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

Statistical inference, A study was conducted at a major north-eastern Ameri...

A study was conducted at a major north-eastern American medical centre regarding blood cholesterol levels and heart-attack incidents. A total of 28 heart-attack patients had their

Corlation, 1. Calculate Karl Pearson’s coefficient of correlation between e...

1. Calculate Karl Pearson’s coefficient of correlation between expenditure on advertising (X) and sales (Y) from the data given below: The management decided to stop further expens

Construct confidence interval for the true mean return, A researcher has ga...

A researcher has gathered data on the daily returns on a portfolio of call options over a recent 250-day period. The mean daily return has been 0.001 and the sample standard deviat

Stistics, what are the function of statistics in business onganizations?

what are the function of statistics in business onganizations?

Calculate regression analysis, Questions In a regression analysis, a nu...

Questions In a regression analysis, a nurse researcher found a correlation of .82 between pain relief scores and satisfaction with nursing care.  She also calculated the follow

Accounting standards in united states, United States: There are currently ...

United States: There are currently more than 10000 companies that are registered with the SEC (Securities Exchange Commission). Of these, around 1000 are non US companies. The non

Linearity, The weight in Kg for each person was matched to their intake of ...

The weight in Kg for each person was matched to their intake of fat per day in Grams.  9 people were selected with the following results. Weight (Xi)         Fat (Yi) 45

IFRS, I am currently doing a report on IRFS and have to identify the the is...

I am currently doing a report on IRFS and have to identify the the issues involved with businesses adopting IRFS

Comb & proportions type will appear in f & f2, In fowl,the genotype rrpp gi...

In fowl,the genotype rrpp gives single comb, R_P_ walnut comb, rrP_ pea comb, and R_pp rose comb. a. What comb type will appear and in what proportions in F and F2 if single- co

What is use of Advantageous , What is use of Advantageous Immediate non-fi...

What is use of Advantageous Immediate non-financial, work-related advantages accruing to the condition.

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