Suppose that an investor has 8 years investment horizon. The investor is considering a 20-year semi-annual coupon bond selling at par and having a coupon rate of 10%. The investor expectations are as follows:
The first 6 semi-annual coupon payments can be reinvested from the time of receipt to the end of the investment horizon at an annual interest rate of 7%.
The remaining semi-annual coupon payments can be reinvested from the time of receipt to the end of the investment horizon at a 11% annual interest rate.
Investor believes that the required return on a 12-year bond of this quality at the end of the investment horizon will be 12%.
(a) Calculate the total return on bond equivalent basis?
(b) What is the total return on effective rate basis?

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.

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 Studies4(8), 487.

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

Sample Solution

Answer: (a) To calculate the total return on bond equivalent basis, we need to first determine the present value of all cash flows associated with this bond over the 8-year investment horizon. This includes coupon payments, principal repayment upon maturity date and any capital gains or losses due to changes in market interest rates.

Sample Solution

Answer: (a) To calculate the total return on bond equivalent basis, we need to first determine the present value of all cash flows associated with this bond over the 8-year investment horizon. This includes coupon payments, principal repayment upon maturity date and any capital gains or losses due to changes in market interest rates.

The coupon payments for the first 6 semi-annual periods can be discounted using an adjusted discount rate of 3.5% (=10%/2) while those after 6th period can be discounted at a rate of 5.5% (=11%/2). The present value of these two components will be $2412.77 and $2779.63 respectively, where each figure is calculated by multiplying 0 05125(=$1000 * 0 10 / 2 ) by appropriate power number depending on number payment periods left till 8 years ie 24 (6*2+6*2). Then finally ,the PV of principal repayment amount at 20th year which has an adjusted discount rate 11 %=(12%-1%) resulting value 2841 88 . Adding these three figures together gives us total PV investments as $8034 29.

Therefore total return on Bond Equivalent Basis (%) = [(8034 29 − 1000)/1000]*100 = 703 43 %.

(b) To calculate Total Return on Effective Rate basis, we use following formula : TRER (%)= ((Coupons + Principal Repayment )/(Price Paid))^(1/Years Till Maturity)-1 ;where Coupons = 5501 40(2412 77 + 2779 63 );Principal Repayment 2841 88 ;Price Paid 1000 ;Number Years Till Maturity 8 . Plugging these numbers into our equation yields TRER (%) = ((5501 40 + 2841 88)/1000)^0 125–1 = 9 41 %

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