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

Margin of error, The poll interviewed 1500 persons rather than 1060, for 95...

The poll interviewed 1500 persons rather than 1060, for 95% confidence.

Cost inventory, how do I find the cost of inventory?

how do I find the cost of inventory?

#title.research.methods and statistics, identify a research report publishe...

identify a research report published by reputable agencies and evaluate the following ;the problem that was addressed

Paasche` quantity index calculationca, Base year price 10,12,18,20 and quan...

Base year price 10,12,18,20 and quantity 49,25,10,5 respectively. current yr quantity 50,20,12& 2

Homogeneity, Let f (?) be the production function associated with a single-...

Let f (?) be the production function associated with a single-output technology, and let Y be the production set. Show that Y satisfies constant returns to scale if and only if f (

Average velocity profile-actual velocity profile, 1)  You are developing a ...

1)  You are developing a sampling protocol whereby you're going to insert a probe into a turbulent flow in a circular conduit of radius R. a. Using a description of a velocity p

Statistics, 1. A search engine site claims that, on average, one out of fi...

1. A search engine site claims that, on average, one out of five visitors clicks on an ad. (a) If 8 users visit the site, what is the probability that at least three click o

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