FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationRegulatory Fundamentals and General Product KnowledgeMedium
A client invested $10,000 in a mutual fund with a 5% front-end load. The fund's Net Asset Value (NAV) per share at the time of purchase was $9.50. How many shares did the client purchase?
- A1052.63 shares
- B994.74 shares
- C950 shares
- D1000 shares
Show answer & explanationAnswer & explanation
Correct answer: D. 1000 shares
With a 5% front-end load, the actual investment amount applied to purchase shares is $10,000 * (1 - 0.05) = $9,500. Then, divide this by the NAV per share: $9,500 / $9.50 = 1000 shares.
Why the other options are wrong
- A. This would be the number of shares if the full $10,000 was invested and the NAV was lower, or if the calculation was inverted incorrectly.
- B. This calculation seems to incorrectly apply the load or divide by POP instead of NAV. ($10000 / $9.50) * 0.95 is not the correct approach.
- C. This would be the number of shares if $9,500 was the total investment with no load, or if the load was applied to the shares directly, which is incorrect.
Front-End Load Calculation
A front-end load is a sales charge deducted from an investor's initial investment in a mutual fund. The amount invested in shares is the initial investment minus the load.
- Load is deducted from the gross investment.
- The remaining amount is used to purchase shares.
- Shares purchased = (Investment - Load) / NAV.
- Public Offering Price (POP) = NAV / (1 - Sales Charge Percentage).
Memory trick: The 'Load' is a 'Lever' that 'Lessens' your investment, so 'Subtract' it first to see what 'Buys'.