Compunding/ discounting Formulae

Question 1

Compounding

Answer 1

FV = PV [1+r]to the power of n

Question 2

Discounting

Answer 2

PV = FV / [1+r] to power n

Question 3

What does money weighted return show/ why is the outcome different (3)

Answer 3

• MWR is influenced by timing of when money is invested
• may have been lower performance in times when more money was invested
• not a straight line return

Question 4

Calculate AER for an account which pays 3.6% pa but is paid monthly (3)

Answer 4

[(1 + 0.036/12) to the power of 12] - 1 x 100

= (1.003)12 - 1 x 100

= 3.66%