Question

The XYZ Equity Fund sells Class A shares with a front-end load of 5% and Class B shares with 12b-1 fees of 0.6% annually as well as back-end load fees that start at 4% and fall by 1% for each full year the investor holds the portfolio (until the fourth year). Assume rate of return on the fund portfolio net of operating expenses is 9% annually.

(a) (9 points) What will be the value of a $10,000 investment in Class A and Class B shares if the shares are sold after (a) 2 years, (b) 3 years, (c) 10 years?

(b) (6 points) Which fee structure provides higher net proceeds at the end of each investment horizon?

Answer 1

The net investments in the Class A shares after the 5% commission is $9,500. If the fund earns a 9% return, the investment will grow after n years to $9,500 X (1.09)n up.

Valuation of fund A was as follows

Net Investment	Rate of Return	Intrest	Fund Value after Year	Year
9500.00	9%	855	10355.00	1
10355.00	9%	931.95	11286.95	2
11286.95	9%	1015.826	12302.78	3
12302.78	9%	1107.25	13410.03	4
13410.03	9%	1206.902	14616.93	5
14616.93	9%	1315.523	15932.45	6
15932.45	9%	1433.921	17366.37	7
17366.37	9%	1562.973	18929.35	8
18929.35	9%	1703.641	20632.99	9
20632.99	9%	1856.969	22489.95	10

At the end of 1st year Fund A Value will be $10,355.00

After 2years Fund Value will be $11,286.95

At the end of 3 years value will be $13,410.03

At the end of 10 years Value will be $22,489.95

In case of Class B Shares there was no front-end load. However, the net return to the investor after 12b-1 fees will be only 8.4%. In addition, there is a back-end load that reduces the sales proceeds by a percentage equal to (4 - years until sale) until the fourth year,

Valuation of Stock B Will Be as follows

Net Investment	Rate of Return	Intrest	Fund Value after Year	Exit load	Final Amount	Year
10000.00	8.4%	840	10840.00	3%	10514.80	1
10840.00	8.4%	910.56	11750.56	2%	11515.55	2
11750.56	8.4%	987.047	12737.61	1%	12610.23	3
12737.61	8.4%	1069.959	13807.57	0%	13807.57	4
13807.57	8.4%	1159.836	14967.40	0%	14967.40	5
14967.40	8.4%	1257.262	16224.66	0%	16224.66	6
16224.66	8.4%	1362.872	17587.54	0%	17587.54	7
17587.54	8.4%	1477.353	19064.89	0%	19064.89	8
19064.89	8.4%	1601.451	20666.34	0%	20666.34	9
20666.34	8.4%	1735.972	22402.31	0%	22402.31	10

At the end of 1st year Fund A Value will be $10,514.80

After 2years Fund Value will be $11,515.55

At the end of 3 years value will be $12,610.23

At the end of 10 years Value will be $22,402.31

While Comparing the Above senario it has been observed that after completion of 2years Stock B was giving the Good returns and in case of 3years also Stock B is giving good returns, in case of 10 years Stock A isgiving good results compared with B.