Question

Suppose an individual invests $25,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 3 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 0.85 percent. The annual fees are charged on the average net asset value invested in the fund and are recorded at the end of each year. Investments in the fund return 8 percent each year paid on the last day of the year. If the investor reinvests the annual returns paid on the investment, calculate the annual return on the mutual fund over the two-year investment period. (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161)) Annual return %

Answer 1

Investment Amount = $ 25000

Less - Up-Front Commission (3 percent ) = $ 750

Net Investment Amount    = $ 24250

Add - Annual Return (8 percent) = $ 1940

Total Value of Investment at year end 1 = $ 26190

Less - Annual Fund operating expenses (0.85 percent) = $ 222.615

Net Investment Value = = $ 25967.385

Less - Up-Front Commission on reinvestment of Annual Return

= (3 percent of 1940)    = $ 58.2

Net Investment Value    = $  25909.185

Add - Annual Return (8 percent) = $ 2072.7348  

Total Value of Investment at year end 1 = $ 27981.9198

Less - Annual Fund operating expenses (0.85 percent) = $ 237.8463

Net Investment Value = = $ 27744.0735

Total Return = (Closing Investment Value - Amount Invested) x 100 / Amount Invested

= (27744.0735 - 25,000) x 100 / 25,000 = 10.9763 or 11 percent

Annual Return = 10.9763/2 = 5.488 percent