Homework Help is Here – Start Your Trial Now!
Business
Finance
What advantages/disadvantages do the mutual funds offer compared to company stock for your retirement investing?

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

Essentials Of Investments
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
See similar textbooks
icon
Related questions
Question

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

 

A Job at S&S Air You recently graduated from college, and your job search led you to S&S Air. Because you felt the company's business was headed skyward, you accepted the job offer. As you are finishing your employment paperwork, Chris Guthrie, who works in the finance department, stops by to inform you about the company's new 401(k) plan. A 401(k) is a type of retirement plan offered by many companies. A 401(k) is tax deferred, which means that any deposits you make into the plan are deducted from your current income, so no current taxes are paid on the money. Assume your salary will be $40,000 per year. If you contribute $3,000 to the 401(k) plan, you will pay taxes only on $37,000 in income. 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 percent of your salary to the plan. As is common, S&S Air also has a 5 percent match program. This means that the company will match your contribution dollar-for-dollar up to 5 percent 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. As you know, a mutual fund is a portfolio of assets. 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. The largest expense is typically the management fee paid to the fund manager, who makes all of the investment decisions for the fund. S&S Air uses Arias Financial Services as its 401(k) plan administrator. Chris Guthrie then explains that the retirement investment options offered for employees are as follows: 1. Company stock. One option is stock in S&S Air. The company is currently privately held. The price you would pay for the stock is based on an annual appraisal, less a 20 percent discount. When you interviewed with the owners, Mark Sexton and Todd Story, they informed you that the company stock was expected to be publicly sold in three to five years. If you needed to sell the stock before it became publicly traded, the company would buy it back at the then- current appraised value. 2. Arias S&P 500 Index Fund. This mutual fund tracks the S&P 500. Stocks in the fund are weighted exactly the same as they are in the S&P 500. This means that the fund's return is approximately the return of the S&P 500, minus expenses. With an index fund, the manager is not required to research stocks and make investment decisions, so fund expenses are usually low. The Arias S&P 500 Index Fund charges expenses of .20 percent of assets per year. 3. Arias Small-Cap Fund. This fund primarily invests in small-capitalization stocks. As such, the returns of the fund are more volatile. The fund also can invest 10 percent of its assets in companies based outside the United States. This fund charges 1.70 percent of assets in expenses per year. 4. Arias Large-Company Stock Fund. This fund invests primarily in large-capitalization stocks of companies based in the United States. The fund is managed by Melissa Arias and has outperformed the market in six of the last eight years. The fund charges 1.50 percent in expenses. 5. Arias Bond Fund. This fund invests in long-term corporate bonds issued by U.S.-domiciled companies. The fund is restricted to investments in bonds with an investment-grade credit rating. This fund charges 1.40 percent in expenses. 6. Arias Money Market Fund. This fund invests in short-term, high-credit-quality debt instruments, which include Treasury bills. As such, the return on money market funds is only slightly higher than the return on Treasury bills. Because of the credit quality and short-term nature of the investments, there is only a very slight risk of negative return. The fund charges .60 percent in expenses.
Transcribed Image Text:A Job at S&S Air You recently graduated from college, and your job search led you to S&S Air. Because you felt the company's business was headed skyward, you accepted the job offer. As you are finishing your employment paperwork, Chris Guthrie, who works in the finance department, stops by to inform you about the company's new 401(k) plan. A 401(k) is a type of retirement plan offered by many companies. A 401(k) is tax deferred, which means that any deposits you make into the plan are deducted from your current income, so no current taxes are paid on the money. Assume your salary will be $40,000 per year. If you contribute $3,000 to the 401(k) plan, you will pay taxes only on $37,000 in income. 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 percent of your salary to the plan. As is common, S&S Air also has a 5 percent match program. This means that the company will match your contribution dollar-for-dollar up to 5 percent 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. As you know, a mutual fund is a portfolio of assets. 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. The largest expense is typically the management fee paid to the fund manager, who makes all of the investment decisions for the fund. S&S Air uses Arias Financial Services as its 401(k) plan administrator. Chris Guthrie then explains that the retirement investment options offered for employees are as follows: 1. Company stock. One option is stock in S&S Air. The company is currently privately held. The price you would pay for the stock is based on an annual appraisal, less a 20 percent discount. When you interviewed with the owners, Mark Sexton and Todd Story, they informed you that the company stock was expected to be publicly sold in three to five years. If you needed to sell the stock before it became publicly traded, the company would buy it back at the then- current appraised value. 2. Arias S&P 500 Index Fund. This mutual fund tracks the S&P 500. Stocks in the fund are weighted exactly the same as they are in the S&P 500. This means that the fund's return is approximately the return of the S&P 500, minus expenses. With an index fund, the manager is not required to research stocks and make investment decisions, so fund expenses are usually low. The Arias S&P 500 Index Fund charges expenses of .20 percent of assets per year. 3. Arias Small-Cap Fund. This fund primarily invests in small-capitalization stocks. As such, the returns of the fund are more volatile. The fund also can invest 10 percent of its assets in companies based outside the United States. This fund charges 1.70 percent of assets in expenses per year. 4. Arias Large-Company Stock Fund. This fund invests primarily in large-capitalization stocks of companies based in the United States. The fund is managed by Melissa Arias and has outperformed the market in six of the last eight years. The fund charges 1.50 percent in expenses. 5. Arias Bond Fund. This fund invests in long-term corporate bonds issued by U.S.-domiciled companies. The fund is restricted to investments in bonds with an investment-grade credit rating. This fund charges 1.40 percent in expenses. 6. Arias Money Market Fund. This fund invests in short-term, high-credit-quality debt instruments, which include Treasury bills. As such, the return on money market funds is only slightly higher than the return on Treasury bills. Because of the credit quality and short-term nature of the investments, there is only a very slight risk of negative return. The fund charges .60 percent in expenses.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Investment in Stocks
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS