Assume we have the following preferred issue. Par value = $100; coupon 8%; yield
ID: 2383205 • Letter: A
Question
Assume we have the following preferred issue. Par value = $100; coupon 8%; yield = 9%.
1.What is its price assuming annual dividends with the next dividend coming in exactly one year.
What is its price assuming annual dividends with the next dividend coming in exactly 3 months.
In the beginning of January 2000 the SPX index value was 1394; exactly 15 years later the value was 2059. Determine the geometric return on the SPX over this period.
(True or false) Does the rate of return you computed in the previous question represent the return to an investor who held the SPX over this period?
Explanation / Answer
Assume we have the following preferred issue. Par value = $100; coupon 8%; yield = 9%.
1.What is its price assuming annual dividends with the next dividend coming in exactly one year.
Price = Coupon/Yield
Price = 8%*100/9%
Price = $ 88.89
What is its price assuming annual dividends with the next dividend coming in exactly 3 months.
Price = Price (at annual dividends with the next dividendcoming in exactly one year) * (1+ Yield)^((12-3)/12)
Price = 88.89*(1+9%)^(9/12)
Price = $ 94.82
In the beginning of January 2000 the SPX index value was 1394; exactly 15 years later the value was 2059. Determine the geometric return on the SPX over this period.
Geometric return = (2059/1394)^(1/15) -1
Geometric return = 2.63%
(True or false) Does the rate of return you computed in the previous question represent the return to an investor who held the SPX over this period?
True