Public Offering Price

For a front-end load fund, the public offering price (POP) equals:

1. A.NAV plus the sales chargeCorrect - investors pay NAV plus the load.
2. B.NAV minus the sales chargeThis reverses the arithmetic and would have the customer paying less than the shares are worth, which no distributor would offer. The load is added to NAV, not deducted from it, so POP is the larger of the two figures.
3. C.NAV plus the 12b-1 feeA 12b-1 fee is a genuine cost, which is what gives this choice its pull, but it is charged annually against fund assets and shows up as a drag on NAV over time. It is never added to the purchase price; the front-end load is what separates POP from NAV.
4. D.NAV onlyThis is correct for a no-load fund and for any redemption, so the statement is true in other settings. The stem specifies a front-end load fund, and there the offering price is NAV plus that charge.

Why: POP = NAV plus the front-end sales charge.

Delia Okonjo notices that the Marston Equity Fund quotes a public offering price of $18.42 and a net asset value of $18.42, and its prospectus shows a 0.20% 12b-1 fee. A no-load mutual fund:

1. A.Always outperforms load fundsAvoiding a sales charge does leave more money invested from day one, so the cost advantage is genuine. Results still depend on what the portfolio owns, and a well-managed load fund can outperform a no-load one; the word always is what makes this false.
2. B.Cannot be redeemedWhether a fund charges a load has nothing to do with redeemability. A no-load fund is still an open-end investment company, so it stands ready to buy shares back at the next computed NAV.
3. C.Charges the maximum 8.5% loadThis states the direct opposite of the term. A fund charging the maximum permitted load is the most heavily loaded fund the rules allow, while a no-load fund sells shares at NAV with no sales charge.
4. D.Sells shares at NAV with no sales chargeCorrect - no front or back load.

Why: A no-load fund sells shares at NAV with no sales charge (and any 12b-1 fee is 0.25% or less).

A mutual fund's sales charge percentage is calculated as:

1. A.(POP minus NAV) divided by POPCorrect - the load as a percent of POP.
2. B.NAV divided by POPThis quotient is the share of the purchase price that actually buys fund assets, which is the complement of the sales charge rather than the charge itself. A fund with a 6 percent load would return 94 percent here, so the figure describes what the investor keeps, not what the investor pays.
3. C.(POP minus NAV) divided by NAVThe numerator is right and only the denominator is wrong, which is what makes this the hardest one to catch. Dividing by NAV expresses the load as a markup on the fund's own value and always produces a larger percentage than the industry figure; the convention, and the ceiling the load is measured against, both use the offering price.
4. D.POP divided by sharesCheck what the units produce: a per-share price divided by a share count yields dollars per share squared, which is not a percentage of anything. The POP is already stated on a per-share basis, so dividing it again by shares has no meaning.

Why: Sales charge % = (public offering price minus NAV) divided by the public offering price.

A fund's NAV is 9.15 and the maximum sales charge is 8.5% of the public offering price. The POP is:

1. A.9.99This answer sits a penny below the correct result, which is a signal in itself: the numbers in this problem are constructed to divide evenly, and 9.15 over 0.915 is exactly 10.00. A figure that lands just short usually comes from rounding the divisor rather than carrying it through.
2. B.9.93This is the single most common error on this calculation: multiplying the NAV by 1.085 instead of dividing by 0.915. Marking up the NAV applies the 8.5 percent to the smaller number, which is why the answer comes in low; the stem says the charge is a percentage of the offering price, so the offering price has to be the base.
3. C.10.85This applies the charge on top of a figure that is already the offering price, effectively loading the fund twice. It also fails a basic containment check: the sales charge is 8.5 percent of POP, so the gap between NAV and POP here would have to be 1.70, nearly 19 percent of the NAV.
4. D.10.00Correct - 9.15 / 0.915 = 10.00.

Why: POP = NAV / (1 - sales charge %) = 9.15 / (1 - 0.085) = 9.15 / 0.915 = 10.00.