ARE143_CHAP_4_KEY - 1 Managerial Economics (ARE) 143...

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1 Managerial Economics (ARE) 143 University of California, Davis Instructor: John H. Constantine KEY—Chapter 4—Mutual Funds Problem 1: Given that no-load funds are widely available, why would a rational investor pay a front-end load? More generally, why don’t fund investors always seek out funds with the lowest loads, management fees, and other fees? A rational investor might pay a load because he or she desires a particular type of fund or fund manager for which a no-load alternative does not exist. More generally, some investors feel you get what you pay for and are willing to pay more. Whether they are correct or not is a matter of some debate. Other investors simply are not aware of the full range of alternatives. Problem 2: Is it true that the NAV of a money market mutual fund never changes? How is this possible. The NAV of a money market mutual fund is never supposed to change; it is supposed to stay at a constant $1. It never rises; only in very rare instances does it fall. Maintaining a constant NAV is possible by simply increasing the number of shares as needed such that the number of shares is always equal to the total dollar value of the fund. Problem 3: (a) The WIA Fund has current assets with a market value of $4.5 billion and has 130 million shares outstanding. What is the net asset value (NAV) for this fund? NAV = $4,500,000,000 / 130,000,000 = $34.62 (b) Suppose the mutual fund in part (a) has a current market price quotation of $36.10 . Is this a load fund, and if so, calculate the front-end load. Load = ($36.10 – 34.62)/$36.10 = 4.11% Problem 4: The Tike Growth and Equity Fund is a “low-load” fund. The current offer price quotation for this mutual fund is $48.65, and the front-end load is 1.5 percent. What is the NAV? If there are 13.4 million shares outstanding, what is the current market value of assets owned by the Tiki Fund? NAV = $48.65(1 – .015) = $47.92; Market value of assets = $47.92(13,400,000) = $642,128,000 Problem 5: The HLA Money Market Mutual Fund has a NAV of $1 per share. During the year, the assets held by this fund appreciated by 4.6 percent. If you had invested $15,000 in this fund at the start of the year, how many shares would you own at the end of year? What will the NAV of this fund be at the end of the year? Explain. Initial shares = 15,000. Final shares = 15,000(1.046) = 15,690, and final NAV = $1 because this is a money market fund.
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2 Problem 6: An open-end mutual fund has the following stocks: Shares Stock price Stock A 4,000 $68.00 Stock B 9,000 $32.00 Stock C 6,500 $44.00 Stock D 8,400 $56.00 Mutual fund 50,000 (a) If there are 50,000 shares of the mutual fund, what is its NAV? Total assets = (4,000 × $68) + (9,000 × $32) + (6,500 × $44) + (8,400 × $56) = $1,316,400 NAV = $1,316,400 / 50,000 = $26.33 (b) Suppose the fund has liabilities of $75,000. What is the NAV of the fund now? NAV = ($1,316,400 – 75,000) / 50,000 = $24.83 (c) Assume the fund is sold with a 5 percent front-end load. What is the offering price of the fund? Offering price = $24.83 / (1 – .05) = $26.14 Problem 7: A mutual fund sold $75 million of assets during the year and purchased $68 million in assets. If the average daily assets of the fund was $120 million, what was the fund turnover?
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This note was uploaded on 01/13/2012 for the course ARE 143 taught by Professor Brinkley,g during the Spring '08 term at UC Davis.

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ARE143_CHAP_4_KEY - 1 Managerial Economics (ARE) 143...

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