1.5 Mutual Funds - Solutions(1)

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1.5 Mutual Funds - Solutions(1)


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4
School:
University of Texas at Austin
Course:
Fin 320f - Foundations of Finance
Foundations of Finance Documents

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FIN 320F Foundations of Finance 1.5 Mutual Funds – Solutions 1. Assume you invested $1,500 in a mutual fund called Alpha. It is a no-load fund. a. On the day that you invested, the fund’s NAV was $97.52 per share. How many shares of the mutual fund do you own? $1,500 ÷ $97.52 per share = 15.381460 shares b. By the end of the year, the NAV rose to $104.20. What is the value of your account? 15.381460 shares × $104. 20 per share = $1,602.748154 ≈ $1,602.75 c. The fund has a 0.85% expense ratio. After expenses are withdrawn, what is the new value of your account? $1,602.748154 × 0.85% = $13.623359 $1,602.748154 – $13.623359 = $1,589.124795 ≈ $1,589.12 d. What is the percent return that the mutual fund will say it earned? (Note: The mutual fund will ignore the impact of loads and fees, because it did not pay them). % Return = Yield = Income + (End value – Beg value) Beginning value = [$0 + ($104.20 – $97.52)] ÷ $97.52 = 6.85% e. What is the net percent return that your account actually experienced? (Note: Your calculation should reflect the impact of loads and fees, because you had to pay them.) % Return = Yield = Income + (End value – Beg value) Beginning value = [$0 + ($1,589.12 – $1,500.00)] ÷ $1,500.00 = 5.94% 2. Assume you also invested $1,500 in mutual fund called Omega. It has a 5.5% up-front load. a. On the day that you invested, the fund’s NAV was $97.52 per share. How many shares of the mutual fund do you own? (Big hint: Pay the load first!) $1,500 × 5.5% = $82.50 Up-front sales load $1,500 deposit – $82.50 load = $1,417.50 invested $1,417.50 ÷ $97.52 per share = 14.535480 shares b. By the end of the year, the NAV rose to $104.20. What is the value of your account? 14.535480 shares × $104. 20 per share = $1,514.597006 ≈ $1,514.60 c. The fund has a 1.5% expense ratio. After expenses are withdrawn, what is the new value of your account? $1,514.597006 × 1.5% = $22.718955 $1,514.597006 – $22.718955 = $1,491.878051 ≈ $1,491.88 The sales load and high fees of the Omega fund ate up all your returns. At the end of the year, your account is worth less than when you originally invested. SourceDocument.docx Page 1 of 4 © Heidi Toprac 2015 - 2022



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