Annualized return

by | Mar 3, 2023 | finance

 

 

Suppose a portfolio manager is considering the purchase of a bond, a 12-year, 8% non-callable bond selling at $1050 per $1000 of par value. Assume also that the portfolio manager’s investment horizon is 5 years. The portfolio manager believes the reinvestment rate range can vary from 3% to 6% and the discount rate at the end of the investment horizon from 4% to 6%. Use 50 bps grids to compute the various return scenarios. Identify all the scenarios that generate less than 4% annualized return.

 

 

 

Sample solution

Dante Alighieri played a critical role in the literature world through his poem Divine Comedy that was written in the 14th century. The poem contains Inferno, Purgatorio, and Paradiso. The Inferno is a description of the nine circles of torment that are found on the earth. It depicts the realms of the people that have gone against the spiritual values and who, instead, have chosen bestial appetite, violence, or fraud and malice. The nine circles of hell are limbo, lust, gluttony, greed and wrath. Others are heresy, violence, fraud, and treachery. The purpose of this paper is to examine the Dante’s Inferno in the perspective of its portrayal of God’s image and the justification of hell. 

In this epic poem, God is portrayed as a super being guilty of multiple weaknesses including being egotistic, unjust, and hypocritical. Dante, in this poem, depicts God as being more human than divine by challenging God’s omnipotence. Additionally, the manner in which Dante describes Hell is in full contradiction to the morals of God as written in the Bible. When god arranges Hell to flatter Himself, He commits egotism, a sin that is common among human beings (Cheney, 2016). The weakness is depicted in Limbo and on the Gate of Hell where, for instance, God sends those who do not worship Him to Hell. This implies that failure to worship Him is a sin.


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God is also depicted as lacking justice in His actions thus removing the godly image. The injustice is portrayed by the manner in which the sodomites and opportunists are treated. The opportunists are subjected to banner chasing in their lives after death followed by being stung by insects and maggots. They are known to having done neither good nor bad during their lifetimes and, therefore, justice could have demanded that they be granted a neutral punishment having lived a neutral life. The sodomites are also punished unfairly by God when Brunetto Lattini is condemned to hell despite being a good leader (Babor, T. F., McGovern, T., & Robaina, K. (2017). While he commited sodomy, God chooses to ignore all the other good deeds that Brunetto did.

Finally, God is also portrayed as being hypocritical in His actions, a sin that further diminishes His godliness and makes Him more human. A case in point is when God condemns the sin of egotism and goes ahead to commit it repeatedly. Proverbs 29:23 states that “arrogance will bring your downfall, but if you are humble, you will be respected.” When Slattery condemns Dante’s human state as being weak, doubtful, and limited, he is proving God’s hypocrisy because He is also human (Verdicchio, 2015). The actions of God in Hell as portrayed by Dante are inconsistent with the Biblical literature. Both Dante and God are prone to making mistakes, something common among human beings thus making God more human.

To wrap it up, Dante portrays God is more human since He commits the same sins that humans commit: egotism, hypocrisy, and injustice. Hell is justified as being a destination for victims of the mistakes committed by God. The Hell is presented as being a totally different place as compared to what is written about it in the Bible. As a result, reading through the text gives an image of God who is prone to the very mistakes common to humans thus ripping Him off His lofty status of divine and, instead, making Him a mere human. Whether or not Dante did it intentionally is subject to debate but one thing is clear in the poem: the misconstrued notion of God is revealed to future generations.

 

References

Babor, T. F., McGovern, T., & Robaina, K. (2017). Dante’s inferno: Seven deadly sins in scientific publishing and how to avoid them. Addiction Science: A Guide for the Perplexed, 267.

Cheney, L. D. G. (2016). Illustrations for Dante’s Inferno: A Comparative Study of Sandro Botticelli, Giovanni Stradano, and Federico Zuccaro. Cultural and Religious Studies, 4(8), 487.

Verdicchio, M. (2015). Irony and Desire in Dante’s” Inferno” 27. Italica, 285-297.

Sample Solution

When a portfolio manager is considering the purchase of a bond, there are many factors that must be taken into consideration. In this case, the portfolio manager is considering purchasing a 12-year, 8% non-callable bond selling at $1050 per $1000 of par value with an investment horizon of 5 years. The portfolio manager also believes the reinvestment rate range can vary from 3% to 6%, and the discount rate at the end of the investment horizon can vary from 4% to 6%. As such, we will use 50 bps grids to compute various return scenarios.

Sample Solution

When a portfolio manager is considering the purchase of a bond, there are many factors that must be taken into consideration. In this case, the portfolio manager is considering purchasing a 12-year, 8% non-callable bond selling at $1050 per $1000 of par value with an investment horizon of 5 years. The portfolio manager also believes the reinvestment rate range can vary from 3% to 6%, and the discount rate at the end of the investment horizon can vary from 4% to 6%. As such, we will use 50 bps grids to compute various return scenarios.

First, we need to calculate the current yield on the bond. To do this, we take (8 x 1000) / 1050 = 7.619047619%. This is our current yield for both our low and high reinvestment rates; however, since our reinvestment rate can range from 3%-6%, these numbers may change depending on what percentages are chosen.

Next, we need to calculate our total cashflows over 5 years in order determine all possible outcomes each respective scenario . Starting with lowest discount rate 4% ,we know that net present value (NPV) equation as follows: NPV= CF1/(1+r) + CF2/(1+r)^2 + … CFn/(1+ r )^n where r equal discount rate selected . Then plugging relevant variables obtain following cash flows : Year 1 = 85 Year 2 = 86 Year3 = 87 Year4 = 88 Year5 = 925 .

Now let us begin analyzing different scenarios based upon given criteria . If choose lowest reinvestment 3% coupled highest discount 6 % then npv equation looks like this : 85/1.06 +86/1.1296 +87/ 1….4941 +88/ 1…555635 +925/ (1..06)…5 or approximately 844 using calculator resulting annunalized return 844 /50 or 16.88 % which greater than required threshold 4 % Therefore if choose same parameters again higher returns expected

However if decide select lower reinvestment 3% combined lower discount 2 % then npv equation changes slightly 917 /(1..02).05 or approximately 1041 meaning annualized return would drop 1041/50 2083 % still above minimum required by portfolio manager Under these conditions it would appear prudent move forward with purchase Bond as long able keep invested period specified generate positive returns customer even potentially sizable profits depending specific circumstances any given situation

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