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

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

how do I find the cost of inventory?

Demonstrate the potential risk from financing in eurodollars, You have the ...

You have the following information about rates in London for Eurocurrency loans of one-year duration, the exchange rate between the USD and euros, the currency in which you want fi

Description of sample at baseline, Description of Sample at Baseline 1...

Description of Sample at Baseline 1. Describe the sample characteristics and baseline values, comparing the two groups'characteristics. With any analysis, the first step

Simple random sample, A simple random sample of n = 300 full-time workers i...

A simple random sample of n = 300 full-time workers is selected from a company list containing the names of all n = 5000 full-time workers in order to evaluate job satisfaction. Gi

Determine the average sales, A company prepares dinners for several airline...

A company prepares dinners for several airlines, and sales average 300,000 meals per month. The significant costs of each dinner prepared are for the meat, veg,plastic trays, and u

Calculate the mean and the standard deviation, 1.  Create formulas to calcu...

1.  Create formulas to calculate the normalized (i.e., percentage scores) for each of the quizzes and exams.  The yellow fields depict where these interim calculations are required

Education , what are the aims of education

what are the aims of education

Correlation analysis and coefficient, Individual Music scores Mathematics s...

Individual Music scores Mathematics scores Angela 2 8 Arthur 6 3 Peter 4 9 Mike 5 7 Barbara 7 2 Jane 7 3 Jean 2 9 Ruth 3 8 Alan 5 6 Theresa 4 7 Assess the data using a Correlation

What are saturn’s rings like, What are Saturn’s rings like? - Saturn’s ri...

What are Saturn’s rings like? - Saturn’s rings are made of tiny icy objects ranging from particles to boulders each orbiting Saturn independently like a tiny moon. They lie in S

Certificate of participation [cop), Certificate of participation [cop) A d...

Certificate of participation [cop) A debt financing agenda administered by the Office of the State Treasurer, A COP is an instrument evidencing a pro rata split in a exact pledged

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