5. 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)?
6. 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.
7. (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)?
8. Excel Question. Download the monthly S&P 500 prices from January 1950 until today http://finance.yahoo.com/ (click investing, click S&P 500, click historical prices, click monthly, click get prices, click download to spreadsheet).
(a) What is your best estimate for next month's return?
(b) What would have been your annualized HPR if you invested as of the start of the index?
(c) In what month occurred the lowest monthly return? What happened?