·
Holding Period Return
HPR = (Income + (ending value – beginning value))/
beginning value
If interests rate high = ($75+ ($850 – $900)) / $900
=2.7%
If interests rate unchanged = ($75+ ($915 – $900)) /
$900
=10%%
If interests rate high = ($75+ ($985 – $900)) / $900
=17.7%
·
Expected Rate of Return
Expected rate of return = summation of (Probability of rate of return * rate of
return)
= (0.2*0.027) +
(0.5*0.1) + (0.3* 0.177)
=10.85%
·
Risk Premium of investment
Risk premium = Investment return – risk free return (rate
of bond)
= 10.85%- 5%
=5.85%
·
Expected year value of investment
If $900 per 1000par value
Therefore $ 27,000 = 30000 par value
If 1000 par value gives interest of $75
Therefore 30000 par value = $ 2250 as interest
Future value = $30,000 + 2250
= $ 32250
Coupon rate = 75/1000
=7.5%
Present value of bond = present value of interest +
present value of principal payment
Face value = (interest / (1 + r)^t)) + face value/
(1 + r)^t))
=$2250/ (1 + 0.075)^1+ $30,000
(1+0.075)^1
=$2093 + 27906.98
= $ 29999.98 which is approximately $30,0000
2.
IF 100% = $ 2,000,000
-38%
= -$760,000
Thus at start of 2009, stock value = $2,000,000-
$760,000
=$ 1,240,000
If $1,240,000 = 100%
$2,000,000 = 161.29%
Thus the rate
of return has to be 161.29% - 100%
= 61.29%
References
Brennan, M., & ES Schwartz. (1977). Convertible
bonds: Valuation and optimal strategies. The Journal of Finance, 32(5),
1699-1715. Retrieved from
www.anderson.ucla.edu/faculty/eduardo.schwartz/articles/6.pdf
Defond, M., & Jiambalvo, J. (1994). Debt Covenat
Violation and mnipulation of accruals. Journal of accounting and
economics, 17(1-2), 117-161.
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