-end load of 6% and Class B shares with 12b-1 fees of .5% annually as well as back-end load fees that start at 5% and fall by 1% for each full year the investor holds the portfolio (until the fifth year). Assume the portfolio rate of return net of operating expenses is 10% annually. If you plan to sell the fund after four years, are Class A or Class B shares the better choice for you? What if you plan to sell after 15 years?
	Class A front end load
	Class B 12b-1 fees
	Class B back end load
		Yr 0
		Yr 1
		Yr 2
		Yr 3
		Yr 4
		Yr 5
	Rate of return
	$$ Invested		$ 1,000.00
Solution
	Proceeds from sale in year 4
		Class A shares	$ 1,000.00
		Class B shares	$ 1,000.00
	Proceeds from sale in year 15
		Class A shares	$ 1,000.00
		Class B shares	$ 1,000.00

	You expect a tax-free municipal bond portfolio to provide a rate of return of 4%. Management fees of the fund are .6%. What fraction of portfolio income is given up to fees? If the management fees for an equity fund also are .6%, but you expect a portfolio return of 12%, what fraction of portfolio income is given up to fees? Why might management fees be a bigger factor in your investment decision for bond funds than for stock funds? Can your conclusion help explain why unmanaged unit investment trusts tend to focus on the fixed-income market?
	Tax free municipal bond fund
		Expected rate of return
		Management fees
	Equity fund
		Expected rate of return
		Management fees
Solution
	Tax free fund fees		ERROR:#DIV/0!
	Equity fund fees		ERROR:#DIV/0!