Question 3

(a) The S&P/ASX200 price index opened the calendar year at 6,690 and was at 5,897 by the end of the June. The S&P/ASX Small Ordinaries index went from 2,900 to 2,599 over the same period. What is the effective annual rate of return on each of these indices? Explain the difference in information provided by these two indices.

(b) Using the approach TIP calculate the annual forward rates of return out to five years given the following annual spot rates, one year (0z1 = 0.89%pa), two year (0z2 = 0.82%pa), three year (0z3 = 0.74%pa), four year (0z4 = 0.64%pa), five year (0z5 = 0.52%pa). What does this imply about future interest rates?

TIP: you might find equations i = ((1+r₁)*(1+r₂)*___*(1+r_n))^1/n-1 and Z_{o,t =} ((1+z_o,1)*(1+z_1,2)*(1+z_2,3)*___*(1+z_t-1,t))^1/t-1 which is Z(oto be useful starting points.

(Rates as a percentages accurate to one basis point)

Please show your calculate by manual formula (do not use excel)