An investor is comparing two share classes of the same mutual fund. Class A shares have a 5.00% front-end sales charge and a 0.25% annual 12b-1 fee. Class C shares have no front-end sales charge, a 1.00% annual 12b-1 fee, and a 1.00% CDSC that applies only to redemptions during the first year. Assume the account value remains constant and ignore compounding.
Approximately how many years must the investor hold the shares before the total cost of Class A becomes lower than the total cost of Class C? Answer: 7 years
The comparison turns on the annual cost difference between the classes. Class C costs 1.00% per year in 12b-1 fees, while Class A costs 0.25% per year, so Class A saves 0.75% each year. The 5.00% front-end load on Class A is recovered when 0.75% times the holding period equals 5.00%, which is 6.67 years, or approximately 7 years; beyond that point Class A is the lower-cost class. The first-year CDSC on Class C does not affect the breakeven because the holding period is well past one year. The 5-year answer divides the load by Class C's full 1.00% fee while ignoring Class A's own 0.25% fee. The 4-year answer divides by the sum of the two 12b-1 fees (1.25%), treating the fees as cumulative rather than as a difference. The 20-year answer divides the load by Class A's 0.25% fee, ignoring Class C's higher fee entirely.
On March 1, an investor purchased $25,000 of a mutual fund's Class A shares and paid the 5.00% front-end sales charge. On May 1, she invested an additional $35,000 in the same fund and signed a letter of intent for a total of $60,000. The fund's breakpoint schedule applies a 3.50% sales charge at $60,000. The fund's letter-of-intent policy permits backdating up to 90 days and repricing purchases made during the backdating period at the applicable breakpoint.
What is the effect of the letter of intent on the sales charges for these purchases? Answer: The March purchase is repriced at 3.50%, producing a $375 credit, and the May purchase is charged $1,225.
Under mutual fund letter-of-intent rules, an LOI may be backdated up to 90 days, so the March 1 purchase falls within the backdating period and counts toward the $60,000 total, and purchases made during that period are repriced at the breakpoint. The March purchase originally incurred a load of $1,250 (5% of $25,000); at the 3.50% breakpoint the correct load is $875, so the investor receives a $375 credit. The May purchase is made while the LOI is in place and is charged $1,225 (3.50% of $35,000). The $900 credit figure would apply the 1.50% difference to the full $60,000, but the May purchase was never charged the 5.00% rate. Leaving the March purchase at 5.00% ignores the 90-day backdating provision, and rejecting the LOI after 30 days misstates the backdating period.
- Class A shares of a mutual fund have a 5% front-end load and a 0.25% annual 12b-1 fee. Class C shares of the same fund have no front-end load and a 1.00% annual 12b-1 fee. Assume the 1% CDSC on Class C shares will not apply and all other expenses are identical. Ignore compounding and the time value of money. Which of the following statements about the two share classes is correct?
Answer: Class C is less expensive for holding periods shorter than about seven years; Class A is less expensive for longer holding periods.
Compare the one-time sales charge with the annual 12b-1 fee difference. Class A pays 5% upfront; Class C pays 0.75% more per year (1.00% - 0.25%). Ignoring compounding and the time value of money, the breakeven holding period is 5% / 0.75% ≈ 6.7 years. Thus, Class C is less expensive for holding periods shorter than about seven years, and Class A is less expensive for longer holding periods. The statement that Class A is less expensive from the first year ignores the 5% upfront cost. The statement that Class C is less expensive only during the first year ignores the continuing 0.75% annual expense gap. The statement that Class C is always less expensive ignores the 12b-1 disadvantage that eventually overtakes the front-end load.
- An investor plans to invest $100,000 in a mutual fund and expects to hold the shares for seven years. The fund's Class A shares have a front-end sales charge of 5.0% and an annual 12b-1 fee of 0.25%. The Class C shares have no front-end sales charge, an annual 12b-1 fee of 1.00%, and a 1.0% contingent deferred sales charge that applies only to redemptions within the first year. Assume the 12b-1 fee is charged each year on the full $100,000 and the account value does not change. By approximately how many dollars will the total sales charges and 12b-1 fees paid on the less expensive class be lower than those paid on the other class over the seven-year period?
Answer: Approximately $250
Class A total: front-end load of 5.0% × $100,000 = $5,000, plus 12b-1 fees of 0.25% × $100,000 × 7 = $1,750, for a total of $6,750. Class C total: 12b-1 fees of 1.00% × $100,000 × 7 = $7,000, with no front-end load and no CDSC, because the shares are held for seven years, past the one-year CDSC period. Class A is the less expensive class, by $7,000 - $6,750 = $250.
