Question

In: Finance

In early January 2010​, you purchased $24,000 worth of some​ high-grade corporate bonds. The bonds carried...

In early January 2010​, you purchased $24,000 worth of some​ high-grade corporate bonds. The bonds carried a coupon of 6.5 % and mature in 2024. You paid 96.086 when you bought the bonds. Over the five years from 2010through 2014​, the bonds were priced in the market as​ follows:

Quoted Prices (% of $1,000 par value)
Year Beginning of the Year End of
the Year		 Average Holding Period Return on High-Grade Corporate Bonds
2010 96.086 102.673 7.30%
2011 102.673 104.365 11.72%
2012 104.365 107.129 -6.89%
2013 107.129 111.853 7.90%
2014 111.853 121.618 9.11%

Coupon payments were made on schedule throughout the​ 5-year period.

a. Find the annual holding period returns for 2010 through 2014. ​(See Chapter 5 for the HPR​ formula.)

b. Use the average return information in the given table to evaluate the investment performance of this bond. How do you think it stacks up against the​ market? Explain.

a. The holding period return for 2010 is ? %. ​(Round to two decimal​ places.)

The holding period return for 2011 is ?​%. ​(Round to two decimal​ places.)

The holding period return for 2012 is ?%. ​(Round to two decimal​ places.)

The holding period return for 2013 is ?​%. (Round to two decimal​ places.)

The holding period return for 2014 is ?%. ​(Round to two decimal​ places.)

b. Use the average return information in the given table to evaluate the investment performance of this bond. How do you think it stacks up against the​ market? Explain.  ​(Select the best choice​ below.)

a.The​ high-grade corporate bond investment has outperformed the market. The average rate of return for the investment is 11.10 ​% versus the average market rate of 5.83​%.

b. The market has outperformed the corporate bond investment. The average rate of return for the investment is 5.83% versus the average market rate of 11.10​%

Solutions

Expert Solution

Holding period return over a period =

(Period Ending price - Period beginning price + coupons received during the period) / Period beginning price

All the quoted prices are % of Face Value of $ 1,000 and coupon is 6.5% of FV of $ 1,000

We can keep the scale common as % of face value in all the calculations below.

a. Find the annual holding period returns for 2010 through 2014. ​(See Chapter 5 for the HPR​ formula.)

The holding period return for 2010 is ? %. ​(Round to two decimal​ places.)

HPR for 2010 = (102.673 - 96.086 + 6.5) / 96.086 = 13.62%

The holding period return for 2011 is ?​%. ​(Round to two decimal​ places.)

HPR for 2011 = (104.365 - 102.673 + 6.5) / 102.673 = 7.98%

The holding period return for 2012 is ?%. ​(Round to two decimal​ places.)

HPR for 2012 = (107.129 - 104.365 + 6.5) / 104.365 = 8.88%

The holding period return for 2013 is ?​%. (Round to two decimal​ places.)

HPR for 2013 = (111.853 - 107.129 + 6.5) / 107.129 = 10.48%

The holding period return for 2014 is ?%. ​(Round to two decimal​ places.)

HPR for 2014 = (121.618 - 111.853 + 6.5) / 111.853 = 14.54%

b. Use the average return information in the given table to evaluate the investment performance of this bond. How do you think it stacks up against the​ market? Explain.

Correct answer is option a.The​ high-grade corporate bond investment has outperformed the market. The average rate of return for the investment is 11.10 ​% versus the average market rate of 5.83​%.

Average return = average of all the returns calculated in part (a) above = (13.62% + 7.98% + 8.88% + 10.48% + 14.54%) / 5 = 11.10%

This is better than the market return of 5.83%. The​ high-grade corporate bond investment has outperformed the market.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

