PS1_09

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

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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.
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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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