Question

In: Finance

You are considering an investment in a mutual fund with a 6% load and expense ratio of 0.5%. You can invest instead in a bank CD paying 2% interest.

You are considering an investment in a mutual fund with a 6% load and expense ratio of 0.5%. You can invest instead in a bank CD paying 2% interest. 

a. If you plan to invest for 2 years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What annual rate of return must the fund portfolio earn if you plan to invest for 7 years to be better off in the fund than in the CD? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of .75% per year. What annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Solutions

Expert Solution

Ans a) Each dollar in mutual fund will earn over the 2 year period
1*(1-6%)*(1+r%-0.5%)^2 1.02^2
Solving the equation we have
0.94*(1+r%-0.5%)^2 1.0404
(1+r%-0.5%)^2 1.106809
(1+r%-0.5%) 1.05205
r= 5.70%
Ans = 5.70%
Ans b) Each dollar in mutual fund will earn over the 7 year period
1*(1-6%)*(1+r%-0.5%)^7 1.02^7
Solving the equation we have
0.94*(1+r%-0.5%)^7 1.148686
(1+r%-0.5%)^7 1.222006
(1+r%-0.5%) 1.029056
r= 3.41%
Therefore return must be greater than 3.41%
ans = 3.41%
Ans b) Each dollar in mutual fund will earn over the 7 year period
1*(1+r%-0.75%)^2 1.02^2
Solving the equation we have
1*(1+r%-0.75%)^2 1.0404
(1+r%-0.75%)^2 1.0404
(1+r%-0.75%)^2 1.02
r= 2.75%
Ans = 2.75%
Therefore return must be greater than 2.75%
ans = 2.75%

Related Solutions

You are considering an investment in a mutual fund with a 6% load and expense ratio...
You are considering an investment in a mutual fund with a 6% load and expense ratio of 0.25%. You can invest instead in a bank CD paying 1% interest. a. If you plan to invest for 5 years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns. (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What...
You are considering an investment in a mutual fund with a 1.9% load and expense ratio...
You are considering an investment in a mutual fund with a 1.9% load and expense ratio of .5%. You can invest instead in a bank CD paying 6% interest. If you plan to invest for 5 years, what annual gross rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns. Round your answer to 4 decimal places. For example, if your answer is 3.205%,...
You are considering an investment in a mutual fund with a 5%load and expense ratio...
You are considering an investment in a mutual fund with a 5% load and expense ratio of 0.5%. You can invest instead in a bank CD paying 3% interest.a. If you plan to invest for 4 years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns. (Do not round intermediate calculations. Round your answer to 2 decimal places.)b. What annual rate...
You are considering an investment in a mutual fund with a 7% load and expense ratio...
You are considering an investment in a mutual fund with a 7% load and expense ratio of 0.25%. You can invest instead in a bank CD paying 3% interest. a. If you plan to invest for 3 years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns. (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What...
You are considering an investment in a mutual fund with a 5% load and expense ratio...
You are considering an investment in a mutual fund with a 5% load and expense ratio of 0.75%. You can invest instead in a bank CD paying 3% interest. a. If you plan to invest for 3 years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns b. What annual rate of return must the fund portfolio earn if you plan...
You are considering an investment in a mutual fund with a 3% load and expense ratio...
You are considering an investment in a mutual fund with a 3% load and expense ratio of 0.75%. You can invest instead in a bank CD paying 2% interest. a. If you plan to invest for 5 years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns Annual rate of return = b. What annual rate of return must the fund...
You are considering an investment in a mutual fund with a 7% load and expense ratio...
You are considering an investment in a mutual fund with a 7% load and expense ratio of 0.5%. You can invest instead in a bank CD paying 3% interest. a. If you plan to invest for 5 years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns. (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What...
You are considering an investment in a mutual fund with a 3% load and an expense...
You are considering an investment in a mutual fund with a 3% load and an expense ratio of 0.6%. You can invest instead in a bank CD paying 5% interest. a. If you plan to invest for two years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Annual...
You are considering an investment in a mutual fund with a 5% load and an expense...
You are considering an investment in a mutual fund with a 5% load and an expense ratio of 1%. You can invest in a bank CD paying 5% interest. a. If you plan to invest for 6 years , what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Does load fee reduce your effective investment amount? Why? b. If you plan to invest for two years...
You are considering an investment in a mutual fund with a 5% load and an expense...
You are considering an investment in a mutual fund with a 5% load and an expense ratio of 1.25%. You can invest instead in a bank CD paying 7% interest. a. If you plan to invest for two years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns. (Do not round intermediate calculations. Round your answer to 2 decimal places.) b....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT