Question

Suppose a mutual fund has $4.5 billion in assets and $0.5 billion in liabilities based on current market values and a total of 100 million shares outstanding. What is the net asset value (NAV) for this mutual fund? Suppose this mutual fund has a current market price quotation of $42. Is this a load fund? If so, calculate the front-end load.

Answer 1

Given, mutual fund has

Assets = $ 4.5 billion

Liabilities = $ 0.5 billion

Share outstanding = 100 million

1) Net asset value (NAV) for this mutual fund?

Net asset value (NAV) = (Assets - Liabilities) / Number of Share outstanding

Net asset value (NAV) = ( $ 4.5 billion - $ 0.5 billion) / 100 million

= 4,000,000,000 / 100,000,000

Net asset value (NAV) = $ 40

2) Is this a load fund?

current market price = $ 42

Net asset value (NAV) = $ 40

here we pay more than Net asset value (NAV) =  $ 42 - $ 40 = $ 2

when we purchase shares in Load fund, we pay prices in excess of Net asset value (NAV),

And the difference between offering price and Net asset value (NAV) is the load.

here we pay $2 in excess of Net asset value (NAV), so it is a load fund.

3) calculate the front-end load.

Front-end load = [ Market price - Net asset value (NAV) ] / Market price

Front-end load = [ $42 - $40] / $42

= $2 / $42

= 0.0476

Front-end load = 4.76 %

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