Question

Loaded-Up Fund charges a 12b-1 fee of 1.00% and maintains an expense ratio of 0.50%. Economy Fund charges a front-end load of 3.0%, but has no 12b-1 fee and an expense ratio of 0.25%. Assume the rate of return on both funds’ portfolios (before any fees) is 6% per year.

Required:
a. How much will an investment of $1,000 in each fund grow to after 1 year?
b. How much will an investment of $1,000 in each fund grow to after 2 year?
c. How much will an investment of $1,000 in each fund grow to after 11 year?

Answer 1

a) $1025.8

b) $1084.8

c) $1794.1

Step-by-step explanation:

The formula for this question is

End value of investment = I * (1 - f) * (1 + r - t)^T,

where

I = basic investment, $1000

f = front end load, 3% = 0.03

r = ratio, 6% = 0.06

t = true expense ratio, 0.25% = 0.0025

T = time of investment, 1, 2 and 11 years.

Now, applying the values to the formula, we have

End of Investment after 1 year =

1000 * (1 - 0.03) * (1 + 0.06 - 0.0025)¹ =

1000 * 0.97 * 1.0575 =

$1025.8

End of Investment after 2 years =

1000 * (1 - 0.03) * (1 + 0.06 - 0.0025)² =

1000 * 0.97 * 1.1183 =

$1084.8

End of Investment after 11 years =

1000 * (1 - 0.03) * (1 + 0.06 - 0.0025)¹¹ =

1000 * 0.97 * 1.8496 =

$1794.1