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1 Jul 2018

7. Suppose you would like to invest $5000 into a mutual fund for three years. The following 3 mutual fund all have an expected annual return of 12% but with different fee structures. Which mutual fund would you like to purchase? Hint: make sure that you understand clearly the fee structures of mutual funds.

FUND A FUND B FUND C
FRONT END LOAD 2% 3% 0
BACK END LOAD 2% if redeem within 1 year; 0% otherwise 0 3%
OPERATING EXPENSE RATIO 1.25% 1.75% 1.5%
12B-1 .75% .5% .5%

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Trinidad Tremblay
Trinidad TremblayLv2
3 Jul 2018

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QUESTION 1

The World Income Appreciation Fund has current assets with a market value of $3.3 billion and has 180 million shares outstanding. What is the net asset value (NAV) for this mutual fund?

QUESTION 2

The Madura HiGro Fund has a net asset value of $47 per share. It charges a 3.1 percent load. How much will you pay for 200 shares?

QUESTION 3

The World Income Appreciation Fund has current assets with a market value of $4.5 billion and has 130 million shares outstanding. The fund has a current market price quotation of $35.36. What is the front-end load in percentages?

QUESTION 4

You are going to invest in a stock mutual fund with a 7 percent front-end load and a 1.4 percent expense ratio. You also can invest in a money market mutual fund with a 4 percent return and an expense ratio of 0.1 percent. If you plan to keep your investment for 3 years, what annual percentage return must the stock mutual fund earn to exceed an investment in the money market fund?

QUESTION 5

You invested $10,000 in a mutual fund at the beginning of the year when the NAV was $41.56. At the end of the year the fund paid $0.38 in short-term distributions and $1.25 in long-term distributions. If the NAV of the fund at the end of the year was $43.91, what was your return for the year?

QUESTION 6

A closed-end fund has total assets of $310 million and liabilities of $800,000. Currently, 20 million shares are outstanding. If the shares currently sell for $15.41, what is the percentage premium or discount on the fund? (Note: Enter premium as a positive number and a discount as a negative number.)

CH4 1.

Bond Funds One of the best Internet sites for information on mutual funds is www.morningstar.com. Go to the Web site and find the ticker symbol for the Harbor Bond Fund. Find all of the following information on the Web site for this fund: loads, expense ratio, top five holdings, bond quality ratings, the fund's rank in its category for the last seven years, and the Morningstar rating. Next, find out how the Morningstar star ranking system works.

2.

Stock Funds Go to www.morningstar.com and find the ticker symbol for a domestic stock fund. Enter the ticker symbol and find the following information for the fund: manager and manager start date, year-to-date return, three-year return, five-year return, front-end or back-end loads, actual and maximum 12b-l fees, management fees, expense ratio, the top 25 holdings, and the fund address and phone number.

3.

Morningstar Fund Selector Find the mutual fund screener on the Morningstar Web site. How many funds fit the following criteria: domestic stock fund, minimum initial purchase equal to or less than $500, expense ratio less than or equal to category average, and turnover less than 75 percent?

You recently graduated from college and accepted a job at M&D, Inc. The HR manager informs you about the company’s new 401 (k) plan. A 401 (k) plan is a tax deferred retirement plan, meaning that no current taxes are paid on the money deposited. For example, assuming a $30,000 salary per year and a $1,500 contribution to your 401 (k), the taxable income is reduced to $28,500. No taxes will be due on any capital gains or plan income while you are invested in the plan, but you will pay taxes when you withdraw the money at retirement. You can contribute up to 15% of your salary to the plan and the company has a 5% match program. This means that the company will match your contribution dollar for dollar up to 5% of your salary, but you must contribute to get the match. The 401(k) plan has several options for investments, most of which are mutual funds. When you purchase shares in a mutual fund, you are actually purchasing partial ownership of the fund’s assets, similar to purchasing shares of stock in a company. The return of the fund is the weighted average of the return of the assets owned by the fund, minus any expenses, with the largest expense being the management fee paid to managers to manage the fund. The retirement investments options offered by M&D are as follows:

a) Company stock. (stock in M&D) The company is currently privately held and its stock is appraised annually. You will be purchasing the stock at a 20% discount from the appraised value. The company is expected to go public in 3 to 5 years. If you need to sell the stock before the company becomes public, the company would buy it back at the then-current appraised value.

b) Vanguard S&P500 Index Fund. This mutual fund tracks the S&P 500 index, so its return is approximately the return on the S&P 500 minus the expenses. Vanguard charges expenses of 0.2% of assets per year

c) Vanguard Small Cap Fund. This fund primarily invests in small capitalization stocks. As such, the returns of the fund are more volatile. The fund charges 1.7% of assets in expenses per year.

d) Vanguard Large Cap Fund. This fund invests primarily in large capitalization stocks of the US companies. The fund manager has outperformed the market in 7 of the last ten years. The fund charges 1.5% in expenses.

Questions:

1. What advantages/disadvantages do the mutual funds offer compared to company stock for your retirement investing?

2. The company matches your contributions up to 5% of your salary. What return on your investment does this represent? What does your answer suggest about matching programs?

3. What are the advantages / disadvantages of choosing Vanguard Large Cap Fund over the Vanguard S&P 500 Index Fund?

4. Why would you consider investing in the Vanguard Small Cap Fund? How do the expenses charged by the fund affect your decision to invest in the fund?

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