Calculate present value-hpr and future value , Basic Statistics

Assignment Help:

Semiannual coupon = 10%*$100/2 = $5

Since it is one-year semiannual bond, it pays two coupons, one at six months from now and the other at maturity when the bank account will be closed too. Hence only one coupon payment is reinvested in the bank account for six months. At maturity, we get $105 (principal and coupon payment).

Present value = $5/(1+(0.1/2)2 + $100/(1+(0.1/2)2 = $95.24

(a)   When reinvestment rate is 10%, the $5 reinvested in bank account will be worth

Future value = $5*(1+(0.1/2)) = $5.25

Since the bank offers semiannual compounding, the reinvested coupon will be worth $5.25 when the account is closed. Thus after one year, I get $110.25. Hence the HPR is

HPR = ($110.25/$100) - 1 = 10.25%

Thus HPR in this part is 10.25%

(b)  When reinvestment rate is 4%, the $5 reinvested in bank account will be worth

Future value = $5*(1+(0.04/2)) = $5.10

Since the bank offers semiannual compounding, the reinvested coupon will be worth $5.10 when the account is closed. Thus after one year, I get $110.10. Hence the HPR is

HPR = ($110.10/$100) - 1 = 10.10%

Thus HPR in this part is 10.10%

(c)   When reinvestment rate is 16%, the $5 reinvested in bank account will be worth

Future value = $5*(1+(0.16/2)) = $5.40

Since the bank offers semiannual compounding, the reinvested coupon will be worth $5.40 when the account is closed. Thus after one year, I get $110.40. Hence the HPR is

HPR = ($110.40/$100) - 1 = 10.40%

Thus HPR in this part is 10.40%

YTM is the average return if the bond is held to maturity and HPR is the rate of return over a particular investment period. YTM is based on coupon rate, maturity and par value, whereas HPR is based on bond's price at the beginning and end of the holding period and other additional income from the bond, if any. When YTM is unchanged from its initial value, the HPR when the holding period is until maturity, is equal to the YTM.

Consider the one-year bond paying a semiannual coupon of $5 and selling at face value of $100. The bond's initial YTM is 10%, equal to the coupon rate, because the current price, $100 equals the face value, which means that the coupon rate = 10/100 = 10%, equals the YTM. If the YTM remains at 10% over the year, the bond price will remain at par (at face value), so the holding period return will also be 10%. This is the case, when the returns are not reinvested or reinvestments are ignored. However, in the above three cases, since the semiannual coupon is reinvested and an interest earned on the coupon, the HPR is slightly higher than the YTM, based on the interest rate paid by the bank and its mode.


Related Discussions:- Calculate present value-hpr and future value

Standard costing, Standard costing In contemporary price sales, the idea...

Standard costing In contemporary price sales, the idea of documenting traditional expenditures was taken further, by assigning the organization''s set expenditures over a given

Calculate and interpret the measures of dispersion for data, You are workin...

You are working for the management of ESK Jewellery as a marketing consultant. The main business of ESK Jewellery is the retailing of diamond jewellery. They opened their first sho

Determine probability of coding state at the last nucleotide, For the zero ...

For the zero order hidden Markov model defined in homework 2 determine probability of coding state at the last nucleotide of the sequence AGTAG. Use parameters provided in the home

Analyze data using chi-square test , Analyze the given data using chi-squar...

Analyze the given data using chi-square test and see if it fits the expected 9:3:3:1 F 2 phenotypic ratio.   Ho: Null hypothesis: The F 2 phenotypic ratio follows the

Management accounting, CRSL has a large auditorium which can cater for 300 ...

CRSL has a large auditorium which can cater for 300 people and is ideal for formal balls and functions. The auditorium can also be reconfigured to cater for 100 people. The Seasons

Normal Random Variable, I need help with the following: Find the ...

I need help with the following: Find the following probabilities for the normal random variable Z: 1) P(Z>1.76) 2) P(Z 3) P(0.59=Z=2.41)

Devaition, i have data points of the form (x,y) of a cluster... I want to f...

i have data points of the form (x,y) of a cluster... I want to find variance nad standard deviation of this so dat i can decide which is a good cluster... so let me know how to do

Benefits of financial sales, Expertsmind.com offering Uses of Financial Ac...

Expertsmind.com offering Uses of Financial Accounting Financial Accounting Sales performs important and useful part by creating the details for offering solutions to many conc

Clipping, Clipping is one form of distortion that occurs when an amplifier ...

Clipping is one form of distortion that occurs when an amplifier is overdriven, which happens when it attempts to increase voltage or current beyond its limits. When an amplifier

Accounting cycle, The Steven Wholesale Co. uses the periodic inventory syst...

The Steven Wholesale Co. uses the periodic inventory system. The following transactions occurred during the month of May, the last month of the fiscal year that runs from June 1 t

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd