CIN2122 Tutorial 4
Question 1
Define the following terms, starting their formulae where necessary:
a. Money weighted rate of return. [2 marks]
b. Time weighted rate of return. [2 marks]
c. Linked internal rate of return. [2 marks]
Question 2
The value of a fund’s assets was £10m on 1 December 2021 and £11m on 31 December 2022. The
cash flows during this period were: ZWL100000 received on 1 March; ZWL500000 paid out on 1
June; and ZWL750000 received on 31 October. Determine the money-weighted rate of return. [3
marks]
Question 3
a. The market value of a small pension fund’s assets was USD$2.7 million on 1 January 2006
and USD$3.1 million on 31 December 2006. During 2006 the only cash flows were: Bank
interest and dividends totalling USD$125000 received on 30 June; a cash payment of
£100,000 received on 1 August when a block of shares was sold; a lump sum retirement
benefit of £75,000 paid on 1 May; and a contribution of USD$50000 paid by the company
on 31 December. Show that the money-weighted rate of return is 16.0%. [5 marks]
b. Calculate the TWRR for the fund in Part (a) given the extra information that the fund value
(including all accrued interest and capital gains) was USD$3 million on 30 April 2006.
[3 marks]
Question 4
a. Old Mutual Investment Group operates a Gold fund which achieved quarterly money-
weighted rates of return of 4.1%, 2.8%, 1.7% and 2.1% during the four quarters of 2016
and half yearly rates of 2.5% and 3.8% during the two halves of 2017. Calculate the LIRR
for period under consideration. [2 marks]
b. First Mutual, which also operates a Gold fund, achieved rates of return which
underperformed the first life office by 0.5% per quarter in each of the first two quarters of
2016, outperformed it by 1% per quarter in each of the last two quarters of 2016 and
equalled the performance in 2005. Calculate the LIRR for the rival life office over the same
period. [4 marks]
Question 5
Calculate the accumulated profit after 20 years of a project in which ZWL20000 is paid out at time
0 and ZWL5000 is received at times 5 to 15, inclusive. Assume an annual effective rate of interest
of 3%. [2 marks]
Question 6
a. Define the following in relation to investment projects
(i) the discounted payback period [1 mark]
(ii) the payback period [1 mark]
(iii) internal rate of return [1 mark]
(iv) net present value [1 mark]
b. Describe the advantages and disadvantages of using the measures in Part (i) for determining
whether to proceed with an investment project.
c. Distinguish between derivatives and futures. [2 marks]
Question 7
An insurance company borrows £50 million at an effective interest rate of 9% per annum. The
insurance company uses the money to invest in a capital project that pays £6 million per annum
payable half-yearly in arrears for 20 years. The income from the project is used to repay the loan.
Once the loan has been repaid, the insurance company can earn interest at an effective interest rate
of 7% per annum.
a. Calculate the discounted payback period for this investment. [3 marks]
b. Calculate the accumulated profit the insurance company will have made at the end of the term
of the capital project. [6 marks]
Question 8
Prior to Covid-19 outbreak in the year 2019, a Zimbabwean investor was considering making an
investment in one or both of two mega deals. The cashflows associated with these mega deals are
as follows. The unit of time is years.
Deal X Initial payments of ZWL2 million at time zero and ZWL4 million at time
2 were made. In return a sum of ZWL900000 per annum was paid
continuously from time 5 to time 25.
Deal Y Regular payments of ZWL100000 were made at the start of each year for
10 years. In return, amounts of K, 2K, 3K and so on were made annually
for 10 years, the first payment being made at time 11.
i. Find the net present value of Project A at an effective annual interest rate of 10%. [4 marks]
ii. Show that the internal rate of return for Deal X is 9.38% per annum. [3 marks]
iii. Find the value of K if the internal rate of return for Deal Y is the same as that for Deal X.
[3 marks]
iv. Find the value of K if both deals are to have the same net present value at 10% pa. [4
marks]
