DollarTime Weighted Forward Rates Dollar Weighted Is the

Dollar/Time Weighted + Forward Rates

Dollar Weighted Is the Internal Rate of Return (i. e. yield rate) Using simple interest approximation for partial years.

Example • A fund has a starting balance of 100. Three months later the balance of the fund is 120 and a deposit of 40 is made. Five months after the deposit the balance is 150 and a withdrawal of 60 is made. The balance of the fund at the end of the year 110. Calculate the dollar-weighted rate of return.

A fund has a starting balance of 100. Three months later the balance of the fund is 120 and a deposit of 40 is made. Five months after the deposit the balance is 150 and a withdrawal of 60 is made. The balance of the fund at the end of the year 110. Calculate the dollarweighted rate of return.

Dollar Weighted formula •

Time Weighted Rate of return Calculated by compounding the returns over successive parts of the year.

Example • A fund has a starting balance of 100. Three months later the balance of the fund is 120 and a deposit of 40 is made. Five months after the deposit the balance is 150 and a withdrawal of 60 is made. The balance of the fund at the end of the year 110. Calculate the time-weighted rate of return.

Forward Rates “A forward rate is an interest rate applicable to a financial transaction that will take place in the future. ” – Investopedia “An m-year spot rate that comes into effect t-years in the future”-SOA

Illustration 3 -year forward rate – deferred 1 year 1 -year forward rate – deferred 2 years 2 -year forward rate – deferred 2 years

Forward rates and Spot rate

Forward rates and Spot rate

Example 1 4% 2 5% 3 5. 5% 4 5. 75% 5 6%

Example-Solution •