HATFIELD'S PARADOX.
Abstract The article focuses on an interesting paradox pointed in a review by Henry Rand Hatfield, professor of accounting, which drew much attention. If two identical bonds are bought on the same day, one of them at 90 and one at 110, the aggregate cost is equal to the aggregate par and the yield rate on the holding is equal to the nominal rate on the bonds. Hatfield demonstrated that if the buyer separately amortizes the premium on one and the discount on the other by the conventional compound interest formula the aggregate interest earnings thus found in the several periods will diverge from the uniform coupon receipts. The author shows that the paradox can arise from the algebraic properties of the "average yield rate" or single compound interest rate implicit in the cost of an aggregate holding acquired in more than one purchase lot. The author also considers some of the properties of the mean yield rate and makes some comments on the meaning of bond premium and bond discount and puts some question about the theoretical accuracy and the consistency of Hatfield's accuracy.
- DOI
- 10.2308/tar-8596323
- Volume
- 4 (2)
- Pages
- 111-115
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref