Question

Loaded-Up Fund charges a 12b-1 fee of 1.00% and maintains an expense ratio of 0.75%. Economy Fund charges a front-end load of 2.0%, 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 7% per year.

How much will an investment of $1,000 in each fund grow to after: (Round your answers to 2 decimal places.)

Year 1:_______Economy Fund

Year 3:_______Economy Fund

Year 10:_______Economy Fund

Answer 1

The end value of the investment = I × (1 - front-end load) × (1 + r - true expense ratio)^T

a). Year 1 = $1,000 × 0.98 × (1 + 0.07 - 0.0025)

= $980 x 1.0675 = $1,046.15

b). Year 4 = $1,000 × 0.98 × (1 + 0.07 - 0.0025)³

  = $980 x 1.2165 = $1,192.15

c). Year 10 = $1,000 × 0.98 × (1 + 0.07 - 0.0025)¹⁰

  = $980 x 1.9217 = $1,883.24