Fin327 Chaper 2

FIN327

1

Topic 2

Examples

1 (HPR): You purchased a stock at $100, and sold it at $110, the dividend paid during the

holding period is $10. What is the HPR?

(110-100+10)/100=20%

2 (APR and EAR): A T-bill pays $10,000 at maturity in 1 month. Its current price is $9900.

What are the HPR? APR? and EAR?

(10000-9900)/9900=1.01%

1.01%*12=12.12%

(1.01%+1)12-1=12.82%

3 (AAR and GAR): The price of a security is $100 at time 0, $50 at time 1, and $100 at time 2.

What’s the AAR and GAR?

AAR: (-50%+100%)/2=25%

GAR: [(1-50%)(1+100%)]1/2-1=0%

4 (FETY): A tax-exempt bond has a yield of 6%, exempt from both federal taxes (30%) and state

taxes (10%). What’s the FETY of a corporate bond on which both federal and state taxes apply?

6%/(1-40%)=10%

5 (yields): A 90-day T-bills pays $10,000 at maturity, the current price is $9875. What’s the bank

discount rate? The bond equivalent yield? Effective annual yield?

See lecture notes

6. You proposed a portfolio for your client with 70% in Apple Inc. stock and 30% in Vanguard

Global Equity Fund (mutual fund, ticker:VHGEX). Five weeks have passed, and you have the