PS1_09 - 3 Suppose you have 2 mutual funds whose annual...

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Problem Set 1 Investments Prof. Pierre-Olivier Weill 1. Suppose a hedge fund manager earns 1% per trading day. There are 250 trading days per year. Answer the following questions: (a) What will be your annual return on $100 invested in her fund if she allows you to reinvest in her fund the 1% you earn each day? (b) What will be your annual return assuming she puts all of your daily earnings into a zero-interest- bearing checking account and pays you everything earned at the end of the year? (c) Can you summarize when it is proper to ”annualize” using APR (annual percentage rate) versus EAR (effective annual rate)? 2. Here are some alternative investments you are considering for one year. (i) Bank A promises to pay 8% on your deposit compounded annually. (ii) Bank B promises to pay 8% on your deposit compounded daily. Compare the effective annual rate (EAR) on these investments.
Image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 3. Suppose you have 2 mutual funds whose annual returns are shown in the following table. Assume you invest $1000 in each, and the proceeds from year 1 are reinvested in year 2 and so on. (a) How much money do you accumulate in each fund after 5 years? (b) ±or each fund, calculate the single annual rate which would yield the same return over the 5-year period. Year ±und A ±und B 1 .16 .30 2 .10-.10 3 .14 .28 4 .02 .17 5 .04-.02 4. (a) Suppose that you have purchased a 3-year zero-coupon bond with face value of $1000 and a price of $850. If you hold the bond to maturity, what is your annual rate of return? (b) Now suppose you have purchased a 3-year bond with face value of $1000, a 7% annual coupon, and a price of $975. Assuming that you hold the bond to maturity, is the IRR greater or less than the return on the bond in part (a)?...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern