Video: Return of Funds with Fees for CFA Exam

Question:

Happy Fund has the following fee structures:

1. Redemption Fee: initially 4% of sale proceeds and declines by 2% per year
2. Distribution Fee: 0%
3. Management Fees: 0.8%
4. Other expenses: 0.5%

If it earns 10% per year, with $1000 investment, what is the redemption value after 1 year and 2 years?

Answer:

This question is testing your knowledge of the fee structures. There are 3 kinds of fees:

1. Front End Load: one-time fee, charged at the time of sales
2. Back End Load: one-time fee, charged when you redeem the fund and it is a variable
3. Annual fees: constant, but paid annually

In this question, there is no front-end load. For back-end load, it is 4% for the 1^st year and 2% for the 2^nd year. Meaning that you pay less back-end load if you redeem later. And for the rests, they are just annual fee. For annual fees of course they have to be compounded annually.

For the return, it has to be compounded annually also. The answers therefore are:

One-year holding period:

1000*1.1*0.96*(1-0.008-0.005) = 1042

Two-year holding period:

1000*1.1^2*0.98*(1-0.008-0.005)^2 = 1155