To discuss:
The increase or decrease of the fund and the type of fund that is recommended.
Introduction:
Mutual fund refers to the fund that consists of the pool of money from various different investors and is done by trained professionals who has a great experience in the field in order to purchase different and various securities that can provide good returns to the investors.
Explanation of Solution
Given,
Shares worth is $10,000.
Return before fee is 12%.
Class A
Initial commission paid to A is 5.75%.
Back end load is 0%.
Management fee is 0.55%.
12b-1 fee is 0.25%.
Formula to calculate annual percentage expense,
Substitute 5.75% for initial commission, 0% for back end load, 0.55% for management fee and 0.25% for 12b-1 fee.
Hence, the annual percentage expense is 6.55%.
Formula to calculate net annual earnings,
Substitute 12% for return before fee and 6.55% for annual percentage expense.
Formula to calculate the
Substitute $10,000 for present value, 5.45% for the interest rate and 5 for number of years.
Hence, the future value of class A is $13,038.
Class B
Initial commission paid to A is 0.0%.
Back end load is 0%.
Management fee is 0.9%.
12b-1 fee is 0.5%.
Formula to calculate annual percentage expense,
Substitute 0% for initial commission, 0% for back end load, 0.9% for management fee and 0.55% for 12b-1 fee.
Hence, the annual percentage expense is 1.4%.
Formula to calculate net annual earnings,
Substitute 12% for return before fee and 6.55% for annual percentage expense.
Formula to calculate the future value,
Substitute $10,000 for present value, 5.45% for the interest rate and 5 for number of years.
Hence, the future value of class A is $16,548.
Working note:
Back end load is 5%.
Declining value per year is 1%.
Declining value for 5 years is 5%.
Computation of total back end load,
Hence, total back load is 0%.
Class C
Initial commission paid to C is 0.0%.
Back end load is 0%.
Management fee is 1.0%.
12b-1 fee is 1.0%.
Formula to calculate annual percentage expense,
Substitute 0% for initial commission, 0% for back end load, 1.0% for management fee and 1.0% for 12b-1 fee.
Hence, the annual percentage expense is 2.0%.
Formula to calculate net annual earnings,
Substitute 12% for return before fee and 2.0% for annual percentage expense.
Formula to calculate the future value,
Substitute $10,000 for present value, 10.0% for the interest rate and 5 for number of years,
Hence, the future value of class A is $16,105.
Hence, the class B has the least fee among all the class so it should be preferred.
Hence, the class B is the best investment as it has the least fee among all the classes.
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Chapter 14 Solutions
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