Relationship between yield to maturity and the frequency of interest payment
There is a positive relationship between the yield to maturity and the interest payment, which means Both are moving co-extensively if the Yield to maturity increases then the interest rate will also increase. If the yield to maturity is decreased then the interest rate also decreases, therefore in simple words, it can be said that the movement of the interest payment will depend upon the movement of the yield to maturity (Van Binsbergen et al.2022). Yield to maturity which means the investor will be earned when the investor purchases a certain bond and the investor will hold the bond till the maturity date of the bond. If the investor does not hold the bond till the maturity of the bond, then the investor will not get the interest. Interest rate also plays an important role which means the price of the bond depends upon the interest rate of the existing bond (Kim et.al. 2021). This means if the interest rate of the bond increases, then the price of the bond which already exists in the market the price of a such existing bond will decrease. in the given case Annual interest rate of the bond is 7.5, the per value of the bond is $1000 and the current market price of the bond is $840.00. In the given case the tenure is 8 years, the annual cash flow from the bond is $75 and at the end of the holding period, the value of the investment is $1075.
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In the given case, the investor on 01-01-12 purchased a bond the face value of the bond is $1000 and the interest rate will be provided in the bond is 7.5. Interest will be declared once in the year in the given case, the market value of the bond on the date of 01-01-12 was $840. The yearly cash inflow from the investment of the bond will be $75 as per the coupon rate which is mentioned earlier. At the end of the 8 years, the investor will get $1075, in the given case the IRR is 10.56. The half-yearly IRR in the given case is 5.25, in the half-yearly case there are 2 times in a year the interest will be paid to the investor. In the given case the date of interest payment will be 1st July and 1st January every year. Half-yearly interest payment will be $37.50, which means there is $37.5 will be provided on the 1st of July and the 1st of January of every year. In the half-yearly declaration of the interest, the YTM is 10.78, which is more than the yearly declaration of the interest. If interest is declared quarterly then there are 4 times in the year the interest will be declared, which are normally 1st April, 1st July,1st October, and 1st January. Quarterly IRR in the given case is 2.62and the YTM in the given case is 10.89, which is higher than the yearly and half-yearly interest declaration. The quarterly interest declaration will be $18.75.
The risk average investor means the investor who prefers the minimum return as per the risk which is known by the investor and the risk average investor in not prefer the highest return as per the risk which is not known by the investor. Being a risk average investor, it can be said that there will be a move in that assets have the minimum return with known risk (Thakkar and Chaudhari, 2021). Therefore, in the given case, there is an analysis of the risk-return relationship between two assets. There are two indexes one is “FTSE100 (UKX) Index and S&P500 (SPX) Index”. Both the Index are occupied 50 portfolio. The average return of the FTSE is 2.04 and the average return of the S&P is 13.40, the median return of the FTSE is 5.68 and for the S&P is 12.18. Variation of the return in the given case is determined as 1.20 for the FTSE and for the S&P is 0.98. The standard deviation of return was determined in the given case as 10.94 for the FTSE and for the S&P is 9.90. annual return for the year 2010 is -5.71 and 0.52 for the FTSE and S&P respectively and the portfolio for 2010 is -2.59. Annual return for the year ended 31-12-12 is 5.68 and 7.96 for FTSE and S&P respectively, and the portfolio for that year is 6.82. It was analyzed that the annual return for the year ended 31-12-12 is more than the 31-12-11, and the portfolio is also increasing in the year ended 31-12-12 as compared to the year 31-12-11.
Average return resembles the rate of return that the investor will get after investing in certain assets and the standard deviation resembles the risk in a certain particular asset. Being an average risk investor, there will select the average return as per average risk (Balcilar et al. 2021). In the given case the FTSE provides the highest risk with a lower return and on the other hand, the S&P provides the lowest risk with the highest return as compared to the FTSE. Therefore, in the given case, the investment should be done in the S&P. At the 50 proportion of the portfolio of the FTSE and S&P, the average return and the standard deviation are 7.72 and 9.74 respectively. The average return for the year ended 31-12-13 for the FTSE and S&P is 13.48 and 23.95 respectively. From the year 2010 to 2020 the highest rate of return in the FTSE is 13.48 and it was for the years 2012 and 2015. The highest annual return for the S&P from 2010 to 2010 is 26.80 and which was for the year 2015. The overall average return is highest for S&P as compared to FTSE the average return for the FTSE is 2.04 and the average return for the S&P is 13.40. The lowest return of FTSE was -15.48 and which was for the year 2019 and the lowest return of S&P was-0.52 and which was for 2017.
From the calculation made in the excel sheet, it has been found that the value of both the stocks in accordance with the CAPM model stands in positive figures. Moreover, it has been seen that due to the change in the value of the CAPM of both the figures of the stock, the value of the firm increases which indicates that the growth of the firm is been more in terms of the value computed firm the excel sheet (Zerbib, 2022). The two stocks are been selected for the firm are been the stocks of BP and Shell where the firm are been used for the computation of various kinds of data that are been required for the calculation of the CAPM of the firm. It has been seen that the value of the firm depends on various kinds of factors such as the growth and the development of the firm in the amount of finance market of the country (Ayub et al.2020). The CAPM model helps in the identification of various kinds of data that are been profitable for the firm in the computation of data that re been profitable for the firm in terms of its investment value and the growth of the firm in the market of the firm.
