Fin630 Assignment No. 2 solution
Saturday, June 18, 2011 Posted In Fin Edit This“Financial Analysis & Portfolio Management (Fin 630)”
Assignment No. 02 Total Marks: 20
Question #01Regional textile issued a 10-year Rs. 500 par value bond at 12% coupon rate (assuming semiannual interest payments). Required rate of return for such investment is 10%.Pesco textile issued a 15-year Rs. 500 par value bond at 16% coupon rate (assuming semiannual interest payments). Required rate of return for such investment is 12%.Assignment No. 02 Total Marks: 20
You are required to calculate:
• Coupon payment in each case
• No. of coupon payments in each case
• Value of each bond
Question #02Suppose you have following stocks in your portfolio:
1. Stock A which was purchased 11 months ago for Rs. 750, currently selling for Rs. 790and has paid Rs.20 dividend.
2. Stock B which was purchased 5 months ago for Rs. 900, currently selling for Rs. 910 and has paid Rs.15 dividend.
You are required to calculate:1. Holding period return of stock A
2. Holding period return of stock B
3. Annual return for both stocks
Note:
Show complete working (formula and calculations) for each part of questions.
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Solution:
Question #01
Regional textile issued a 10-year Rs. 500 par value bond at 12% coupon rate
(assuming semiannual interest payments). Required rate of return for such
investment is 10%.
Pesco textile issued a 15-year Rs. 500 par value bond at 16% coupon rate
(assuming semiannual interest payments). Required rate of return for such
investment is 12%.
You are required to calculate:
• Coupon payment in each case
• No. of coupon payments in each case
• Value of each bond
Coupon payment in each case:
Because the coupon payments are semi-annual, divide the coupon rate in half.
The coupon rate is the percentage off the bond's par value. As a result,
each semi-annual
Case#01
500*(12%/2) = 500*0.06 = 30
Case#02
500*(16% / 2) = 500*0.08 = 40
No. of coupon payments in each case:
Because two coupon payments will be made each year for ten years, we will
have
Coupon payments for
Case#01 = 10*2 =20
Case#02 = 15*02 = 30
Value of each bond
Like the coupon rate, the required yield of 12% must be divided by two
because the number of periods used in the calculation has doubled. If we
12%, our bond price would be very low and inaccurate. Therefore, the required semiannual yield is 6% (0.12/2) for case#02 and 5% for case#01 left the required yield atCase#01
=30*[1-{1/ (1+0.05) ^20}] / 0.05 + 500 / (1+0.05) ^20
=30* [1-{1/ (1.05) ^20} / 0.05 + 500/ (1.05) ^20
=562.3
Case#02
=40*[1-{1/ (1+0.06) ^30}] / 0.06 + 500 / (1+0.06) ^30
=40*[1-{1/ 5.74}] / 0.06 + 500 / 5.74
=40*13.76+ 87.05
=637.64
Question #02
Suppose you have following stocks in your portfolio:
1. Stock A which was purchased 11 months ago for Rs. 750, currently selling
for Rs. 790and has paid Rs.20 dividend.
2. Stock B which was purchased 5 months ago for Rs. 900, currently selling
for Rs. 910 and has paid Rs.15 dividend.
You are required to calculate:
1. Holding period return of stock A
2. Holding period return of stock B
3. Annual return for both stocks
Holding period return = Ending value – Beginning value + Income /
Beginning value
Stock A
Holding period return = 790 – 750 +20 / 750 = 0.08
Holding period of 11 months = 0.08 *12/11 = 8.72%
Stock B
Holding period return = 910 – 900+15 / 900 = 0.027
Holding period of 5 months = 0.027 *12/5 = 6.48%
Annualized Return Formula
APY = (principal + gain/principal) ^ (365/days) – 1
Stock A
APY = (750+ 40 / 750) ^ (12/11) – 1
=1.05^1.09 -1
=5.46%
Stock B
APY = (900+ 10/900) ^ (12/5) – 1
= 2.4%
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Solution
Answer 1:
Coupon payment in each case:
Bound A: 30
Bond B: 40
No. of coupon payments in each case:
Bound A: 20
Bond B: 30
Value of each bond
B0 =C/ (1+i/2) n*2 + Par/ (1+i) n*2
Bound A: 562
Bond B: 637
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Holding period return of stock A
If you purchase 1 shares of stock at Rs.750.00 per share, each paying a Rs.20.00 annual
dividend, and you sell your shares after 11 months for Rs.790.00 per share, then the
holding period return would be 8.49%.
