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

Simple random sampling, This type of sampling is also known as chance sampl...

This type of sampling is also known as chance sampling or probability where each and every item in the population has an equal change of inclusion in the sample and one of the poss

Minitab run a multiple linear regression, Have Minitab run a multiple linea...

Have Minitab run a multiple linear regression to predict the margin of victory using the four predictors (home team record, away team record, stat1diff, stat2diff). Store the resi

Spss, what is spss explain in breif

what is spss explain in breif

Depression screening measures , A study of a new anti-depressant drug took ...

A study of a new anti-depressant drug took a sample of 10 individuals with high depression screening measures (DSM) and gave them the drug for three months.  At the end of the thre

#title. .decision tree, Assume that you have a client that is a paper manuf...

Assume that you have a client that is a paper manufacturer and they have expressed concern that the government will pass a new regulation banning the use of chlorine-based technolo

Homework, The probability a computer will boot is .08. What is the least nu...

The probability a computer will boot is .08. What is the least number needed so that the probability at least two will boot is greater than .99?

Index numbers, discuss the considerations to be borne in mind when construc...

discuss the considerations to be borne in mind when constructing index numbers

What is the tension in the upper string, Question: The weights shown in the...

Question: The weights shown in the figure are in equilibrium. It consists of objects held by vertical strings. The object 3 weighs 1.4 N. The horizontal bars are identical, uniform

#introduction to statistics, #A________variable is a variable whose values ...

#A________variable is a variable whose values are countable.

Accounting equation, A.Austria invested cash $1,000 and a type writer $2,50...

A.Austria invested cash $1,000 and a type writer $2,500

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