Financial Analysis & Portfolio Management (Fin 630)”
Assignment No. 02 Total Marks: 20Question #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%.
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.
Assignment No. 02 Total Marks: 20Question #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%.
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
______________________________
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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