Here in this report, the value of the stocks are been determined based on the amount of finance value of the country as well as the value of the actual shares of the firm as mentioned in the excel sheet. The Market return of the country has been determined in order to identify the beta value of the stocks that are been made for the betterment of the firm in the amount of finance market. There are various nki9nds of value that are been derived from excel and it can be said that the value of the stocks depends on the actual value of the firm in the amount of finance market of the country. Furthermore, it has been seen that the value of the covariance for the BP has been evaluated to 2.31 which has been in the case of the investment of the firm in the amount of finance management of the firm. It can be seen that there is a variance in the firm of Shell where the CAPM of the firm has been 2.18 which has been more in terms of the changes in the value of the firm in the amount of finance management of the firm. It has been found that the value of the firm is been determined based on the market value of the firm and therefore it can be said that there are various kinds of risks that are been seen in the computation of the beta value of the shares. The risk of the firm might be the amount of finance investment risk and profitable risk (Hundal et al. 2019). Further, it can be seen that there are various kinds of performance risk for the firm if the firm invest in the two stocks provided by the firm in the amount of finance management of the firm. The average return of the firm is been evaluated to be 1.21 for BP and 0.45 for Shell.
Question D
From the provided excel sheet, it can be seen that there are various kinds of changes that are been seen for the betterment of the firm in terms of the estimation that are been made for the change them in the amount of finance position of the firm in the market (Yeh and Lien, 2020). It can be seen that the value of the share price of ABC ltd changes with the estimation made for several types of periods. It can be seen that in period 1, the value of the share price can increase up to $80 which is kind of profitable for the firm in its growth and development and can also lead to its value in the market by getting downwards to $40. It can be said that the value of the firm depends on the changes in the price of the shares of the firm in the amount of finance market of the country. Moreover, the value of the shares in the case of the second period seems that it can rise up to $40 in the first place which is kind of less than the value of the share in the present situation is been $50. This change can result in the downfall of the value of the firm in the amount of finance market of the firm. The value of the share can fall to $20 which is very less and indicates that the value of the firm is getting lost in the market value of the country. This can lead to a change in the amount of finance value and the growth of the firm in the market. This might also lead to a fall in the value of the customers of the firm in the market. The Binomial process has been used for the computation of the value of the data in the amount of finance market. It can be further said that the value of the firm depends on various kinds of factors which can result in the fall of the value of the shares in the market.
From the excel sheet, it has been seen that the risk-free return of the firm has been 4 which is kind of more in terms of the growth and the development of the firm in the amount of finance position of the entity. The bond value for period 1 has been computed to $1.04 and for period 2 at $1.08. the Put value of the shares that is been mentioned in the project has been computed the value in terms of various kinds of functions that are been required for the betterment of the entity in the amount of finance position of the firm in the business. Therefore, it can be said that the value of the firm has been less in terms of the growth in the value of the entity in the share market of the country (Beneda, 2019). Therefore the value relates to the various kinds of decisions that are been required for the computation of the data that are been related to the growth of the firm in the market.
References
Ayub, U., Kausar, S., Noreen, U., Zakaria, M. and Jadoon, I.A., 2020. Downside risk-based six-factor capital asset pricing model (CAPM): A new paradigm in asset pricing. Sustainability, 12(17), p.6756.
Balcilar, M., Ozdemir, Z.A. and Ozdemir, H., 2021. Dynamic return and volatility spillovers among S&P 500, crude oil, and gold. International Journal of Finance & Economics, 26(1), pp.153-170.
Beneda, N., 2019. Measuring life cycles using binomial option pricing: The pharmaceutical industry. Journal of Corporate Accounting & Finance, 30(3), pp.20-29.
Hundal, S., Eskola, A. and Tuan, D., 2019. Risk–return relationship in the Finnish stock market in the light of Capital Asset Pricing Model (CAPM). Journal of Transnational Management, 24(4), pp.305-322.
Kim, J.M., Kim, D.H. and Jung, H., 2021. Estimating yield spreads volatility using GARCH-type models. The North American Journal of Economics and Finance, 57, p.101396.
Thakkar, A. and Chaudhari, K., 2021. A comprehensive survey on portfolio optimization, stock price and trend prediction using particle swarm optimization. Archives of Computational Methods in Engineering, 28(4), pp.2133-2164.
Van Binsbergen, J.H., Diamond, W.F. and Grotteria, M., 2022. Risk-free interest rates. Journal of Financial Economics, 143(1), pp.1-29.
Yeh, I.C. and Lien, C.H., 2020. Evaluating real estate development project with Monte Carlo based binomial options pricing model. Applied Economics Letters, 27(4), pp.307-324.
Zerbib, O.D., 2022. A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Environmental Integration and Sin Stock Exclusion. Review of Finance, 26(6), pp.1345-1388.
