Chapter 14, Problem 4PA

Summary Introduction

(a)

To determine:

The pay in the initial commission.

Introduction:

Mutual fund refers to the fund that is managed by the professionals and consists of the pool of money from various different investors in order to purchase different and various securities.

Explanation of Solution

Initial commission for class A

Given,

Front end load is 5.5,

Worth of the asset is $2,500

Formula to calculate the initial commission,

$\text{Initial}\text{commission}=\text{Front end load}\times \text{Worth of the asset}$

Substitute 5.5% for front end load and $2,500 for the worth of the asset.

$\begin{array}{c}\text{Initial}\text{commission}=5.55\times \$2,500\\ =\$137.5\end{array}$

Hence, the initial commission for A is $137.5.

Initial commission for class B

Given,

Front end load is 0.0,

Worth of the asset is $2,500

Formula to calculate the initial commission,

$\text{Initial}\text{commission}=\text{Front end load}\times \text{Worth of the asset}$

Substitute 0.0% for front end load and $2,500 for the worth of the asset.

$\begin{array}{c}\text{Initial}\text{commission}=0.0\%\times \$2,500\\ =\$0\end{array}$

Hence, the initial commission for B is $0.

Initial commission for class B

Given,

Front end load is 0.0,

Worth of the asset is $2,500

Formula to calculate the initial commission,

$\text{Initial}\text{commission}=\text{Front end load}\times \text{Worth of the asset}$

Substitute 0.0% for front end load and $2,500 for the worth of the asset.

$\begin{array}{c}\text{Initial}\text{commission}=0.0\%\times \$2,500\\ =\$0\end{array}$

Hence, the initial commission for C is $0.

Conclusion

The initial commission for class A, B and C are $137.5, $0 and $0.

Summary Introduction

(b)

To determine:

The pay in the back end commission.

Explanation of Solution

Back end commission for class A

Given,

Back end load is 0%.

Worth of the asset is $2,500

Formula to calculate the initial commission,

$\text{Back}\text{end}\text{commission}=\text{Back end load}\times \text{Worth of the asset}$

Substitute 0.0% for back end load and $2,500 for the worth of the asset.

$\begin{array}{c}\text{Initial}\text{commission}=0.0\%\times \$2,500\\ =\$0\end{array}$

Hence, the back end commission for A is $0.

Back end commission for class B

Given,

Back end load is 5%.

Worth of the asset is $2,500

Formula to calculate the initial commission,

$\text{Back}\text{end}\text{commission}=\text{Back end load}\times \text{Worth of the asset}$

Substitute 3.0% for back end load and $2,500 for the worth of the asset.

$\begin{array}{c}\text{Initial}\text{commission}=3.0\%\times \$2,500\\ =\$75\end{array}$

Hence, the back end commission for B is $75.

Back end commission for class C

Given,

Back end load is 1%.

Worth of the asset is $2,500.

Formula to calculate the initial commission,

$\text{Back}\text{end}\text{commission}=\text{Back end load}\times \text{Worth of the asset}$

Substitute 0.0% for back end load and $2,500 for the worth of the asset.

$\begin{array}{c}\text{Initial}\text{commission}=0.0\%\times \$2,500\\ =\$0\end{array}$

Hence, the back end commission for C is $0.

Working notes:

Back end load of class B,

Given,

Back end load is 5%.

Declining value for 1 year is 1%.

Declining value for 2 years is 2%.

Computation of the total back end,

$\begin{array}{c}\text{Total}\text{back}\text{end}=\text{Back}\text{end}\text{load}-\text{Declining}\text{vale}\text{for}\text{2}\text{years}\\ =5\%-2\%\\ =3\%\end{array}$

Hence, total back end is 3%.

Conclusion

The back end commission for class A, B and C are $0, $75 and $0 respectively.

Summary Introduction

(c)

To determine:

The annual expenses.

Explanation of Solution

Annual expense for class A

Given,

Management fee is 0.90%

12b-1 fee is 0.25%

Formula to calculate annual expense,

$\text{Annual}\text{expense}=\left(\begin{array}{l}\text{Initial}\text{commission}+\text{Back}\text{end}\text{load}\\ +\text{Management}\text{fee}+12\text{b}-1\text{fee}\end{array}\right)\times \text{Worth}\text{of}\text{asset}$

Substitute 5.5% for initial commission, 0.005 for back end load, 0.90% for the management fee and 0.25% for 12b-1 fee.

$\begin{array}{c}\text{Annual}\text{expense}=\left(5.50\%+0.00\%+0.90\%+0.25\%\right)\times \$2,500\\ =6.65\%\times \$2,500\\ =\$166.25\end{array}$

Hence, the annual expense for class A is $166.25.

Annual expense for class B

Given,

Management fee is 0.90%

12b-1 fee is 0.50%

Formula to calculate annual expense,

$\text{Annual}\text{expense}=\left(\begin{array}{l}\text{Initial}\text{commission}+\text{Back}\text{end}\text{load}\\ +\text{Management}\text{fee}+12\text{b}-1\text{fee}\end{array}\right)\times \text{Worth}\text{of}\text{asset}$

Substitute 0.0% for initial commission, 3.0% for back end load, 0.90% for the management fee and 0.50% for 12b-1 fee.

$\begin{array}{c}\text{Annual}\text{expense}=\left(0.0\%+3.0\%+0.90\%+0.50\%\right)\times \$2,500\\ =4.40\%\times \$2,500\\ =\$110\end{array}$

Hence, the annual expense for class B is $110.

Annual expense for class C

Given,

Management fee is 0.90%

12b-1 fee is 1.00%

Formula to calculate annual expense,

$\text{Annual}\text{expense}=\left(\begin{array}{l}\text{Initial}\text{commission}+\text{Back}\text{end}\text{load}\\ +\text{Management}\text{fee}+12\text{b}-1\text{fee}\end{array}\right)\times \text{Worth}\text{of}\text{asset}$

Substitute 0.0% for initial commission, 0.0% for back end load, 0.90% for the management fee and 1.0% for 12b-1 fee.

$\begin{array}{c}\text{Annual}\text{expense}=\left(0.0\%+0.0\%+0.90\%+1.00\%\right)\times \$2,500\\ =1.90\%\times \$2,500\\ =\$47.5\end{array}$

Hence, the annual expense for class C is $47.5.

Conclusion

The annual expense for class A, B, and C are $166.25, $110 and $47.5 respectively.