Loaded-Up Fund charges a 12b-1 fee of 1.0% and maintains an expense ratio of 0.75%. Economy Fund charges a front-end load of 2% but has no 12b-1 fee and an expense ratio of 0.25%. Assume the rate of return on both funds’ portfolios (before any fees) is 6% per year. How much will an investment of $1,000 in each fund grow to after:

How much will an investment in each fund grow to after: (LO 4-5)

a. 1 year?

b. 3 years?

c. 10 years?

A.  Year 1 = $1036.35

B.  Year 3 = $1158.96

C.  Year 10 = $1714.08

Explanation:

Given an investment of $1000. The end value of the investment will be equal

to I × (1 - front-end load) × (1 + r - true expense ratio)T

Loaded-Up:

Then add the 12b-1 fee to the operating expenses to obtain the true expense ratio: Expense ratio + (12b-1 fee) = 1% + 0.75% = 1.75%

a. Year 1 = $1000 (1 + 0.06 - 0.0175) = $104.25

b. Year 3 = $1000 (1 + 0.06 - 0.0175)^3 = $113.30

c. Year 10 = $1000 (1 + 0.06 - 0.0175)^10 = $151.62

Economy fund:

a. Year 1 = $1000 * 0.98 (1 + 0.06 - 0.0025) = $1036.35

b. Year 3 = $1000 * 0.98 (1 + 0.06 - 0.0025)^3 = $1158.96

c. Year 10 = $1000 * 0.98 (1 + 0.06 - 0.0025)^10 = $1714.08