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)?...
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- Spring '08
- effective annual rate, Annual rate, fund manager