a
To compute: The annual rate of return when the plan of investment is for 2 years.
Introduction:
Rate of return on Investment: Normally, when an investor invests his funds, his intention will be to earn profits. A rate of return on investment can be described as the net gain or loss incurred on investing the funds.
a
Explanation of Solution
Given Information:
Expense ratio = 0.5%
Mutual Fund = 4% load
Bank CD interest = 6%
There is another option for investing i.e., investment in Bank CD (Certificate of Deposit). So, better option for investment is has to be analyze- whether investing in mutual funds is better or in Bank CD. In case option mutual funds is chosen, then it should be ensured that it provides rate of return more than any bank CD. Normally a mutual fund requires front-end load and this adversely reduces the net value investment amount. Further the investor has to shell down the expense ratio also on this investment. So, to balance the rate of return of bank CD and the mutual fund, the following calculation will be helpfully.
where r= rate of return
t=number of period
Now depict the values in the equation and proceed with the calculation:
We can rewrite the equation as :
So,
Converting the above value into percentages
= 8.69%
Therefore, the mutual fund portfolio will be better than Bank CD if it earns more than 8.69% per annum.
The mutual fund portfolio will be better than Bank CD if it earns more than 8.69% per annum.
b
To compute: The annual rate of return when the plan of investment is for 6 years.
Introduction:
Investment: When an individual deposit or does an act of investing his money for profit, it is called investment. Investments can be for short term and long term.
b
Explanation of Solution
Given Information:
Expense ratio = 0.5%
Mutual Fund = 4% load
Bank CD interest = 6%
To calculate the rate of return to balance the return earned on investment in mutual fund with than of Bank CD when the investment is made for 6 years. The formula to be used for this computation is as follows:
Where ‘r’ = rate of return
‘t’ = number of period
Now let us depict the values in the equation and proceed with the calculation:
The equation can be written as :
So,
Or 7.22%.
Therefore, the mutual fund portfolio will be better than Bank CD if it earns more than 7.22% per annum.
Incase, the investor decides to hold the investment in mutual fund for 6 years, then the mutual fund portfolio will be better than Bank CD if it earns more than 7.22% per annum.
c
To compute: The annual rate of return of the Mutual Fund portfolio in case there is no front-end load and 12b-1 fee of 0.75% per year is utilized.
Introduction:
Mutual Funds: It is a type of investment which can be done even by individual investors and can be managed at a low price. It consists of portfolio of stocks, bonds and other types of securities.
c
Explanation of Solution
Given Information:
Expense ratio = 0.5%
12b-1 fee= 0.75%
Bank CD interest = 6%
Like in previous cases, here we are not considering (1-Front-end load) calculation as there is no front-end load and instead we will use 12b-1 fee. So the formula will be as follows:
where r= rate of return
t=number of period
Now let us depict the values in the equation and proceed with the calculation when the investment is made for 2 years.
We can rewrite the equation as :
So,
When we convert the above value into percentages we get 7.25%
Therefore, the mutual fund portfolio will be better than Bank CD if it earns more than 7.25% per annum.
The same calculation has to be done when the investment is made for 6 years.
where r= rate of return
t=number of period
Now substitute the values in the formula
We can rewrite the equation as :
So,
When we convert the above value into percentages we get 7.25%
Therefore, the mutual fund portfolio will be better than Bank CD if it earns more than 7.25% per annum.
Given the situation where investment is made for 2 years and 6 years, the mutual fund portfolio will be better than Bank CD if it earns more than 7.25% per annum in the both cases.
Want to see more full solutions like this?
