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In early January 2014​, you purchased $83,000 worth of some​ high-grade corporate bonds. The bonds carried...

In early January 2014​, you purchased $83,000 worth of some​ high-grade corporate bonds. The bonds carried a coupon of 7​% and mature in 2027. You paid 101.477 when you bought the bonds. Over the five years from 2014 through 2018​, the bonds were priced in the market as​ follows:

   Quoted Prices (% of $1,000 par value)      
Year   Beginning of the Year   End of the Year   Average Holding Period Return on High-Grade Corporate Bonds
2014   101.477 110.926 -8.90%
2015   110.926 108.012 10.80%
2016   108.012 106.104   1.30%
2017   106.104 106.969 0.70%
2018   106.969 102.035 2.90%

. Annual coupon payments were made on schedule throughout the​ five-year period.

a. Find the annual holding period returns for 2014 through 2018.

​(See Chapter 5 for the HPR​ formula.)

b. Use the average return information in the given table to evaluate the investment performance of this bond. How do you think it stacks up against the​ market? Explain.

Solutions

Expert Solution

Bond par value 1000
Coupon 7%

A. Computation of Holding Period Return (HPR)

HPR Formula = p1-p0/p0 + I/p0
Year Beginning %of Year End % of year Beginning price(p0) End Price( P1) Average Return Coupon payments(I) HPR
2014 101.477 110.926 1014.77 1109.26 -8.90% 70 16%
2015 110.926 108.012 1109.26 1080.12 10.80% 70 4%
2016 108.012 106.104 1080.12 1061.04 1.30% 70 5%
2017 106.104 106.969 1061.04 1069.69 0.70% 70 7%
2018 106.969 102.035 1069.69 1020.35 2.90% 70 2%

B.Evaluation of Investment Performance of this bond

As we know,The higher a bond's price, the lower its yield. That's because an investor buying the bond has to pay more for the same return.

Year Beginning price(p0) End Price( P1) Average Return Bond price scenario(Is P1>P0) Remarks
2014 1014.77 1109.26 -8.90% Yes As P1 is Greater than P0,due to this Average return is lower and becomes negative in this case,because Higher bond price,lower the YTM
2015 1109.26 1080.12 10.80% No As P1 is Smaller than P0,due to this Average return is Higher ,because Lower the bond price,Higher the YTM
2016 1080.12 1061.04 1.30% No As P1 is Smaller than P0,due to this Average return is Higher ,because Lower the bond price,Higher the YTM
2017 1061.04 1069.69 0.70% Yes As P1 is Greater than P0,due to this Average return is lower,because Higher bond price,lower the YTM
2018 1069.69 1020.35 2.90% No As P1 is Smaller than P0,due to this Average return is Higher ,because Lower the bond price,Higher the YTM

ekkarill92 answered 1 year ago
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