You are considering an investment in a mutual fund with a 4% load and an expense ratio of .5%. You can invest instead in a bank CD paying 6% 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. b. How does your answer change if you plan to invest for 6 years? Why does your answer change? 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? Does your answer in this case depend on your time horizon?
You are considering an investment in a mutual fund with a 4% load and an expense ratio of .5%. You can invest instead in a bank CD paying 6% 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. b. How does your answer change if you plan to invest for 6 years? Why does your answer change? 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? Does your answer in this case depend on your time horizon?
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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How can i calculate the annual
Is there a formula that i can use? or can i solve this in excel?
Transcribed Image Text:22. You are considering an investment in a mutual fund with a 4% load and an expense ratio of .5%.
You can invest instead in a bank CD paying 6% 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.
b. How does your answer change if you plan to invest for 6 years? Why does your answer
change?
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? Does your answer in this case depend on your time horizon?
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