An investor is considering buying a bond from Company HelloWorld. The bond pays 12% semi-annual coupon, it has 15 years to maturity and the current price of this bond is $1,150. This bond is callable at the end of year 5 (the first and only call date). The call price of the bond is $1,120. What is the RTC for this bond?
Suppose our investor’s investment horizon is only 7 years (a period extending beyond the first call date, but shorter than the maturity of the bond). Also
assume that this investor believes that she can invest all proceeds @ 9%.
(a) Compute the total return of the bond on the assumption that the bond is called in 5 years.
(b) Compute the total return of the bond on the assumption that the bond is not called and lives until maturity.

 

 

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

(a) The total return for this bond if the bond is called in 5 years will be calculated using the reinvestment rate of 9% over the 7-year investment horizon. To calculate this, first we need to determine the present value at year 5 of all cash flows from year 6 to maturity (15 years). This is done by taking each coupon amount ((12/2)*1000=$600) and discounting it back to present value, then summing all discounted cash flows.
For example, PV of Cash Flow at Year 6 = $600/(1.09)^6 = $454.67
The total present value will be:
Total PV=($454.67+$454.67+…+$414.88)/(1-(1/ 1 .09 )^15 )=3860.99
Then we subtract this from the call price of $1120 to get our RTC or return on call : RTC=$1120 – 3860 .99=$2739 .01 or 2 .73 %

Sample Solution

(a) The total return for this bond if the bond is called in 5 years will be calculated using the reinvestment rate of 9% over the 7-year investment horizon. To calculate this, first we need to determine the present value at year 5 of all cash flows from year 6 to maturity (15 years). This is done by taking each coupon amount ((12/2)*1000=$600) and discounting it back to present value, then summing all discounted cash flows.
For example, PV of Cash Flow at Year 6 = $600/(1.09)^6 = $454.67
The total present value will be:
Total PV=($454.67+$454.67+…+$414.88)/(1-(1/ 1 .09 )^15 )=3860.99
Then we subtract this from the call price of $1120 to get our RTC or return on call : RTC=$1120 – 3860 .99=$2739 .01 or 2 .73 %

(b) If we assume that the bond does not get called and lives until maturity, then we can calculate its total return using a different equation that takes into account both principal repayment and coupon payments over 15 years with a reinvestment rate of 9%. This equation is as follows: Total Return=(PV+(Coupons x (1-(1/N))/r)/Price – 1 where N=number of cashflows per year (in this case semi-annual which equals 2), r=reinvestment rate (in this case 9%) and Price equals $1150.

Using these inputs, our total return calculation comes out as [(3860.99 + 5959-.6875)/ 1150]- 1 = 4 .87 %

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