clearlycanadian

Why is the time-weighted rate of return the preferred method of performance measurement?

A) Time weighted allows for inter-period measurement and therefore is more flexible in determining exactly how a portfolio performed during a specific interval of time.

B) Time-weighted returns are not influenced by the timing of cash flows.

C) There is no preference for time-weighted versus money-weighted.

---

Money-weighted returns are sensitive to the timing or recognition of cash flows while time-weighted rates of return are not.

clearlycanadian

A 10% coupon bond was purchased for $1,000. One year later the bond was sold for $915 to yield 11%. The investor's holding period yield on this bond is closest to:

A) 9.0%.

B) 18.5%.

C) 1.5%.

---

HPY = [(interest + ending value) / beginning value] − 1
= [(100 + 915) / 1,000] − 1
= 1.015 − 1 = 1.5%

optiix

A Treasury bill with a face value of $1,000,000 and 45 days until maturity is selling for $987,000. The Treasury bill’s bank discount yield is closest to:

A) 10.54%.

B) 7.90%.

C) 10.40%.

---

The actual discount is 1.3%, 1.3% × (360 / 45) = 10.4%
The bank discount yield is computed by the following formula, r = (dollar discount / face value) × (360 / number of days until maturity) = [(1,000,000 − 987,000) / (1,000,000)] × (360 / 45) = 10.40%.

optiix

What is the effective annual yield for a Treasury bill priced at $98,853 with a face value of $100,000 and 90 days remaining until maturity?

A) 4.79%.

B) 1.16%.

C) 4.64%.

---

HPY = (100,000 − 98,853) / 98,853 = 1.16%
EAY = (1 + 0.0116)365/90 − 1 = 4.79%

optiix

A T-bill with a face value of $100,000 and 140 days until maturity is selling for $98,000. What is the effective annual yield (EAY)?

A) 2.04%.

B) 5.14%.

C) 5.41%.

---

The EAY takes the holding period yield and annualizes it based on a 365-day year accounting for compounding. HPY = (100,000 − 98,000) / 98,000 = 0.0204. EAY = (1 + HPY)365/t − 1 = (1.0204)365/140 − 1 = 0.05406 = 5.41%.

optiix

A T-bill with a face value of $100,000 and 140 days until maturity is selling for $98,000. What is the money market yield?

A) 5.25%.

B) 5.41%.

C) 2.04%.

---

The money market yield is equivalent to the holding period yield annualized based on a 360-day year. = (2,000 / 98,000)(360 / 140) = 0.0525, or 5.25%.

optiix

A T-bill with a face value of $100,000 and 140 days until maturity is selling for $98,000. What is its holding period yield?

A) 5.25%.

B) 5.14%.

C) 2.04%.

---

The holding period yield is the return the investor will earn if the T-bill is held to maturity. HPY = (100,000 – 98,000) / 98,000 = 0.0204, or 2.04%.

optiix

A T-bill with a face value of $100,000 and 140 days until maturity is selling for $98,000. What is the bank discount yield?

A) 5.41%.

B) 4.18%.

C) 5.14%.

---

Actual discount is 2%, annualized discount is: 0.02(360 / 140) = 5.14%

optiix

A Treasury bill (T-bill) with a face value of $10,000 and 219 days until maturity is selling for 97.375% of face value. Which of the following is closest to the holding period yield on the T-bill if held until maturity?

A) 2.63%.

B) 2.81%.

C) 2.70%.

---

The formula for holding period yield is: (P1 − P0 + D1) / (P0), where D1 for a T-bill is zero (it does not have a coupon). Therefore, the HPY is: ($10,000 − $9,737.50) / ($9,737.50) = 0.0270 = 2.70%.
Alternatively (100 / 97.375) − 1 = 0.02696.

optiix

A Treasury bill (T-bill) with a face value of $10,000 and 44 days until maturity has a holding period yield of 1.1247%. Which of the following is closest to the effective annual yield on the T-bill?

A) 9.72%.

B) 12.47%.

C) 8.76%.

---

The formula for the effective annual yield is: ((1 + HPY)365/t) − 1. Therefore, the EAY is: ((1.011247)(365/44)) − 1 = 0.0972, or 9.72%