The $1,250 figure adds the 1.0% CDSC to the Class C total (8.0% versus 6.75%) even though the CDSC expires after the first year. The $2,000 figure compares only the 5.0% front-end load with the Class C 12b-1 fees, omitting the Class A 0.25% 12b-1 fee. The $6,750 figure is the Class A total by itself, reported as the difference without subtracting the Class C 12b-1 fees.
- A mutual fund has $86 million in total assets, $6 million in total liabilities, and 5 million shares outstanding. The fund's Class A shares carry a sales charge of 4% of the public offering price. Approximately how many Class A shares would an investor receive for a $25,000 purchase?
Answer: 1,500 shares
The offering price equals net asset value divided by (1 - the sales charge as a decimal). Step 1: NAV = ($86,000,000 - $6,000,000) / 5,000,000 = $16.00. Step 2: POP = $16.00 / (1 - 0.04) = $16.67. Step 3: the 4% load consumes $1,000 of the $25,000 payment, so $24,000 is invested at NAV; $24,000 / $16.00 = 1,500 shares (equivalently, $25,000 / $16.67 is approximately 1,500). The 1,563-share figure divides $25,000 by the $16.00 NAV, omitting the sales charge. The 1,440-share figure subtracts the $1,000 load but then divides the remaining $24,000 by the $16.67 offering price instead of by the $16.00 NAV. The 1,395-share figure computes $17.20 per share by failing to subtract the $6 million of liabilities and then applies the correct 4% load formula: $25,000 / ($17.20 / 0.96) is approximately 1,395.
An investor purchased 2,000 Class B shares of a mutual fund at an NAV of $10 per share. The fund's CDSC schedule applies a 5% charge to redemptions during the first year after purchase, 4% during the second year, 3% during the third year, 2% during the fourth year, 1% during the fifth year, and 0% thereafter. The fund's prospectus states that the CDSC is assessed on the lesser of the shares' original cost or their current value at redemption. The current NAV is $13 per share. The investor redeems all of her shares during the third year after purchase.
What contingent deferred sales charge will the fund assess on the redemption? Answer: $600
Contingent deferred sales charge on Class B shares. Under the fund's stated policy, the CDSC is assessed on the lesser of the shares' original cost or their current value at redemption. The original cost is $20,000 (2,000 × $10) and the current value is $26,000 (2,000 × $13), so the basis for the charge is cost. Because the redemption occurs during the third year after purchase, the applicable rate is 3%, and 3% of $20,000 equals $600. The $780 result applies the 3% rate to the $26,000 current value, improperly charging the CDSC on the $6,000 of appreciation. The $1,000 result uses the first-year 5% rate, ignoring the declining CDSC schedule. The $400 result uses the fourth-year 2% rate, an off-by-one misreading of the schedule.
- Which of the following statements regarding mutual fund share classes and sales charges is TRUE?
Answer: A 12b-1 fee is paid annually out of fund assets and is included in the fund's expense ratio, so the fee reduces the fund's net asset value.
The true statement is the one describing the 12b-1 fee: it is a recurring distribution and shareholder-service charge paid out of fund assets, it is included in the fund's expense ratio, and it reduces the fund's net asset value.
The CDSC statement is false because the contingent deferred sales charge is applied to the lesser, not the greater, of original cost and current market value, so appreciation is not subject to the charge. The letter-of-intent statement is false because a letter of intent does not bind the investor to complete the purchases; if the investor falls short, the fund collects the higher sales charge from shares held in escrow, not by enforcing the letter. The rights-of-accumulation statement is false because breakpoint aggregation is available within a single fund family, not across unaffiliated fund families.
- An investor's existing Class A holdings in the Halden Family of Funds have a current value of $40,000. The investor notifies the fund that future purchases should be aggregated under rights of accumulation. The family's Class A breakpoint is $50,000, and its sales-charge schedule is 5% for purchases below $50,000 and 4% for purchases of $50,000 or more. If the investor now invests $15,000 and the fund's NAV is $30.00, approximately how many Class A shares will be purchased?
Answer: 480 shares, because the aggregated $55,000 qualifies the entire new purchase for the 4% breakpoint rate.
