FRM Part I · FRM Exam Part I · Fund Management
An investor puts $10,000 into a mutual fund Class A share with a 5% front-end load at the start of the year. The fund's NAV per share rises from $20.00 at the investment date to $23.00 at year end, with no distributions. The fund's offering price at purchase equals NAV divided by (1 - load). What is the investor's one-year return, assuming the shares are redeemed at year-end NAV with no back-end load?
The return is 9.25%. The offering price is $20 / 0.95 = $21.05, so $10,000 buys 475 shares. At a $23 NAV they are worth $10,925, a gain of 9.25%. Ignoring the load would give 15%, overstating the return.
- A15.00%
- B9.25%Correct
- C9.75%
- D10.00%
Explanation
Offering price = 20/0.95 = $21.0526. Shares bought = 10,000/21.0526 = 475 shares. Redemption = 475 x 23 = $10,925, so return = 9.25%. 15% ignores the load. 9.75% subtracts 5 points from 15% less accurately? it wrongly applies the load to the gain. 10% wrongly treats 5% load as 5% of the return only.
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