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In: Finance

Suppose an open end mutual fund has $10000 worth of assets. There are 1000 shares outstanding....

Suppose an open end mutual fund has $10000 worth of assets. There are 1000 shares outstanding.

a. If the fund value rises by 8% and there is a 25 basis point management fee that is subtracted from the asset value at the end of the year, what is the return on a share of the fund?

b. Suppose that at the beginning of the year a new investor comes in and invests another $1000. If the same return and fees happen as in (a) above, what will be the return for the new investor?

c. Suppose instead of what happened in (b) the new investor puts money in the fund at the end of the year, after the asset value has changed and after the fees have been charged. How many shares will the new investor have?

Solutions

Expert Solution

a. If the fund value rises by 8% and there is a 25 basis point management fee that is subtracted from the asset value at the end of the year, what is the return on a share of the fund?

Rate of Return = (1 + Rise in Value) * (1 - Management Fee) - 1

Rate of Return = (1 + 0.08) * (1 - 0.25%) - 1

Rate of Return = 1.0773 - 1

Rate of Return = 7.73%

b. Suppose that at the beginning of the year a new investor comes in and invests another $1000. If the same return and fees happen as in (a) above, what will be the return for the new investor?

Rate of return to new investor will not change as he invested at the beginning of the year.

Return for the new investor = 7.73%

c. Suppose instead of what happened in (b) the new investor puts money in the fund at the end of the year, after the asset value has changed and after the fees have been charged. How many shares will the new investor have?

Price of Share in Mutual fund at the end of year = Current Value of Mutual Fund * (1 + rate of return) / Shares O/s

Price of Share in Mutual fund at the end of year = 10000 * 1.0773 / 1000

Price of Share in Mutual fund at the end of year = $10.773

Number of Investor gets = Amount Invested / Price per Share = $1000 / 10.773 = 92.82 Shares

Please upvote if satisfied

jeff jeffy answered 2 years ago
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