Mutual fund sales-charge convention: a front-end load is calculated on the offering price, so POP = NAV ÷ (1 - load). Under rights of accumulation, existing holdings count toward the breakpoint. The aggregate is $40,000 + $15,000 = $55,000, so the entire new purchase qualifies for the 4% rate. POP = $30.00 ÷ (1 - 0.04) = $31.25, and $15,000 ÷ $31.25 = 480 shares. The 475-share result applies the 5% load to the whole purchase and ignores the breakpoint; the 477-share result discounts only the portion above the breakpoint, which is not how breakpoints work; the 500-share result ignores the sales charge entirely.
An investor owns 5,000 Class A shares of the Value Fund, a fund in a mutual fund family. She purchased the shares at $16 per share, and the current NAV is $19. She now invests $10,000 in Class A shares of the Growth Fund, another fund in the same family. The family permits rights of accumulation across all of its funds and determines breakpoint eligibility using the current market value of existing holdings. The family's breakpoint schedule is 5.00% for investments below $50,000, 4.00% for $50,000 to $99,999, and 3.50% for $100,000 or more.
What sales charge will the investor pay on the new $10,000 investment? Answer: $350, because the current value of the Value Fund shares plus the new investment is $105,000, at the 3.50% rate
Under mutual fund breakpoint practice, rights of accumulation allow existing holdings in the same fund family to count toward the breakpoint for a new purchase; the stem specifies that this family uses current market value. The Value Fund position is worth $95,000 (5,000 shares × $19), and adding the $10,000 new investment gives $105,000, which falls in the 3.50% bracket. The new purchase is therefore charged 3.50% of $10,000, or $350. The $400 figure is based on the original cost of the Value Fund shares ($80,000) plus the new investment, for a total of $90,000, which would fall in the 4.00% bracket but ignores the stated market-value basis. The $500 figure looks only at the new $10,000 purchase and ignores rights of accumulation. The $150 figure is the amount of the breakpoint discount (1.50% of $10,000), not the sales charge paid on the purchase.
- An investor signs a 13-month letter of intent to invest $100,000 in Class A shares of a mutual fund and immediately invests $40,000. The fund's sales-charge schedule is 5% below $100,000 and 4% at $100,000 or more. Which statement about the letter of intent is true?
Answer: The initial $40,000 purchase is charged the 4% rate; if the target is not completed, the fund will retroactively charge the higher rate.
Letter-of-intent convention: the investor qualifies for the breakpoint rate on purchases made under the letter, and a portion of shares is held in escrow to cover any additional charge if the target is not met. The $40,000 purchase therefore gets the 4% rate immediately; if the $100,000 target is not completed within 13 months, the fund retroactively applies the higher rate. The refund version misstates the usual mechanism—the reduced rate is applied now, not refunded later. The "only after cumulative purchases reach the breakpoint" version treats the sales charge like a marginal-rate schedule, which is wrong. The "not binding" version confuses no contractual obligation to buy with no sales-charge adjustment.
- A mutual fund's Class A sales charge schedule is 5.0% for purchases below $50,000, 4.0% for purchases of $50,000 to $99,999, and 3.0% for purchases of $100,000 or more. Under the fund's rights-of-accumulation policy, the current market value of existing Class A shares counts toward the breakpoint. An investor owns Class A shares currently worth $65,000, with a cost basis of $55,000, and now purchases an additional $40,000 of the same class. What dollar amount of sales charge will apply to the new purchase?
Answer: $1,200
Under rights of accumulation, the current market value of the existing shares is added to the new purchase to determine the breakpoint. The aggregate is $65,000 + $40,000 = $105,000, which reaches the $100,000 tier, so the 3.0% rate applies to the new purchase. The sales charge is 3.0% × $40,000 = $1,200; the breakpoint rate is applied only to the new money, not to the value already held.
The $1,600 figure uses the investor's $55,000 cost basis instead of the $65,000 current value, putting the aggregate at $95,000 and the rate at 4.0%. The $2,000 figure looks only at the new $40,000 purchase and applies the 5.0% rate for purchases below $50,000, ignoring the existing holdings. The $3,150 figure identifies the correct 3.0% tier but applies the rate to the entire $105,000 aggregate, charging a load on shares that were already purchased.
- Two and a half years ago, an investor purchased $10,000 of a mutual fund's Class B shares. The account is now worth $8,000, and the investor redeems the entire account. The fund's contingent deferred sales charge is 5% for redemptions during the first year after purchase, 4% during the second year, 3% during the third year, and 0% thereafter. The charge is applied to the lesser of the shares' original cost or their current market value. What dollar amount of CDSC will the investor pay?
