An investor purchases fund shares with a 3 percent front-end load and expects to hold the shares for 10 years.The fund has a total fund expense ratio (including 12b-1 fees) of 1 percent per year.The annual total shareholder cost for this fund is _______ per year.

Question

Quizplus · Accepted Answer

The front-end load is a one-time cost that is paid when the investor purchases the shares, so it is not an annual cost. Therefore, the investor will pay 3 percent upfront.
The total fund expense ratio is 1 percent per year, which is the annual cost the investor will pay to own the fund shares. Therefore, the annual total shareholder cost is 1 percent + 3 percent = 4 percent. However, since the investor plans to hold the shares for 10 years, the total cost over that period of time will be 4 percent x 10 years = 40 percent. 
Hence, the annual total shareholder cost for this fund is 1.3 percent (1 percent + [3 percent ÷ 10 years]).

An Investor Purchases Fund Shares with a 3 Percent Front-End