RealWorldGraduation_Question_44_Bond_Commissions <– PDF
Suppose Christine has $1000 to invest for one year only (she will cash out after 12 months), and is only interested in conservative investments such as mutual funds based on high-quality bonds that have a guaranteed annual return. She is presented with three options: a) Bond Fund A with a guaranteed return of 3% and no sales commission; b) Bond Fund B with a guaranteed return of 6% and a sales commission of 3%; and c) Bond Fund C with a guaranteed return of 10% and a sales commission of 7%. Assume that the risk of all three options is zero. Sales commissions are always paid up-front. Choose the correct statement for this one-year investment:
a) Bond Fund B is twice as good an investment as Bond Fund A (6/3 = 200%)
b) Bond Fund C is 166% better as an investment than Bond Fund B (10/6 = 166%).
c) Bond Fund C is 333% better as an investment as Bond Fund A (10/3 = 333%)
d) Bond Fund C is a better investment than splitting the $1000 between Fund A and Fund B in any ratio.
e) All of the above are true.
(The answer is shown on p. 2 of the PDF.)
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