Question

Kitty bought $5000 worth of mutual funds with a back-end load of 5 percent if she sells the first year. it decreaes 1 percent afterward.

if Kitty sells during the third year how much would will the back-end load?

Answer 1

If Kitty sells her mutual funds during the third year, the back-end load she will pay is 3 percent, which amounts to $150 from her initial investment of $5000.

Step-by-step explanation:

Kitty bought $5000 worth of mutual funds with a 5 percent back-end load if she sells in the first year. The back-end load decreases by 1 percent each year thereafter. If she decides to sell during the third year, we calculate the back-end load as follows:

• First year: 5%
• Second year: 5% - 1% = 4%
• Third year: 4% - 1% = 3%

Therefore, the back-end load Kitty would pay when selling her mutual funds during the third year would be 3 percent of $5000, which is $150.

Answer 2

The back-end load for Kitty's mutual funds if she sells during the third year is $242.50.

Using the following values:

Initial back-end load (BL) = 5%

Annual decrease in BL = 1%

Years passed (t) = 3

Purchase amount = $5,000

To calculate the decrease in BL over the years:

Decrease in BL per year = BL * Decrease rate = 5% * 1% = 0.05%

To calculate the total decrease in BL over 3 years:

Total decrease = Decrease per year * Number of years = 0.05% * 3 = 0.15%

To calculate the remaining BL after the decrease:

Remaining BL = Initial BL - Total decrease = 5% - 0.15% = 4.85%

To calculate the back-end load on the purchase amount:

Back-end load = Remaining BL * Purchase amount = 4.85% * $5,000 = $242.50

Therefore, the back-end load for Kitty's mutual funds if she sells during the third year is $242.50.