Holding Period Return

Just a quick question really. With regards to HPY, the formula is (P1-P0+CF)/P0, which makes sense, but I’m wondering what about when the cash flows (ie dividend) occurs in the middle of the holding period? Shouldn’t we have to consider the appropriate discount/compound effect on that cash flow and not simply add it in to the formula?

For example, if we were to find the HPY of a stock over 9 months, and it paid a dividend at the three month mark, that dividend would have 6 months of compounding to account for. None of the practice problems I’ve done so far say anything about this, they’re more just “during which time it paid a dividend” type wording. Maybe I’m overthinking but I’d rather be safe.

And while I’m at it, what notification are you using for interest rates/cost of capital/etc? I keep switching between r, i, and i/y. Gotta settle on one.

That’s a good question. Maybe the formula assumes that the dividend is not actually reinvested.

just think of it as (what you have at the end of the period - what you had at the beginning of the period)/what you had at the beginning of the period, or the way i prefer, (what you had at the end/what you had at the beginning) -1

if you had $500 and in the end you have $700, it doesnt really matter how you got there…whether its dividends w/no reinvestment…or dividends with reinvestment and appreciation…or whether its no dividends at all and its pure appreciation…its what do u have at the end vs what you started with. so, whats your return for simply holding that original $500 investment. 700/500 - 1

now, if they throw you a curveball and say the stock grew 6% over the year and the dividend was reinvested and earned 3% on an annual basis then my guess is yes you’d want to account for that.

i dont think it will get that intense but could you solve that if you needed to?

Reinvestment is not taken into consideration for HPY. Else you can think of it in the manner that the dividend income is accruing at the end of the period. (The selection of the period is done in such a manner)

I/Y is more of a calculator convention - too cumbersome to write while practising.

I tend to use r or k

true but the question is what do you have in the end? because they give the price for which the bond was sold and you have to add dividends to find out what do you actually have in the end.