Chapter 14 Mutual Funds, Investment Real Estate, and Other Investment Alternatives

CHAPTER 14 MUTUAL FUNDS, INVESTMENT REAL ESTATE, AND OTHER INVESTMENT ALTERNATIVES SOLUTIONS TO END OF CHAPTER APPLICATION PROBLEMS Page 480 in Textbook

1. Net Asset Value a. Net asset value = (240 – 10)/15 = $15.33 per share b. The price is $1.67 or 10.9% highet than the closed end fund’s NAV. Investors are willing to pay more than the current market price for the fund. Whether this is a good deal depends on if you expect the price of the fund’s shares to continue to rise in the future. If you think that prices might fall, it would be a good idea to sell and realize the difference.

2. Net Asset Value a. NAV=(50 – 5)/5 = $9.90 per share. b. The NAV has increased $9.90 - $8.00 = $1.90 per share. The annual change in value was 1.90/8.00 = 23.75%

3. Expense Ratio The expense ration = 1/40 = 0.025, or 2.5%.

4. Front-End Load a. Your total investment is 50 x $35 = $1,750. The sales charge is 0.04 x $1,750 = $70. b. $1,750 - $70 = $1,680. This is 1,680/50 = 33.60 per share.

5. 12b-1 Fees a. Since it’s a no load fund, you won’t pay the fee directly. b. The ½% 12b-1 fee will be taken out of the investment returns for the year on the entire fund, so you will earn ½% less than you would have without the fees. That will result in an indirect cost of $10,000 x 0.005 = $50 for the year.

6. Back-End Load If you sell in the third year, the back-end load will be 3 percent. The deferred sales charge will therefore be $1,000 x 3% = $30.

7. Matching Investment Objectives with Funds a. 20-year old saving for down payment: recommend money market fund, since she needs to preserve capital and she has a short time horizon. b. 60-year old retired couple: recommend corporate bond fund for income or a state municipal bond fund that would provide tax-free income. c. 30-year old couple saving for child’s college: recommend equity fund because they need capital appreciation and they have a fairly long time horizon.

8. One-Year Returns a. Percent return for the year is the increase in NAV plus the dividend yield.

163 = 12% + (1.50/$50) = 12% + 3% = 15% Your return is lower because you must factor in the 5% front-end load you paid. Your return is therefore only 10% b. If the NAV fell by 15%, the loss would be offset by the 3% dividend yield, so the net for the year would be a loss of 12%. With your front-end load, you would have lost 17%.

9. Return on Investment a. Two year holding period return = (36+2+2-31)/31 = 9/31 = 29% b. Annual holding period return = (1.29)1/2 -1 = 13.6%

10. Return on Investment Real Estate a. Return on investment = (190,000 + 12,000 – 180,000)/180,000 = 12.2% b. Annual interest on the loan = 6% x 90,000 = $5,400 Return on investment = (190,000 +12,000 – 5,400 – 180,000)/90,000 = 18.4% c. You would have to pay a real estate commission and closing costs. This will reduce the net selling price and decrease the return on investment.

11. Return on Collectible Investment Annual return = (2,500/1,000)1/10 – 1 = 9.6% per year.