The beginning value (bv) is the price of the bond

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Reference no: EM13735821

A yellow memo pad with the following text:

We are considering purchasing a 7% percent coupon bond (coupons paid semiannually) with 14 years remaining to maturity for 102-21 (priced in 32nds). We can re-invest the coupon payments at 4% percent, and we expect to sell the bond after a 3-year holding period for 106-16 (priced in 32nds).

The beginning value (BV) is the price of the bond, 102-21 - (convert into decimal format)
The ending value (EV) consists of the future value of the coupons re-invested at 4 percent AND the expected sales price of the bond at the end of the 3-year holding period. The future value of the coupons ($3.50 semiannual) re-invested at two percent (semiannual) for six semiannual periods in the 3-year holding period is $xyz. The expected sales price is given as 106-16 (convert into decimal format). The EV is the sum of $xyz and the expected sales price, which is $YYY. Now we can input the variables into the HPY formula:
HPY = ...
If the hurdle rate is six percent, the candidate bond should be (or should not be) accepted for inclusion in the bond portfolio.

Reference no: EM13735821

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