Answer: $240
The CDSC is applied to the lesser of original cost and current market value at redemption. Measured from the purchase date, a redemption at 2.5 years falls in the third year, so the rate is 3%. The lesser of $10,000 (original cost) and $8,000 (current value) is $8,000, so the charge is 3% × $8,000 = $240.
The $300 figure applies the 3% rate to the original $10,000 cost, ignoring the lesser-of-cost-or-value rule. The $320 figure applies the 4% second-year rate to the $8,000 value, as if the redemption occurred in the second year. The $400 figure applies the 5% first-year rate to the $8,000 value, ignoring the declining rate schedule.
A mutual fund offers three share classes. Class A shares have a 5.00% front-end sales charge and a 0.25% annual 12b-1 fee. Class B shares have no front-end sales charge, a 1.00% annual 12b-1 fee, a CDSC that declines from 5.00% to zero over six years, and they convert automatically to Class A shares eight years after purchase. Class C shares have no front-end sales charge, a 1.00% annual 12b-1 fee, and a 1.00% CDSC that applies only to redemptions during the first year. An investor plans to hold the fund for approximately ten years. Assume the account value remains constant and ignore compounding.
Which share class is least costly for this investor? Answer: Class A, because its total cost over ten years is approximately 7.50% of the investment, which is below the other classes
Mutual fund share-class cost comparison adds the front-end load and the annual 12b-1 fees over the holding period, accounting for Class B's conversion feature. For a ten-year hold: Class A costs 5.00% plus 0.25% for ten years, or 7.50%. Class B costs 1.00% for eight years plus 0.25% for the two years after conversion, or 8.50%, and its CDSC has expired. Class C costs 1.00% for all ten years, or 10.00%, because its CDSC expires after year one but the 1.00% 12b-1 fee continues. Class A is therefore least costly. Choosing Class B for its conversion feature overlooks that Class A's annual fee is 0.75% lower for the first eight years, a 6.00% advantage that already exceeds the 5.00% load. Choosing Class C for having no front-end load ignores that its 1.00% annual fee is 0.75% higher than Class A's for all ten years. The equal-cost statement compares the 5.00% load with the 6.00% excess fee before conversion and ignores the correct totals of 7.50% and 8.50%.
- Three and a half years ago, an investor purchased $60,000 of Class B shares in an open-end fund. The fund's CDSC schedule is 5% in the first year after purchase, 4% in the second, 3% in the third, 2% in the fourth, and 1% in the fifth. The fund assesses the CDSC on the lesser of the original cost or the current value of the shares redeemed. No distributions have been reinvested. The account now has a market value of $82,000. If the investor redeems the entire account today, during the fourth year after purchase, approximately what CDSC will be charged?
Answer: $1,200, because the applicable 2% rate is based on the $60,000 original cost, not the current value.
CDSC convention: the rate depends on how long the shares were held, and this fund, as the stem states, assesses the charge on the lesser of original cost or current value of the shares redeemed. The shares were bought three and a half years ago, so the redemption falls in the fourth year, where the schedule's rate is 2%. No distributions were reinvested, and the $60,000 original cost is lower than the $82,000 current value, so $60,000 is the base: CDSC = 2% × $60,000 = $1,200. The $1,640 result uses the correct 2% rate but applies it to current value instead of the lower original cost. The $3,000 and $4,100 results use the first-year 5% rate on original cost and current value respectively.
- A mutual fund's Class A shares have a net asset value of $9.50 and a sales charge equal to 5.75% of the public offering price. What percentage of the net asset value of the shares purchased does the sales charge represent?
Answer: The sales charge is approximately 6.10% of the net asset value.
The stated sales charge is a percentage of the offering price, and the shares purchased are measured by their net asset value. For every $100 of offering price, $5.75 is the sales charge and $94.25 is invested in shares, so the charge is $5.75 / $94.25 = 6.10% of the net asset value. The $9.50 NAV does not affect the ratio; the offering price would be $9.50 / 0.9425 = $10.08, and the same proportion holds at any NAV.
The 5.75% answer treats the stated rate as if it applied to the net asset value rather than to the offering price, confusing the two bases. The 5.44% answer divides $5.75 by $105.75, a conversion that would be appropriate only if the stated rate applied to the net asset value and had to be restated as a percentage of the offering price; the conversion runs in the wrong direction here. The cannot-be-determined answer overlooks that the offering price is computable from the NAV and the stated load, and that the ratio of the charge to the net asset value is fixed by the 5.75%-of-offering-price rate.
