4. Suppose a Midwest telephone company and telegraph MTT company bond maturing in one year can be purchased today for $975 assuming that that the bond is held until maturity the investor will receive $1000 principal plus 6 percent interest that is 0.06x $ 1000= 60 determine the percentage holding period return on this investment
5. a. national telephone and telegraph NTT company common stock currently sells for $60 per share NTT is expected to pay a $4 dividend during the coming year, and the price of the stock is expected to increase to $65 a year from now determine the expected ex-ante percentage holding period return on NTT common stock.
b. Suppose that 1 year later, NTT’s common stock is selling for $75 per
share. During the 1-year period, NTT paid a $4 common stock dividend.
Determine the realized (ex-post) percentage holding period return on
NTT common stock.
c. Repeat (b) given that NTT’s common stock is selling for $58 1 year later.
d. Repeat (b) given that NTT’s common stock is selling for $50 1 year l
4. To determine the percentage holding period return on the investment, we need to calculate the total return as a percentage of the initial investment.
Total return = Principal + Interest
Total return = $1000 + $60
Total return = $1060
Percentage holding period return = (Total return - Initial investment) / Initial investment * 100
Percentage holding period return = ($1060 - $975) / $975 * 100
Percentage holding period return = $85 / $975 * 100
Percentage holding period return ≈ 8.72%
5. a. To determine the expected ex-ante percentage holding period return, we need to calculate the total return as a percentage of the initial investment.
Total return = Dividend + Expected price increase
Total return = $4 + ($65 - $60)
Total return = $4 + $5
Total return = $9
Percentage holding period return = (Total return - Initial investment) / Initial investment * 100
Percentage holding period return = ($9 - $60) / $60 * 100
Percentage holding period return = -$51 / $60 * 100
Percentage holding period return ≈ -85%
b. To determine the realized (ex-post) percentage holding period return, we need to calculate the total return as a percentage of the initial investment.
Total return = Dividend + Price increase
Total return = $4 + ($75 - $60)
Total return = $4 + $15
Total return = $19
Percentage holding period return = (Total return - Initial investment) / Initial investment * 100
Percentage holding period return = ($19 - $60) / $60 * 100
Percentage holding period return = -$41 / $60 * 100
Percentage holding period return ≈ -68.3%
c. To determine the realized (ex-post) percentage holding period return, we need to calculate the total return as a percentage of the initial investment.
Total return = Dividend + Price decrease
Total return = $4 + ($58 - $60)
Total return = $4 - $2
Total return = $2
Percentage holding period return = (Total return - Initial investment) / Initial investment * 100
Percentage holding period return = ($2 - $60) / $60 * 100
Percentage holding period return = -$58 / $60 * 100
Percentage holding period return ≈ -96.7%
d. To determine the realized (ex-post) percentage holding period return, we need to calculate the total return as a percentage of the initial investment.
Total return = Dividend + Price decrease
Total return = $4 + ($50 - $60)
Total return = $4 - $10
Total return = -$6
Percentage holding period return = (Total return - Initial investment) / Initial investment * 100
Percentage holding period return = (-$6 - $60) / $60 * 100
Percentage holding period return = -$66 / $60 * 100
Percentage holding period return ≈ -110%
To calculate the holding period return for each investment, you need to know the initial investment and the final value. The holding period return is expressed as a percentage and can be calculated using the formula:
Holding Period Return = (Final Value - Initial Investment) / Initial Investment
Let's calculate the holding period returns for each scenario:
4. The initial investment for the bond is $975, and the final value is $1000 (principal + interest). Plugging these values into the formula:
Holding Period Return = ($1000 - $975) / $975 = $25 / $975 = 0.0256 = 0.0256 * 100% = 2.56%
Therefore, the percentage holding period return on this investment is 2.56%.
5a. The initial investment for the NTT stock is the current price per share, which is $60. The final value is the expected price per share after one year, which is $65 (excluding the dividend). The expected dividend is $4.
Holding Period Return = ($65 + $4 - $60) / $60 = $9 / $60 = 0.15 = 0.15 * 100% = 15%
Therefore, the expected ex-ante percentage holding period return on NTT common stock is 15%.
5b. The initial investment is the same as in 5a ($60), and the final value is $75 (including the $4 dividend). Plugging these values into the formula:
Holding Period Return = ($75 - $60) / $60 = $15 / $60 = 0.25 = 0.25 * 100% = 25%
Therefore, the realized (ex-post) percentage holding period return on NTT common stock is 25%.
5c. The initial investment is still $60, and the final value is $58 (including the $4 dividend). Using the formula:
Holding Period Return = ($58 - $60) / $60 = -$2 / $60 = -0.0333 = -0.0333 * 100% = -3.33%
Therefore, the realized (ex-post) percentage holding period return on NTT common stock with a stock price of $58 is -3.33%.
5d. The initial investment is $60, and the final value is $50 (including the $4 dividend). Plugging these values into the formula:
Holding Period Return = ($50 - $60) / $60 = -$10 / $60 = -0.1667 = -0.1667 * 100% = -16.67%
Therefore, the realized (ex-post) percentage holding period return on NTT common stock with a stock price of $50 is -16.67%.