You are considering investing in a mutual fund with a 5% sales charge (front-end load) and an expense ratio of 0.5% annually. You can invest instead in a bank CD paying 6% interest. Ignore any differences in risk and focus solely on returns.
A. If you plan to invest for 2 years, what annual rate of return must the fund portfolio earn for you to prefer the fund to the CD?
B. How does your answer to part A. change if you invest for 6 years?
C. If the fund’s assets return 7% annually, after how many years will the mutual fund and CD give you the same future wealth amounts?