Question

Assume you have a 1 year investment horizon. A bond has 10% year coupon rate and pays the coupon once per year. The bond matures in 10 years and is priced to yield 8% this year. If you expect the yield to maturity on the bond to be 7% at the beginning of the next year, what is your holding period return, assuming you have received the coupon for this year.

Answer 1

We need to find the price of bond now and after 1 year. It will help us to find the holding period return

You need to use Financial calculator to solve this problem. You can download it.

N = 10 (The Bond is for 10 Year)

I/Y = 8 (The yield is 8%)

PMT => 10% of 1,000 = 100 ( The coupon 10% is on Face Value, considering the face value to be 1,000)

FV = 1,000 (The Face value of bond is $1,000)

CPT +PV = 1,134.20

After 1 year

N = 9 (The Bond is now for 9 Years)

I/Y = 7 (The yield is 7%)

PMT => 10% of 1,000 = 100 ( The coupon 10% is on Face Value, considering the face value to be 1,000)

FV = 1,000 (The Face value of bond is $1,000)

CPT +PV = 1,195.4569

So the investor bought the bond for 1,134.20 and sold it after 1 year for 1,195.4569 with coupon 100

Holding Period return = {(Ending price - beginning price) + coupon} / Beginning Price

= {(1,195.4569 - 1,134.20) + 100} / 1,134.20 *100

= 14.21%

So the holding period return is 14.21%