FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProcessing Customer Orders and TransactionsMedium
A client wants to purchase shares of a mutual fund with an offering price of $10.50 and a Net Asset Value (NAV) of $10.00. The fund imposes a front-end sales charge. What is the sales charge percentage?
- A0.50%
- B4.76%
- C5.00%
- D5.25%
Show answer & explanationAnswer & explanation
Correct answer: B. 4.76%
The sales charge is the difference between the offering price and the NAV. The sales charge percentage is calculated by dividing the sales charge by the offering price. Sales charge = $10.50 (POP) - $10.00 (NAV) = $0.50. Sales charge percentage = $0.50 / $10.50 = 0.047619, or 4.76%.
Why the other options are wrong
- A. This is an incorrect calculation; it represents the sales charge amount, not the percentage.
- C. This would be the sales charge as a percentage of NAV ($0.50 / $10.00), which is incorrect for calculating the sales charge percentage based on POP.
- D. This is an incorrect calculation.
Mutual Fund Sales Charge Percentage
The sales charge percentage is calculated by dividing the sales charge amount by the Public Offering Price (POP).
- Sales Charge = POP - NAV.
- Sales Charge % = Sales Charge / POP.
- FINRA limits maximum sales charge to 8.5% of POP.
Memory trick: Sales Charge is part of the 'POP' price, so divide by POP.