Holding period return of stock B
If you purchase 1 shares of stock at Rs.900.00 per share, each paying a Rs.15.00 annual
dividend, and you sell your shares after 5 months for Rs.910.00 per share, then the
holding period return would be 2.89%
Annual return for both stocks
While using the equation of Geometric Mean the annual return of both stock can b
measured
Annual return of both stock 4.95%
:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: Question #01
Regional textile issued a 10-year Rs. 500 par value bond at 12% coupon rate (assuming
semiannual interest payments). Required rate of return for such investment is 10%.
Pesco textile issued a 15-year Rs. 500 par value bond at 16% coupon rate (assuming semiannual
interest payments). Required rate of return for such investment is 12%.
You are required to calculate:
• Coupon payment in each case
• No. of coupon payments in each case
• Value of each bond
Coupon payment in each case:
Because the coupon payments are semi-annual, divide the coupon rate in half. The
coupon rate is the percentage off the bond's par value. As a result, each semi-annual
Case#01
500*(12%/2) = 500*0.06 = 30
Case#02
500*(16% / 2) = 500*0.08 = 40
No. of coupon payments in each case:
Because two coupon payments will be made each year for ten years, we will have
Coupon payments for
Case#01 = 10*2 =20
Case#02 = 15*02 = 30
Value of each bond
Like the coupon rate, the required yield of 12% must be divided by two because the
number of periods used in the calculation has doubled. If we left the required yield at
12%, our bond price would be very low and inaccurate. Therefore, the required semiannual
yield is 6% (0.12/2) for case#02 and 5% for case#01
Case#01
=30*[1-{1/ (1+0.05) ^20}] / 0.05 + 500 / (1+0.05) ^20
=30* [1-{1/(1.05)^20} / 0.05 + 500/(1.05)^20
=562.3
Case#02
=40*[1-{1/ (1+0.06) ^30}] / 0.06 + 500 / (1+0.06) ^30
=40*[1-{1/ 5.74}] / 0.06 + 500 / 5.74
=40*13.76+ 87.05
=637.64
Question #02
Suppose you have following stocks in your portfolio:
1. Stock A which was purchased 11 months ago for Rs. 750, currently selling for Rs. 790and has
paid Rs.20 dividend.
2. Stock B which was purchased 5 months ago for Rs. 900, currently selling for Rs. 910 and has
paid Rs.15 dividend.
You are required to calculate:
1. Holding period return of stock A
2. Holding period return of stock B
3. Annual return for both stocks
Holding period return = Ending value – Beginning value + Income / Beginning value
Stock A
Holding period return = 790 – 750 +20 / 750 = 0.08
Holding period of 11 months = 0.08 *12/11 = 8.72%
Stock B
Holding period return = 910 – 900+15 / 900 = 0.027
Holding period of 5 months = 0.027 *12/5 = 6.48%
I think (not sure)
Annualized Return Formula
APY = (principal + gain/principal) ^ (365/days) – 1
Stock A
APY = (750+ 90/750) ^ (12/11) – 1
=1.12^1.09 -1 =13%
Stock B
APY = (900+ 10/900) ^ (12/5) – 1
=2.4%
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“Financial Analysis & Portfolio Management (Fin 630)”
Assignment No. 02 Total Marks: 20
Question #01
Regional textile issued a 10-year Rs. 500 par value bond at 12% coupon rate (assuming semiannual interest payments). Required rate of return for such investment is 10%.
