Chapter 16 Solutions W06

Chapter 16 Solutions W06 - Mutual Funds Chapter 16...

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Mutual Funds Chapter 16 Solutions W06 1.(a) i) The front-end fee of fund A should be amortized over the 10 year holding period: 5% = x [1 - ( 1.1 ) -10 ]/.1 x = .814% p.a. The annual cost of A = .814% + 1% + 0% = 1.814% ii) The rear-end fee of fund B should be spread out over the 10 year holding period: 2% = x [(1.1) 10 – 1]/.1 x = .125% p.a. The annual cost of B = 0% + 1.5% +.125 % = 1.625% Fund B has the cheaper fee structure. (b) i) The front-end fee of fund A should be amortized over the 3 year holding period: 5% = x [1 - (1.08) -3 ]/.08 x = 1.94% p.a. The annual cost of A = 1.94% + 1% + 0% = 2.94% ii) The rear-end fee of fund B should be spread out over the 3 year holding period: 2% = x[(1.08) 3 – 1]/.08 x = .616% p.a. The annual cost of B = 0% + 1.5% +.616% = 2.116% Therefore fund B has the cheaper fee structure. (c) No, it depends on their annual and rear-load fees. 6. THREE-YEAR INVESTMENT HORIZON LOAD ANNUAL COSTS FUND FRONT BACK FRONT LOAD BACK LOAD MANAGEMENT FEE TOTAL ANNUAL
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Chapter 16 Solutions W06 - Mutual Funds Chapter 16...

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