You have $10,000 to invest and you are considering investing in a fund. The fund charges a front-end load of 5.75% and an annual expense fee of 1.25% of the average asset value over the year. You believe the fund's gross rate of return will be 11% per year. If you make the investment, what should your investment be worth in one year?

Question

Quizplus · Accepted Answer

To calculate the investment's future value, we first need to calculate the initial investment amount after deducting the front-end load. The initial investment would be $10,000 * (1-0.0575) = $9,425. The fund's gross rate of return is stated to be 11% per year, therefore the future value after one year would be $9,425 * 1.11 = $10,461.75. 
Next, we need to calculate the annual expense fee. The average asset value over a year would be the sum of the initial and future values, divided by two. Therefore, average asset value = ($10,461.75 + $9,425) / 2 = $9,943.375. The annual expense fee would then be $9,943.375 * 0.0125 = $124.29. 
Finally, we need to subtract the annual expense fee from the future value to get the actual investment value after one year. Therefore, the investment should be worth $10,461.75 - $124.29 = $10,337.46 after one year. Option B is the closest answer to this value.

You Have $10,000 to Invest and You Are Considering Investing