HW2_Solutions

# HW2_Solutions - BusM 410 Name Section HW#2 Due Jan 19 Show...

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BusM 410 HW #2 Name: Due Jan 19 Section: Show your work. 1. The effective quarterly return is 4%. What is the effective 2-year return? (1+ER 3mo ) 8 =(1+ER 24mo ) (1.04) 8 =1+ ER 24mo ER 24mo = 36.86% 2. The effective 2 year return is 12%. What is the effective annual return? (1+ER 12mo ) 2 =(1+ER 24mo ) (1 + ER 12mo ) 2 = 1.12 ER 12mo = 5.83% 3. The effective monthly return is 2%. What is the effective annual return? (1+ER 1mo ) 12 =(1+ER 12mo ) (1.02) 12 = 1 + ER 12mo ER 12mo = 26.82% 4. The effective annual rate on an account that pays interest every six months is 13%. What is the effective six-month rate? What is the APR? (1+ER 6mo ) 2 =(1+ER 12mo ) (1 + ER 6mo ) 2 = 1.13 ER 6mo = 6.30% APR = 2* ER 6mo =2*6.30% = 12.60% 5. The APR is 12% with quarterly compounding. What is the effective quarterly rate? What is the effective annual rate? What is the effective two-month rate? ER 3mo =APR/m=12/4 = 3% where m is the number of compounding intervals in a year (1+ER 3mo ) 4 =(1+ER 12mo ) (1.03) 4 = 1 + ER 12mo ER 12mo = 12.55% (1 + ER 2mo ) 6 =(1+ER 12mo ) (1 + ER 2mo ) 6 =1.1255 ER 2mo = 1.99%

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6. The APR is 12% with monthly compounding. What is the effective monthly rate? What is the effective 8-month rate? ER 1mo = APR/m =.12/12 = 1% where m is the number of compounding intervals in a year (1+ER 1mo ) 8 =(1+ER 8mo ) (1.01) 8 = 1 + ER 8mo ER 8mo = 8.29% 7. The effective annual rate on an account that pays interest every quarter is 16%. What is the effective quarterly rate? What is the APR? (1 + ER 3mo ) 4 = (1 + ER 12mo ) (1 + ER 3mo ) 4 = 1.16 ER 3mo = 3.78% APR=m* ER 3mo =4*3.78%=15.12% where m is the number of compounding intervals in a year 8. What is the effective annual return on an account that pays 8% with compounding of a. 100 times per year? (1+APR/m)^m = (1 + ER 12mo ) where m is the number of compounding intervals in a year (1+0.08/100)^100=8.3252% b. 1000 times per year? (1+0.08/1000)^1000=8.3284% c. Continuous compounding? (Hint: FV=PV*e rt ) e 0.08 -1= 8.3287% see discussion in assigned reading in chapter 5 of BKM 9. Consider the three stocks in the following table. P t represents the price at time t, and Q t represents shares outstanding at time t. Stock C splits 2 for 1 in the last period: P 0 Q 0 P 1 Q 1 P 2 Q 2 A 45 10 0 47 10 0 4 7 100 B 25 200 22 200 22 200 C 10 0 200 110 200 6 0 400
a. Calculate the rate of return on a price-weighted index of the three

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## This note was uploaded on 11/22/2011 for the course FINANCE BUS M 410 taught by Professor Robertschonlau during the Winter '11 term at BYU.

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HW2_Solutions - BusM 410 Name Section HW#2 Due Jan 19 Show...

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