Problem
Consider that a load is a mutual fund that comes with a sales charge or commission. In addition, an expense ratio reflects how much a mutual fund, or an ETF (exchange-traded fund) pays for portfolio management, administration, marketing, and distribution, among other expenses.
You have inherited nine-thousand dollars from a deceased relative. You have researched investment options. You are considering an investment in a mutual fund with a 4% front-end load and an expense ratio of 0.5%, or you could invest instead in a bank CD paying 6% interest.
Consider the following to determine what investment you will make:
I. If you plan to invest for two years: What annual rate of return must the mutual fund portfolio earn for you to be better off in the mutual fund than in the CD? Is the mutual fund or CD more beneficial at two years? When calculating assume annual compounding of returns.
II. If you plan to invest for six years: How does your calculation change? Why does your answer change? Is the mutual fund or CD more beneficial at six years? When calculating assume annual compounding of returns.
III. Now suppose that instead of a front-end load, the mutual fund assesses a 12b-1 fee of .75% per year.
i. What annual rate of return must the mutual fund portfolio earn for you to be better off in the fund than in the CD? Does your answer in this case depend on your time horizon?
IV. Consider and summarize how you applied relevant information technology to determine your investment strategies. Explain your work in detail and provide in-text citations.
V. Provide brief analysis having rational reasoning of the results