Alexa plans to invest $50,000 in a mutual fund that requires either a 4% front-end load or a 4% back-end load. She expects the fund to return 8% per year and she plans to hold the investment for 3 years. Calculate the size of the front-end and back-end load and show evidence that Alexa is indifferent between the front-end versus back-end load alternatives.
Alexa plans to invest $50,000 in a mutual fund that requires either a 4% front-end load or a 4% back-end load. She expects the fund to return 8% per year and she plans to hold the investment for 3 years. Calculate the size of the front-end and back-end load and show evidence that Alexa is indifferent between the front-end versus back-end load alternatives.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Alexa plans to invest $50,000 in a mutual fund that requires either a 4% front-end load or a 4% back-end load. She expects the fund to return 8% per year and she plans to hold the investment for 3 years. Calculate the size of the front-end and back-end load and show evidence that Alexa is indifferent between the front-end versus back-end load alternatives.
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Step 1
Mutual Fund
Mutual funds refer to the type of investment that invests money in different risky as well as risk-free securities so that the overall risk can be diversified and a stable return can be provided to the investor. Like securities have a market price, mutual funds have their net asset value.
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