Question

The Investments Fund sells Class A shares with a front-end load of 5% and Class B shares with 12b-1 fees of 0.75% annually as well as back-end load fees that start at 5% and fall by 1% for each full year the investor holds the portfolio (until the fifth year). Assume that you have $1,000 to invest and the portfolio rate of return net of operating expenses is 13% annually.
a-1.If you invest in each fund and sell after 4 years, how much will you receive from each sale?(Round your answers to 2 decimal places. Omit the "$" sign in your response.)
Amounts
Class A $
Class B $
a-2. Are Class A or Class B shares the better choice for you?
Class A
Class B
b-1.If you invest in each fund and sell after 12 years, how much will you receive from each sale?(Round your answers to 2 decimal places. Omit the "$" sign in your response.)
Amounts
Class A $
Class B $
b-2.Are Class A or Class B shares the better choice for you?
Class A
Class B

Answer 1

Answer:

The responses to the given choices can be defined as follows:

Explanation:

Assume is the investment. Each original Class A investment is of the net-front unburden. The portfolio will be worth four years from now:  

$\ 1,000 \times 5\% = \ 50 =\ 1,000 - \ 50 = \ 950\\\\ \ 950 (1 + 0.13)^4 = \ 950 (1.13)^4 = \ 950 (1.630474) = \ 1,548.95$  

You will place the total of $\ 1,000$ on class B shares, but only $12b-1$will be paid $(13-0.75 = 12.25)$ at a rate of $12.25\%$ and you'll pay a $1\%$back-end load charge if you sell for a four-year period.

After 4 years, your portfolio worth would be:      

$\ 1,000 (1 + 0.1225)^4 = \ 1,437.66 \\\\ \ 1,000 (1.1225)^4 = \ 1000 (1.587616) = \ 1,587.62$  

Their portfolio worth would be: after charging the backend load fee:      

$\ 1,587.616 \times 0.99 = \ 1,571.74 \\\\ Amounts \\\\ Class A \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 1,548.95\\\\ Class B \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 1,571.74$

When the horizon is four years, class B shares are also the best option.

Class A shares would value from a 12-year time frame:

$\ 950 (1.13)^{12} = \ 950 (4.334523) = \ 4,117.80$

In this case, no back-end load is required for Class B securities as the horizon is larger than 5 years.

Its value of the class B shares, therefore, is as follows:

$\ 1,000 (1.1225) 12 = \ 1,000 (4.001623) = \ 4,001.62 \\\\Amounts \\\\\ Class A \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 4,117.80\\\\ Class B \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 4,001.62$

Class B shares aren't any longer a valid option in this, prolonged duration. Its impact on class B fees of $0.75\%\ \ 12b-1$cumulates over a period and eventually outweighs the $5\%$ the burden of class A shareholders.