In early January 2010​, you purchased ​$45,000 worth of some​ high-grade corporate bonds. The bonds carried...
In early January 2010​, you purchased ​$45,000 worth of some​ high-grade corporate bonds. The bonds carried a coupon of 8 font size decreased by 1 font size decreased by 1 font size decreased by 1 5/8 %(one and five eighths) and mature in 2024. You paid 94.312 when you bought the bonds. Over the five years from 2010 through 2014​, the bonds were priced in the market as​ follows: Quoted Prices​ (% of​ $1,000 par​ value) Year Beginning of the...
In early January 2010​, you purchased ​$34,000 worth of some​ high-grade corporate bonds. The bonds carried...
In early January 2010​, you purchased ​$34,000 worth of some​ high-grade corporate bonds. The bonds carried a coupon of 7 4/8% and mature in 2024. You paid 93.426 when you bought the bonds. Over the five years from 2010 through 2014​, the bonds were priced in the market as​ follows: Coupon payments were made on schedule throughout the​ 5-year period. A. Find the annual holding period returns for 2010 through 2014. ​(See Chapter 5 for the HPR​ formula.) b. Use...
In early January 2010, you purchased $12,000 worth of some high-grade corporate bonds. The bonds carried...
In early January 2010, you purchased $12,000 worth of some high-grade corporate bonds. The bonds carried a coupon of 7 6/8% and mature in 2024. You paid 94.643 when you bought the bonds. Over the five years from 2012 through 2014, the bonds were priced in the market as follows: Coupon payments were made on schedule throughout the 5-year period. a. Find the annual holding returns for 2010 through 2014. (HPR formula) b. Use the average return information in the...
In early January 2014​, you purchased $83,000 worth of some​ high-grade corporate bonds. The bonds carried...
In early January 2014​, you purchased $83,000 worth of some​ high-grade corporate bonds. The bonds carried a coupon of 7​% and mature in 2027. You paid 101.477 when you bought the bonds. Over the five years from 2014 through 2018​, the bonds were priced in the market as​ follows:    Quoted Prices (% of $1,000 par value)       Year   Beginning of the Year   End of the Year   Average Holding Period Return on High-Grade Corporate Bonds 2014   101.477 110.926 -8.90% 2015  ...
In early January 2010​, you purchased ​$19 comma 000 worth of some​ high-grade corporate bonds. The...
In early January 2010​, you purchased ​$19 comma 000 worth of some​ high-grade corporate bonds. The bonds carried a coupon of 7 4/8% and mature in 2024. You paid 95.463 when you bought the bonds. Over the five years from 2010 through 2014​, the bonds were priced in the market as​ follows: Year Beginning of the Year End of the Year Average Holding Period Return on High-Grade Corporate Bonds 2010 95.463 104.824 7.30% 2011 104.824 106.783 11.72% 2012 106.783 108.567...
On January 2, 2019, the Hanover Company purchased some office equipment for $24,000. The equipment is...
On January 2, 2019, the Hanover Company purchased some office equipment for $24,000. The equipment is expected to have a useful life of five years and a salvage value of $3,000. Prepare a schedule showing the annual depreciation for each of the first three years of the asset's life under the straight-line method, the double-declining-balance method, and the sum-of-the-years'-digits method
On January 1, 2020, Sarasota Company purchased $432,000 worth of 8% bonds of Aguirre Co. for...
On January 1, 2020, Sarasota Company purchased $432,000 worth of 8% bonds of Aguirre Co. for $398,642. The bonds were purchased to yield 10% interest. Interest is payable semi-annually, on July 1 and January 1. The bonds mature on January 1, 2025. Sarasota Company uses the effective interest method to amortize the discount or premium. On January 1, 2022, to meet its liquidity needs, Sarasota Company sold the bonds for $400,384, after receiving interest. Prepare the journal entry to record...
On January 1, a company purchased 3%, 20-year corporate bonds for $69,057,808 as an investment. The...
On January 1, a company purchased 3%, 20-year corporate bonds for $69,057,808 as an investment. The bonds have a face amount of $80 million and are priced to yield 4%. Interest is paid semiannually. Prepare a partial amortization table at the effective interest rate on June 30 and December 31. Prepare the journal entries necessary to record revenue at the effective interest rate on June 30 and December 31. Period-End Cash Interest Received Bond Interest Revenue Discount Amortization Carrying Value...
It is early 2015, and you are thinking about buying some Greek bonds. a. You know...
It is early 2015, and you are thinking about buying some Greek bonds. a. You know that Greek bonds have very risky. Why would you still want to buy them, given that there is a high chance of default and non-payment? b. For the following situations, sketch a demand and supply diagram and explain what happens with the 1) price, 2) quantity of bonds sold and 3) the interest rate. Write 1-2 sentences to explain. 1. There are protests in...
Dryden purchased a van for $24,000 on January 1, in year 1 and planned to use...
Dryden purchased a van for $24,000 on January 1, in year 1 and planned to use it as rental property. The van has an estimated salvage value of $4,000 and an estimated useful life of 4 years. Dryden also assumed that the productive capacity of the van is 100,000 miles, and odometer readings indicate that the van was driven 40,000 miles in year 1, 20,000 miles in year 2, 30,000 miles in year 3, and 15,000 miles in year 4,...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT