Harry is an investor, and has managed to purchase a PPP for exactly $340. For your...

 

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Harry is an investor, and has managed to purchase a PPP for exactly $340. For your convenience, the information regarding PPP's has been repeated below. • The PPP will pay out $84 after exactly one year, and then $84 another year after that. • Exactly 1 year after the second payment of y, the PPP will pay out a further payment of $205. • There are no further payments after this payment of $205. (a) Harry holds the PPP for 6 months, when he decides he would like to sell it to his friend Ron. Harry initially o ffers a price that yields Ron 4.09% p.a. eff ective (assuming Ron holds the PPP for the remaining 2.5 years). Calculate the price that Harry has offered. Give your answer in dollars, to the nearest cent. (2 marks) Answer: (b) After some negotiation, and a bunch of promises unrelated to this transaction being made between these two friends, Harry and Ron settie on a price of $349 for the sale. Calculate the yield Harry earned over the 6 months, expressed as an effective annual rate. Give you answer as a percentage to 4 decimal places. Do NOT include a percentage sign. (2 marks) Answer: (c) Despite receiving the same cash flows that Harry would have received (had he held the PPP for the full 3 years), Ron has paid a larger price than what Harry originally paid. Which of the following is the LEAST valid explanation for this? O a. The cash flows for the PPP do not have to discount as far to reach Ron's purchase date, so they have a larger present value. O b. Changes in the market conditions have caused this change in price. Since the price went up, this must mean that the return fell. O c. Ron does not have to wait as long to receive his first cash flow, so he is willing to pay more than what Harry paid. o d. Harry invested his money for 6 months and should be compensated for this. Harry is an investor, and has managed to purchase a PPP for exactly $340. For your convenience, the information regarding PPP's has been repeated below. • The PPP will pay out $84 after exactly one year, and then $84 another year after that. • Exactly 1 year after the second payment of y, the PPP will pay out a further payment of $205. • There are no further payments after this payment of $205. (a) Harry holds the PPP for 6 months, when he decides he would like to sell it to his friend Ron. Harry initially o ffers a price that yields Ron 4.09% p.a. eff ective (assuming Ron holds the PPP for the remaining 2.5 years). Calculate the price that Harry has offered. Give your answer in dollars, to the nearest cent. (2 marks) Answer: (b) After some negotiation, and a bunch of promises unrelated to this transaction being made between these two friends, Harry and Ron settie on a price of $349 for the sale. Calculate the yield Harry earned over the 6 months, expressed as an effective annual rate. Give you answer as a percentage to 4 decimal places. Do NOT include a percentage sign. (2 marks) Answer: (c) Despite receiving the same cash flows that Harry would have received (had he held the PPP for the full 3 years), Ron has paid a larger price than what Harry originally paid. Which of the following is the LEAST valid explanation for this? O a. The cash flows for the PPP do not have to discount as far to reach Ron's purchase date, so they have a larger present value. O b. Changes in the market conditions have caused this change in price. Since the price went up, this must mean that the return fell. O c. Ron does not have to wait as long to receive his first cash flow, so he is willing to pay more than what Harry paid. o d. Harry invested his money for 6 months and should be compensated for this.

Answer rating: 100% (QA)

Ob Cash Plows 205 O sum ob pV 84 84 346 883 ... View the full answer