K the one year return is then equal to 88 957 2582

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K The one year return is then equal to: 88 . 957 $ 2582 . 742 $ 6182 . 210 $ ) 06 . 1 ( 000 , 1 06 . 0 ) 06 . 1 ( 1 50 5 5 0 = + = + ⎥ ⎦ ⎤ ⎢ ⎣ ⎡ − = PV 35 . 965 $ 0937 . 792 $ 2553 . 173 $ ) 06 . 1 ( 000 , 1 06 . 0 ) 06 . 1 ( 1 50 4 4 1 = + = + ⎥ ⎦ ⎤ ⎢ ⎣ ⎡ − = PV 1-year return = 50 957.88 + 965.35 ! 957.88 957.88 = 5.22% + 0.78% = 6% current yield + %capital gain
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Realized Rates of Return K So far, we have been talking about an investor s required or expected rate of return. K This is the return an investor hopes to get from an investment in the future. – It s a forward-looking concept. K Often we want to calculate an investor s realized rate of return (ROR), which is the rate of return an investor actually obtained after selling an investment. This is backwards looking. K The ROR is quoted as an effective annual return. K It should be computed from something that looks like this: 11 PV ! (1 + ROR ) n = FV
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12 iClicker Example: ROR K You buy a painting for $2,000. Five years later you sell it for $2,600. K What is your ROR on this investment? a) 30.00% – b) 6.00% – c) 5.25% – d) 5.39% e) None of the above.
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13 iClicker Example: ROR K You buy a painting for $2,000. Five years later you sell it for $2,600. K What is your ROR on this investment? a) 30.00% – b) 6.00% – c) 5.25% – d) 5.39% e) None of the above. Timeline: 0 1 2 3 4 5 Years --|--------|--------|--------|--------|--------|--------- $2,000 $2,600 % 3874 . 5 600 , 2 ) 1 ( * 000 , 2 ) 1 ( * 5 = = + = + r r FV r PV n
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14 iClicker: ROR on Bond from Earlier Example K Consider our bond with a face value of $1,000. Coupon payments are annual and the coupon rate is 5% with 5 years to maturity. K The market interest rate is 6% for similar bonds K The price of the bond is $957.88 (see earlier example). K Now suppose that one year later, the yield-to-maturity for similar bonds has increased to 8%. K If an investor bought the bond one year ago at $957.88 and sells it now, what is his realized rate of return (ROR)? – a) 6.00% – b) 8.00% c) - 5.98% d) – 0.76% e) None of the above.
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15 iClicker: ROR on Bond from Earlier Example K Consider our bond with a face value of $1,000. Coupon payments are annual and the coupon rate is 5% with 5 years to maturity.
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