TOPIC 2 – TUTORIAL 2

1. Would you expect a typical open-end fixed-income mutual fund to have higher or lower
operating expenses than a fixed-income unit investment trust? Why?
A unit investment trust is an unmanaged mutual fund. Its portfolio is fixed and does not change due to
asset trades, as does a close-end fund.

Investors who wish to liquidate their holdings of a unit investment trust may sell the shares back to the
trustee for net asset value, while a close-end fund is traded on the open market.

=>An open-end fund will have higher fees since they are actively marketing and managing their investor
base. The fund is always looking for new investors. A unit investment trust need not spend too much
time on such matters since investors find each other.

2. Why can closed-end funds sell at prices that differ from net asset value while open-end funds
do not?
1. Close-end funds trade on the open market and are thus subject to market pricing.
2. Open-end funds are sold by the mutual fund and must reflect the NAV of the investments.
3. The composition of the Vingroup Fund portfolio is as follows:

a. The fund has not borrowed any funds, but its accrued management fee with the portfolio
manager currently totals $30,000. There are 4 million shares outstanding. What is the net
asset value of the fund?
A. Given that net asset value equals assets minus liabilities expressed on a per-share basis,
we first add up the value of the shares to get the market value of the portfolio:

Stock Value Held by Fund

A $ 7,000,000
B 12,000,000
C 8,000,000
D 15,000,000
Total $42,000,000
Knowing that the accrued management fee, which adjusts the value of the portfolio, totals
$30,000, and the number of the shares outstanding is 4,000,000, we can use the NAV
 equation:

Net asset value = (market value of assets - market value of liabilities) / shares outstanding =
($42,000,000 - $30,000) / $4,000,000 = $10.49

b. If during the year the portfolio manager sells all of the holdings of stock D and replaces it
with 200,000 shares of stock E at $50 per share and 200,000 shares of stock F at $25 per
share, what is the portfolio turnover rate?
B. The value of stocks sold and replaced = $15,000,000.
Turnover rate = The value of stocks sold or replaced / value of assets = $15,000,000 /
$42,000,000 = 0.3571 = 35.71%
4. The Closed Fund is a closed-end investment company with a portfolio currently worth $200
million. It has liabilities of $3 million and 5 million shares outstanding.
a. What is the NAV of the fund?
A. NAV = (market value of assets - market value of liabilities) / shares outstanding = ($200,000,000 -
$3,000,000) / $5,000,000 = $39.40
b. If the fund sells for $36 per share, what is its premium or discount as a percent of net asset
value?
B. Premium (or discount) = (Price - NAV) / NAV = ($36 - $39.40) / $39.40 = -0.0863 = -8.63%
The fund sells at an 8.63% discount from NAV.
5. City Street Fund has a portfolio of $450 million and liabilities of $10 million. If 44 million
shares are outstanding, what is net asset value?

Net Asset Value:

Net asset value is a concept used by mutual funds especially the open-ended funds and it helps to
determine if the fund is valued correctly or not. Net asset value is the difference between the
asset's total funds and liabilities divided by the number of shares of the fund outstanding and the
shares are redeemed at the NAV.

Answer:

a) If there are 44 million shares outstanding:

The net asset value is $10.

Explanation:

The formula for NAV:

Net asset value = (Total assets - Total Liabilities) / Shares outstanding

 Net asset value = ($450 million - $10 million) / 44 million

 Net asset value = $10 per share.
6. Corporate Fund started the year with a net asset value of $12.50. By year-end, its NAV
equaled $12.10. The fund paid year-end distributions of income and capital gains of $1.50. What
was the (pretax) rate of return to an investor in the fund?
ROR= Rate of return =NAV1 - NAV 0 + income & cap gain / NAV0
NAV 0 = $12.50
NAV 1 = $12.10
income & captain = $1.50
ROR= 12.10 - 12.50 + 1.50 / 12.50
ROR= 8.80%
7. The New Fund had average daily assets of $2.2 billion last year. The fund sold $400 million
worth of stock and purchased $500 million during the year. What was its turnover ratio?
The excess of purchases over sales must be due to new inflows into the fund. Therefore, $400 million of
stock previously held by the fund was replaced by new holdings. So turnover is: Turnover rate = The
value of stocks sold or replaced / value of assets =400m / 2.2b = 18.18%
8. You purchased 1,000 shares of the New Fund at a price of $20 per share at the beginning of
the year. You paid a front-end load of 4%. The securities in which the fund invests increase in
value by 12% during the year. The fund’s expense ratio is 1.2%. What is your rate of return on
the fund if you sell your shares at the end of the year? T nghĩ dùng tương tự công thức này 
Rate of return =NAV1 - NAV 0 + income & cap gain / NAV0
Giải đây:
Rate of return = (Aggregate investment value after one year - Investment value) / investment value   -----
equation 1
Cost of shares =number of shares* price per share  = 1000* $20 =$20,000
Total amount invested = Purchasing cost /(1- front-end load)   = $20,000 / (1-0.04) =$20,000 / 0.96 =
$20,833.333
Investment value after one year
= Total Investment*( 1+ price increase-expense ratio)  = $20,000*( 1 +0.12 -0.012)
= $20,000*(1.12-0.012) = $20,000 * 1.108 = $22,160
From equation 1 above
Rate of return = ($22,160 - $ 20,833.333) / $20,833.333= $ 1,326.667 / $ 20,833.333= 0.0637=6.37%
My rate of return on the fund will be 6.37% if I sell the shares at the end of the year.
9. Loaded-Up Fund charges a 12b-1 fee of 1.0% and maintains an expense ratio of .75%.

