Open-end Funds Calculations on the Series 7 Exam
You need to know two basic formulas to determine the sales charge and public offering price of open-end funds. The Series 7 will expect you to be prepared to use multiple formulas, but fortunately, you only need two for open-end funds.
Sales charge percent
The sales charge, which is set at a maximum of 8-1/2 percent, is part of the public offering price (POP), or ask price, not something tacked on afterward like a sales tax.
One of the tricks for calculating the sales charge for open-end funds is remembering that the POP equals 100 percent. Therefore, if the sales charge is 8 percent, the net asset value (NAV) is 92 percent of the POP. The formula for determining the sales charge percent is as follows:
The following question tests your expertise in calculating the sales charge of a mutual fund.
ABC Aggressive Growth Fund has a net asset value of $9.20 and a public offering price of $10.00. What is the sales charge percent?
(A) 6.8 percent
(B) 7.5 percent
(C) 8 percent
(D) 8.7 percent
The right answer is Choice (C). The first thing that you have to do is set up the equation. Start with the POP of $10.00 and subtract the NAV of $9.20 to get $0.80. Next, divide the $0.80 by the POP of $10.00 to get the sales charge of 8 percent:
To help you remember that the ask (offer) price of a fund is the same as the POP, remember to ask your POP about it.
Public offering price (POP)
When taking the Series 7 exam, you may be asked to figure out the public offering price of a mutual fund when you’re given only the sales charge percent and the NAV.
Remember, the sales charge is already a part of the POP, so the sales charge is not equal to the sales charge percent times the NAV. Use the following formula to figure out how much an investor has to pay to buy shares of the fund when you know only the NAV and the sales charge percent:
The following question tests your ability to answer a POP question.
DEF Aggressive Growth Fund has a NAV of $9.12 and a POP of $9.91. If there is a 5 percent sales charge for investments of $30,000 and up, how many shares can an investor who is depositing $50,000 purchase?
(A) 5,045.409 shares
(B) 5,208.333 shares
(C) 5,219.207 shares
(D) 5,482.456 shares
The answer you want is Choice (B). Don’t let the decimals throw you off; mutual funds can sell fractional shares. This investor isn’t going to be paying the POP of $9.91 per share because she’s receiving a breakpoint for a large dollar purchase. To figure out the POP for this investor, set up the formula:
After working out the formula, you see that the investor is paying $9.60 per share instead of $9.91. Next, determine the number of shares the investor can purchase by dividing the amount of the investment by the cost per share:
This investor is able to purchase 5,208.333 shares because of the breakpoint. Without the breakpoint, the investor would have been able to purchase only 5,045.409 shares.