Question

1. A bond is 4% YTM, coupon 8%, term 5 years semi. It is sold in 2 years, calculate the holding period return. If the reinvestment rate is 3%, calculate the total return (MIRR), if it is callable in 2 years at 101, calculate the YTC.

Answer 1

Holding period return:

Current price :

Number of periods = 10

YTM = 2% per period

Coupon = 1000*8% / 2 = 40

Using financial calculator

[N = 10 ; I/Y = 2% ; PV = ? ; PMT = 40 ; FV = 1000]

Price = 1179.65

Price after 2 years:

Here everything remains same as above except N will be 6

[N = 6 ; I/Y = 2% ; PV = ? ; PMT = 40 ; FV = 1000]

Selling Price = 1112.03

Holding period return =

(Selling price - Purchase price + total coupon ) / purchasing price

= (1112.03 - 1179.65 + 160) / 1179.65

= 92.38 / 1179.65

= 7.83%

MIRR:

(It is assumed that holding period is 2 years)

Reinvestment rate = 3% / 2 = 1.5% per period

YTC:

given maturity value = 1000 * 101% = 1010

[N = 4 ; I/Y = ? ; PV = -1179.65 ; PMT = 40 ; FV = 1010]*2

Compute I/Y

YTC (I/Y) = -0.4325%

(Negative yield)

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