Question

6. An investor deposits $2000 into a fund at time 0. Four months later when his balance has declined to $1900 he withdraws $300. After four more months his balance is $1800 and he deposits $500. At the end of a year his balance is 2400. a. Find this investor' s (dollar weighted) annual rate of return. (You can assume simple interest.) b. find the fund's annual (time weighted) rate of return. 6a. Current spot rates are si- 0.025, s2 0.032, s3 - 0.035. Consistent with these spot rates, find the price a 3 year bond whose redemption value is $50000 and wh pays annual coupons of $1500.

Answer 1

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Answer:

Explanation:

	Dollar weighted annual return
	Amount	Time	Gain/	Annualised	Annualised	Dollar*
	invested	period	(loss)	Return	Return%	Return
	$2,000	4 months	($100)	(-100/2000)*(12/4)=-0.15	-15%	-30000
(1900-300)	$1,600	8months	200	(200/1600)*(12/8)=0.1875	18.75%	30000
	$2,300	1 year	-200	(-200/2300)=-0.08696	-8.696%	-20000.8
Total	$5,900				Total	-20000.8
	Dollar weighted annual return=			(-20000.8/5900)=	-3.39%
				Dollar weighted annual return=	-3.39%
	Time weighted annual return
	Amount	Time	Gain/	Holding period	1+holding period return
	invested	period	(loss)	Return
	$2,000	4 months	($100)	(-100/2000)=-0.05	0.95
	$1,600	8months	200	(200/1600)=0.125	1.125
	$2,300	1 year	-200	(-200/2300)=-0.08696	0.91304
	Time Weighted Return=			(0.95)*(1.125)*(0.91304)-1=	-0.0241885
				Time Weighted Return=	-2.42%

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