Personal Finance (8th Edition) (What's New in Finance)
Personal Finance (8th Edition) (What's New in Finance)
8th Edition
ISBN: 9780134730363
Author: Arthur J. Keown
Publisher: PEARSON
Question
Book Icon
Chapter 14, Problem 2PA
Summary Introduction

(a)

To determine:

The lower cost alternative to purchase.

Introduction:

Mutual fund refers to the fund that is managed by the professionals and consists of the pool of money from various different investors in order to purchase different and various securities.

Expert Solution
Check Mark

Explanation of Solution

Purchase of electronic trade funds (ETF) is relatively cheaper as compared to the regular mutual fund.

ETF has a lower ratio of expense.

Annual expense of electronic trade fund is less costly as it has percent of 0.25%.

Conclusion

Hence, Electronic trade funds are cheaper.

Summary Introduction

(b)

To determine:

The lower cost to own 6 months.

Expert Solution
Check Mark

Explanation of Solution

Given,

Annual gain is 7%.

Investment holding time is 6 months,

Cost of mutual funds purchasing is 0.85%.

Cost of EFT annual expense is 0.25%

Transaction cost is $20.

Consider the value of investment to $10,000.

Formula to calculate cost of purchasing the mutual fund,

Costofpurchasingmutualfunds=Expenseratio×Valueofasset

Substitute 0.85% for expense ratio and $10,000 for value of asset.

Costofpurchasingmutualfunds=0.0085×$10,000=$85

Cost of purchasing mutual funds is $85.

Formula to calculate cost of purchasing electronic trading fund,

Costofpurchasingelectronictradingfund=[(Expenseratio×Valueofasset)+Transactionfee]

Substitute 0.25% for the expense ratio, $10,000 for the value of the asset and $20 for the transaction fee.

Costofpurchasingelectronictradingfund=(0.025%×$10,000)+$20=$45

Cost of purchasing ETF is $45.

Conclusion

Hence, Cost of purchasing ETF is quite less compared to mutual funds.

Summary Introduction

(c)

To determine:

The lower cost to own 2 years.

Expert Solution
Check Mark

Explanation of Solution

Given,

Annual gain is 10%.

Investment holding time is 6 months,

Cost of mutual funds purchasing is 0.85%.

Cost of EFT annual expense is 0.25%

Transaction cost is $20.

Consider the value of investment to $10,000.

Formula to calculate cost of purchasing the mutual fund,

Costofpurchasingmutualfunds=Expenseratio×Valueofasset

Substitute 0.85% for expense ratio and $10,000 for value of asset.

Costofpurchasingmutualfunds=0.0085×$10,000=$85

Cost of purchasing mutual funds is $85.

Formula to calculate cost of purchasing electronic trading fund,

Costofpurchasingelectronictradingfund=[(Expenseratio×Valueofasset)+Transactionfee]

Substitute 0.25% for the expense ratio, $10,000 for the value of the asset and $20 for the transaction fee.

Costofpurchasingelectronictradingfund=(0.025%×$10,000)+$20=$45

Cost of purchasing ETF is $45.

Conclusion

Hence, Cost of purchasing ETF is quite less compared to mutual funds.

Summary Introduction

(d)

To determine:

The lower cost to own 2 years.

Expert Solution
Check Mark

Explanation of Solution

Given,

Annual loss is 10%.

Investment holding time is 6 months,

Cost of mutual funds purchasing is 0.85%.

Cost of EFT annual expense is 0.25%

Transaction cost is $20.

Consider the value of investment to $10,000.

Formula to calculate cost of purchasing the mutual fund,

Costofpurchasingmutualfunds=Expenseratio×Valueofasset

Substitute 0.85% for expense ratio and $10,000 for value of asset.

Costofpurchasingmutualfunds=0.0085×$10,000=$85

Cost of purchasing mutual funds is $85.

Formula to calculate cost of purchasing electronic trading fund,

Costofpurchasingelectronictradingfund=[(Expenseratio×Valueofasset)+Transactionfee]

Substitute 0.25% for the expense ratio, $10,000 for the value of the asset and $20 for the transaction fee.

Costofpurchasingelectronictradingfund=(0.025%×$10,000)+$20=$45

Cost of purchasing ETF is $45.

Conclusion

Hence, Cost of purchasing ETF is quite less compared to mutual funds.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
< When you purchased your car, you took out a 5-year annual-payment loan with an interest rate of 5% per year. The annual payment on the car is $5,200. You have just made a payment and have now decided to pay off the loan by repaying the outstanding balance. What is the payoff amount for the following scenarios? a. You have owned the car for 1 year (so there are 4 years left on the loan)? b. You have owned the car for 4 years (so there is 1 year left on the loan)? a. You have owned the car for 1 year (so there are 4 years left on the loan)? The payoff if there are 4 years left on the loan is $ (Round to the nearest cent.) b. You have owned the car for 4 years (so there is 1 year left on the loan)? The payoff if there is 1 year left on the loan is $ (Round to the nearest cent.)
Victoria Exports (Canada). A Canadian exporter, Victoria Exports, will be receiving six payments of €13,800, ranging from now to 12 months in the future. Since the company keeps cash balances in both Canadian dollars and U.S. dollars, it can choose which currency to exchange the euros for at the end of the various periods. Which currency appears to offer the better rates in the forward market? (Click on the icon to import the table into a spreadsheet.) Period Days Forward spot 1 month C$/euro 1.3347 1.3370 US$/euro 1.3219 1.3224 m 2 months 3 months 1.3392 30 60 1.3229 90 1.3235 180 1.3438 12 months 360 1.3464 1.3239 1.3269 6 months 1.3416 Calculate the forward premium, the Canadian dollar proceeds, and the difference from the spot rate proceeds in the C$/Euro forward market below: (Round the forward premium to three decimal places and the Canadian dollar amounts to the nearest cent.) Days Forward Premium C$ Proceeds of Difference Period Forward C$/euro on the C$/euro €13,800 Over Spot…
identify the primary sources of financing, both traditional and alternative, accessible to companies seeking sources of funding. To do so, you should: Collect and curate data and documentary resources from various sources (magazine articles, newspapers, online content, working papers from various institutions, activity reports, performance reports, legal regulations, speeches, appearances, press conferences, etc.). Analyze the documentary content you have previously curated and collected. During your analysis, consider the context, location, timing, and target audience of the texts. Reference Article: One Park Financial. (2022). Best alternative business loans and financing for entrepreneurs. https://www.oneparkfinancial.com/blog/alternative-business-funding Questions: Identify and summarize the traditional financial avenues available to businesses. What are the most innovative financing options they could find? Open-ended question: if you were in the opposite position, as an…
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Text book image
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:9781260013962
Author:BREALEY
Publisher:RENT MCG
Text book image
Financial Management: Theory & Practice
Finance
ISBN:9781337909730
Author:Brigham
Publisher:Cengage
Text book image
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Text book image
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Text book image
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author: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 Professor
Publisher:McGraw-Hill Education