Pesco textile issued a 15-year Rs. 500 par value bond at 16% coupon rate (assuming semiannual interest payments). Required rate of return for such investment is 12%.
You are required to calculate:
• Coupon payment in each case
• No. of coupon payments in each case
• Value of each bond
Coupon payment in each case:
Because the coupon payments are semi-annual, divide the coupon rate in half. The coupon rate is the percentage off the bond's par value. As a result, each semi-annual
Case#01
500*(12%/2) = 500*0.06 = 30
Case#02
500*(16% / 2) = 500*0.08 = 40
No. of coupon payments in each case:
Because two coupon payments will be made each year for ten years, we will have
Coupon payments for
Case#01 = 10*2 =20
Case#02 = 15*02 = 30
Value of each bond
Like the coupon rate, the required yield of 12% must be divided by two because the number of periods used in the calculation has doubled. If we left the required yield at
12%, our bond price would be very low and inaccurate. Therefore, the required semiannual yield is 6% (0.12/2) for case#02 and 5% for case#01
Case#01
=30*[1-{1/ (1+0.05) ^20}] / 0.05 + 500 / (1+0.05) ^20
=30* [1-{1/ (1.05) ^20} / 0.05 + 500/ (1.05) ^20
=562.3
Case#02
=40*[1-{1/ (1+0.06) ^30}] / 0.06 + 500 / (1+0.06) ^30
=40*[1-{1/ 5.74}] / 0.06 + 500 / 5.74
=40*13.76+ 87.05
=637.64
Question #02
Suppose you have following stocks in your portfolio:
1. Stock A which was purchased 11 months ago for Rs. 750, currently selling for Rs. 790and has paid Rs.20 dividend.
2. Stock B which was purchased 5 months ago for Rs. 900, currently selling for Rs. 910 and has paid Rs.15 dividend.
You are required to calculate:
1. Holding period return of stock A
2. Holding period return of stock B
3. Annual return for both stocks
Stock holding period return:
stock A = (790-750+20)/750
= 60/750 = 0.08 = 8%
stock B = (910-900+15)/900
= 25/900 = 0.0277 = 2.78%
Annual holding return:
stock A = 12/11*0.08 = 0.087 = 8.7%
stock B = 12/5*0.0277 = .06648 = 6.67%
just check this net example:
1- The Holding Period Return is calculated as follows:[Income + (ending value - beginning value)]/beginning value Let’s look at an example. A stock that you have been holding in your portfolio for six months has paid dividends of $47 and is currently worth $693. You purchased the stock six months ago for $550. The Holding Period Return would be: [$47 + ($693 - $550)]/$550 or 34.5%you have had a 34.5% return on your investment over the length of time you have held it.
stock A = (790-750+20)/750
= 60/750 = 0.08 = 8%
stock B = (910-900+15)/900
= 25/900 = 0.0277 = 2.78%
Annual holding return:
stock A = 12/11*0.08 = 0.087 = 8.7%
stock B = 12/5*0.0277 = .06648 = 6.67%
just check this net example:
1- The Holding Period Return is calculated as follows:[Income + (ending value - beginning value)]/beginning value Let’s look at an example. A stock that you have been holding in your portfolio for six months has paid dividends of $47 and is currently worth $693. You purchased the stock six months ago for $550. The Holding Period Return would be: [$47 + ($693 - $550)]/$550 or 34.5%you have had a 34.5% return on your investment over the length of time you have held it.
2-To annualize your Holding Period Return using simple interest, multiply your Holding Period Return by 12 divided by the number of months you have held the investment. For example, in our first stock example, the annualized return would be 34.5% X 12/6 or 69%. In the second bond example, the annualized return would be 1.6% X 12/1 or 19.2%.
