Question

You buy a four-year bond that has a 3.50% current yield and a 3.50% coupon (paid annually). In one year, promised yields to maturity have risen to 4.50%. What is your holding-period return? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Holding-period return %

Answer 1

BOND coupon rate    3.50%  
Assume face value =   1000  
Coupon amount = 1000*3.5% =   35  
Bond current yield =   3.50%  
Current yield = Coupon / Price of bond      
3.5% = 35/Price of bond  

Price of bond= 3.5%/35
So purchase Price of bond= 35/3.5% = $1000   

Promised Ytm after 1 year (i)= 4.5% or    0.045  
Time (n) = 4- 1 = year   3  
      
Bond price formula = Coupon amount * (1 - (1/(1+i)^n)/i + face value/(1+i)^n      
=(35*(1-(1/(1+0.045)^3))/0.045) + (1000/(1+0.045)^3)      
=972.5103565      

One year coupon received during holding = 1*35 = 35  

Holding period return = (Coupon + Sale price - Buying price)/Buying price * 100      
=(35+972.5103565 - 1000)/1000 * 100      
=0.75%      

So, holding period return is 0.75%      

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