Question

In: Finance

Suppose Bond A has a face value worth $1000. It pays a coupon on a semi-annual...

Suppose Bond A has a face value worth $1000. It pays a coupon on a semi-annual basis, and the annual coupon rate is 8%. The YTM is 10%. The bond will mature 10 years from now. Suppose that you buy Bond A today. After 6 months from the time of buying the bond, you decide to sell the bond (you sell the bond after you receive the first coupon). Right before you sell the bond, the YTM goes up to 12%. What is your six-month holding period return (percentage return)?

Solutions

Expert Solution

  

_______________________________

_______________________________

Purchase Price

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 10% / 2 = 0.05

And n is the no of Compounding periods 10 years * 2 = 20

Coupon 8% / 2 * 1000= 40

=

= 875.38

Selling Price

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 12% / 2 = 0.096

And n is the no of Compounding periods 10 years * 2 = 20 - 1= 19

Coupon 8% / 2 * 1000= 40

=

= 776.84

HPR = Coupon + Capital Gain / Purcashe Price

= 40 + (776.84 - 875.38) / 875.38

= -6.69%

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