Economy Fund charges a front-end load of 2% but has no 12b-1 fee and an expense ratio of

.25%. Assume the rate of return on both funds’ portfolios (before any fees) is 6% per year.

How much will an investment in each fund grow to after:

a. 1 year?

b. 3 years?
c. 10 years?

Answer

Loaded - Up Fund

1 Year

The value of the investment can be calculated by the formula;

= Investment*(1-front end load)*(1+r-true expense ratio)^t

Loaded-Up fund has no front end load.

r is the return

True Expense Ratio = Fees + Expense Ratio

= 1% + 0.75%

= 1.75%

=> Investment*(1-front end load)*(1+r-true expense ratio)^t

= 1,000 * ( 1 + 6% - 1.75%) ^ 1

= $1,042.50

3 years

=  Investment*(1-front end load)*(1+r-true expense ratio)^t

= 1,000 * ( 1 + 6% - 1.75%) ^ 3

= $1,133.00

10 years

=  Investment*(1-front end load)*(1+r-true expense ratio)^t

= 1,000 * ( 1 + 6% - 1.75%) ^ 10

= $ 1,516.21

Economy Fund.
1 year

The same formula applies and this time because the Economy fund uses a front-load charge of
2% as well as an expense ratio of 0.25%, the formula will be;

=  Investment*(1-front end load)*(1+r-true expense ratio)^t

= 1,000 * (1 - 2%) * ( 1 + 6% - 0.25%) ^ 1

= 1,000 * 98% * ( 1 + 6% - 0.25%) ^ 1

= $1,036.35

3 years

= Investment*(1-front end load)*(1+r-true expense ratio)^t

= 1,000 * (1 - 2%) * ( 1 + 6% - 0.25%) ^ 3

= 1,000 * 98% * ( 1 + 6% - 0.25%) ^ 3

= $1,158.96

10 years

= Investment*(1-front end load)*(1+r-true expense ratio)^t

= 1,000 * (1 - 2%) * ( 1 + 6% - 0.25%) ^ 10

= 1,000 * 98% * ( 1 + 6% - 0.25%) ^ 10

= $1,714.08

Extra exercises:

1. What are some comparative advantages of investing in the following?

a. Unit investment trusts.

diversification, divisibility, and lower transaction costs associated with large-scale trading; professional
management; predictable portfolio composition and income flows, low management fees and portfolio
turnover

b. Open-end mutual funds.

Diversification, divisibility, and lower transaction costs associated with large scale trading; professional
management; large market with many investing choices

c. Individual stocks and bonds that you choose for yourself.

No management fee, more direct controls over portfolio exposures and tax management

2. A closed-end fund starts the year with a net asset value of $12.00. By year-end, NAV equals

$12.10. At the beginning of the year, the fund was selling at a 2% premium to NAV. By the

end of the year, the fund is selling at a 7% discount to NAV. The fund paid year-end

distributions of income and capital gains of $1.50. Bài này t tự làm, ko biết sai hay đúng đâu nhớ:))

a. What is the rate of return to an investor in the fund during the year?

T nghĩ dùng tương tự công thức này  Rate of return =NAV1 - NAV 0 + income & cap gain / NAV0
NAV0=$12*(1+2%)=12.24

NAV1=$12.1*(1-7%)=11.253

ROR=(11.253-12.24+ 1.5)/12.24=4.19%

b. What would have been the rate of return to an investor who held the same securities as the fund

manager during the year?

ROR=(12.1-12+1.5)/12=13.33%

Bài tương tự câu 2

A closed-end fund starts the year with a net asset value of $27. By year-end, NAV equals $28.60. At the
beginning of the year, the fund is selling at a 2% premium to NAV. By the end of the year, the fund is
selling at a 7% discount to NAV. The fund paid year-end distributions of income and capital gains of
$3.00.

a. What is the rate of return to an investor in the fund during the year? (Do not round intermediate
calculations. Round your answer to 2 decimal places.) ? T nghĩ dùng tương tự công thức này  Rate
of return =NAV1 - NAV 0 + income & cap gain / NAV0

Start of year price = 27 x 1.02 = 27.54

End of year price = 28.60 x 0.93 = 26.598
Price fell by 0.942

Rate of Return = (∆NAV + Distributions) / Start of year NAV = (-0.942 + 3) / 27.54 = 0.747 = 7.47%
b. What would have been the rate of return to an investor who held the same securities as the fund
manager during the year? (Round your answer to 2 decimal places.)

Rate of Return = (∆NAV + Distributions) / Start of Year NAV = (1.60 + 3)/27 = .1704 = 17.04%

3. Consider a mutual fund with $200 million in assets at the start of the year and 10 million shares

outstanding. The fund invests in a portfolio of stocks that provides dividend income at the end

of the year of $2 million. The stocks included in the fund’s portfolio increase in price by 8%,

but no securities are sold and there are no capital gains distributions. The fund charges 12b-1

fees of 1%, which are deducted from portfolio assets at year-end. What is the fund’s net asset

value at the start and end of the year? What is the rate of return for an investor in the fund?

Answer:

At start = $20/share

At end = $21.384

Explanation:

DATA

ASSets at the start = $200m

Outstanding shares = 10m

Dividend income at the end = $2m=>dividend per share=2m/10m=0.2m

Gain in price = 8%

12b-1 fees = 1%

A.

Net Assets value at start = Assets at start/Outstanding shares

Net Assets value at start = $200m/10m

Net Assets value at start = $20/share

Net assets value at the end = Gain Price x (1-12b-1 fees)

Net Assets value at the end = $20x (1-8%) x (1 - 0.01)

Net Assets value at the end = $21.384

Rate of return =NAV1 - NAV 0 + income & cap gain / NAV0

=(21.384-20+0.2)/20=7.92%