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Thread: please help me solve this problem

  1. #1
    Actuary.com - Level I Poster
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    please help me solve this problem

    An investor purchases 1000 worth of units in a mutual fund whose units are
    valued at 4.00. The investment dealer takes a 9% “front-end load” from the
    gross payment. One year later the units have a value of 5.00 and the fund
    managers claim that the “fund’s unit value has experienced a 25% growth
    in the past year.” When units of the fund are sold by an investor, there is a
    redemption fee of 1.5% of the value of the units redeemed.
    (a) If the investor sells all his units after one year, what is the effective annual
    rate of interest of his investment?
    (b) Suppose instead that after one year the units are valued at 3.75. What
    is the return in this case?


    Answer: (a) 12.04% (b) −15.97%

    How do you do this problem? Please help! Thanks

  2. #2
    Super Moderator
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    Initial investment = # of units * initial unit value
    1000 units * $4/unit = $4000

    Also calculate # of units actually purchased
    1000 units * (1 - .09) = 910 units

    a) End of period value per unit is $5.
    Value = 910 units * $5/unit = 4481.75
    Redemption value = 4550 * (1-.015) = 4481.75
    IRR = ending return / initial investment -1 = 4481.75 / 4000 -1
    = 12.04%

    I leave b) for you.

  3. #3
    Actuary.com - Level I Poster
    Join Date
    May 2010
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    Thank you very much!
    it really helps me a lot

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