Managerial Economics (ARE) 143
University of California, Davis
Instructor: John H. Constantine
KEY—Chapter 4—Mutual Funds
Given that no-load funds are widely available, why would a rational investor pay a front-end load?
generally, why don’t fund investors always seek out funds with the lowest loads, management fees, and
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.
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
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.
The WIA Fund has current assets with a market value of $4.5 billion and has 130 million shares
What is the net asset value (NAV) for this fund?
NAV = $4,500,000,000 / 130,000,000 = $34.62
Suppose the mutual fund in part (a) has a current market price quotation of
Is this a load
fund, and if so, calculate the front-end load.
Load = ($36.10 – 34.62)/$36.10 = 4.11%
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
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?
Initial shares = 15,000. Final shares = 15,000(1.046) = 15,690, and final NAV = $1 because this is a
money market fund.