An investor with 2,300 units and an early encashment charge of 5% in year one that reduces by 1% each year has a unit price of €1.87 in year 3. What is the encashment value in year 3?

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Prepare for the Qualified Financial Adviser Exam 2 with flashcards and multiple choice questions, complete with hints and explanations. Get exam-ready and increase your confidence with our comprehensive study materials!

Multiple Choice

An investor with 2,300 units and an early encashment charge of 5% in year one that reduces by 1% each year has a unit price of €1.87 in year 3. What is the encashment value in year 3?

Explanation:
Encashment value is what you receive when you redeem the investment: you take the number of units and apply the price per unit after the applicable early encashment charge for that year. The charge starts at 5% in year one and drops by 1% each year, so in year three it is 3%. Net price per unit = €1.87 × (1 − 0.03) = €1.8139. Encashment value = 2,300 units × €1.8139 ≈ €4,171.97 → €4,172. So, the encashment value in year three is €4,172.

Encashment value is what you receive when you redeem the investment: you take the number of units and apply the price per unit after the applicable early encashment charge for that year. The charge starts at 5% in year one and drops by 1% each year, so in year three it is 3%.

Net price per unit = €1.87 × (1 − 0.03) = €1.8139.

Encashment value = 2,300 units × €1.8139 ≈ €4,171.97 → €4,172.

So, the encashment value in year three is €4,172.

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