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chap004 - Chapter 04 Mutual Funds and Other Investment...

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Chapter 04 - Mutual Funds and Other Investment Companies Chapter 4 Mutual Funds and Other Investment Companies 1. The unit investment trust should have lower operating expenses. Because the investment trust portfolio is fixed once the trust is established, it does not have to pay portfolio managers to constantly monitor and rebalance the portfolio as perceived needs or opportunities change. 2. The offering price includes a 6% front-end load, or sales commission, meaning that every dollar paid results in only $0.94 going toward purchase of shares. Therefore: Offering price = 06 . 0 1 70 . 10 $ load 1 NAV - = - = = $11.38 3. NAV = offering price × (1 – load) = $12.30 × 0 .95 = $11.69 4. Stock Value held by fund A $ 7,000,000 B 12,000,000 C 8,000,000 D 15,000,000 Total $42,000,000 Net asset value = 000 , 000 , 4 000 , 30 $ 000 , 000 , 42 $ - = $10.49 5. Value of stocks sold and replaced = $15,000,000 Turnover rate = 000 , 000 , 42 $ 000 , 000 , 15 $ = 0.357 = 35.7% 6. a. NAV = million 5 million 3 $ million 200 $ - = $39.40 4-1
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Chapter 04 - Mutual Funds and Other Investment Companies b. Premium (or discount) = NAV NAV ice Pr - = 40 . 39 $ 40 . 39 $ 36 $ - = –0.086 = -8.6% The fund sells at an 8.6% discount from NAV 7. Rate of return = NAV year of Start ons Distributi ) NAV ( + = 50 . 12 $ 50 . 1 $ 40 . 0 $ + - = 0.0880 = 8.80% 8. a. Start of year price = $12.00 × 1.02 = $12.24 End of year price = $12.10 × 0.93 = $11.25 Although NAV increased, the price of the fund fell by $0.99. Rate of return = price year of Start ons Distributi ) ice (Pr + = 24 . 12 $ 50 . 1 $ 99 . 0 $ + - = 0.0417 = 4.17% b. An investor holding the same portfolio as the fund manager would have earned a rate of return based on the increase in the NAV of the portfolio: Rate of return = NAV year of Start ons Distributi ) NAV ( + = 00 . 12 $ 50 . 1 $ 10 . 0 $ + = 0.1333 = 13.33% 9. a. Unit investment trusts : diversification from large-scale investing, lower transaction costs associated with large-scale trading, low management fees, predictable portfolio composition, guaranteed low portfolio turnover rate. b. Open-end funds : diversification from large-scale investing, lower transaction costs associated with large-scale trading, professional management that may be able to take advantage of buy or sell opportunities as they arise, record keeping.
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