- You are considering an investment in a mutual fund with a 5% load and an expense ratio of 0.75%. You can invest instead in a bank CD paying 3% interest. Required: a. If you plan to invest for 3 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. b. What annual rate of return must the fund portfolio earn if you plan to invest for 6 years to be better off in the fund than in the CD? c. Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of 0.50% 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? Note: Do not round intermediate calculations. Round your answers to 2 decimal places.arrow_forwardYou are considering an investment in a mutual fund with a 7% load and expense ratio of 0.5%. You can invest instead in a bank CD paying 3% interest. a. If you plan to invest for 5 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 returnsarrow_forward3. You are considering to invest in a mutual fund with a 4% load and an expense ratio of 0.5%. Alternative, you may invest in a bank certificate of deposit (CD) paying 6% interest. a. If you plan to invest for 2 years, what annual rate of return must the mutual fund earn so that the result will be better than making investment in the CD ? Assume annual compounding of returns. b. How does your answer change if you plan to invest for 6 years ? c. Now suppose that instead of a front-end load, the mutual fund charges a fee of 0.75% per year. What annual rate of return must the mutual fund earn so that the result will be better than making investment in the CD ? Does your answer in this case depend on your time horizon ?arrow_forward
- You are considering an investment in a mutual fund with a 3% front-end load and an expense ratio of 0.6%. You can invest instead in a bank CD paying 5% 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. Enter your answer as a percentage rounded to two decimal places.) Annual rate of return 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. Enter your answer as a percentage rounded to two decimal places.) Annual rate of return 7.13 % Annual rate of return % c. Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of 0.85% per year. If you plan to invest for two years, what annual rate of return must the fund…arrow_forwardYou have $5000 to invest for 1 year. Fund A has an estimated 4% annual return, and Fund B has an estimated 10% annual return. Fund A is more stable, and preferred among investors with low risk tolerance. Fund B is less stable, but has larger returns. Answer the following questions about this investment opportunity. 1. Suppose you have a low risk-tolerance, and you invest everything in Fund A. How much do you expect to make on your investment?Round to the nearest cent. 2. Suppose you have a medium risk-tolerance, and you want an annual return of $355. You decide to invest part in Fund A and the rest in Fund B. How much do you need to invest in Fund A?arrow_forwardYou are considering an investment in a mutual fund with a 4% load and expense ratio of 0.5%. You can invest instead in a bank CD paying 6% interest.a. If you plan to invest for 2 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.)arrow_forward
- 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. Required: 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.) Annual rate of return 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.) Annual rate of return % Annual rate of return % 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…arrow_forwardSuppose you are considering investing $1,000 in a load fund that charges a fee of 7%, and you expect your investment to earn 13% over the next year. Alternatively, you could invest in a no-load fund with similar risk that charges a 1% redemption fee. You estimate that this no-load fund will earn 11%. Given your expectations, which is the better investment and by how much? Do not round intermediate calculations. Round your answers to two decimal places. Load fund growth: No-load fund growth: The-Select- fund is better by % % %.arrow_forwardSuppose you have recently accepted a new job and are setting up your retirement allocations within the firm's 401k plan. The plan options contain two risky mutual funds, A and B. You may assume that all fees are the same across the two funds. Fund A has an expected return of 6% and the standard deviation of returns is 12%. Fund B has an expected return of 7% and the standard deviation of returns is 15%. The correlation between returns on the two funds is 0. The plan also contains a Treasury fund which provides a risk-free return of 3%. A Suppose you can only invest in one of the two risky mutual funds (A or B), but can combine it with the Treasury fund in any proportions you wish. Which of the two mutual funds would you choose and why B Maintaining the restrictions on your investment choices from the last question, what is the best expected return you could achieve if you set up a portfolio with a standard deviation of returns equal to 10%? (Please express your answer in percentage…arrow_forward
- Suppose you have a medium risk-tolerance, and you want an annual return of $355. You decide to invest part in Fund A and the rest in Fund B. How much do you need to invest in Fund A? $ . Round to the nearest cent. Appreciate it thanks!!@@arrow_forwardYour friend offers you an investment opportunity. If you give him $1,200 today, his project will provide you with the following cash flows in Years 1-4: $100, $200, $600, $550. You required 10% return on investments of this risk level. Alternatively, you can invest your $1,200 in the money market fund at 4% today. Which of the two options is a better investment opportunity? Q4. There are two different ways to answers the question (both lead to the same conclusion). Show the complete formula (not the calculator shortcuts) with all the necessary terms that you would use to solve the problem as if you didn't have a financial calculator on hand. Q5. Circle the better investment opportunity: Friend's project / Money market fundarrow_forward(Use Calulator or Formula Approach) Suppose you invest $500 in a mutual fund today and $600 in one year. If the fund pays 9% annually, how much will have you in two years? How much will you have in 5 years if you make no further deposits?arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education