Question

Calculate Holding period yield – A bond is purchased at $1,200 and pays a $120 annual payment with
maturity in 7 years. The buyer has to sell the bond after 3 years and rates are now 7%. What is the price
the bond sells at? What is the holding period yield?

Do not use Excel!

Answer 1

Price of The Bond = Present Value of future Cash flows + PV of the PAR value . , PV = Present Value.

bond has 4 years remaining , $120 each every year Plus the PAR value would be receiving at the end of the maturity.

soSelling price = present value = cf/(1+r) + cf/(1+r)^2 + cf/(1+r)^3 + cf/(1+r)^4 + Par/(1+r)^4 ,

here , CF = Cash flows / Annual Payment = $120,

r = Rate of Interest = 7% = .07 , Par = $1200

Present Value of Bond = 120/(1+0.07) + 120/(1.07)^2 + 120/(1+.07)^3 + 120/(1.07)^4 + 1200/(1.07)^4

therefore Selling Price of Bond = PV of Bond =112.15 + 104.81 + 97.95 + 91.54 + 915.47 = 1321.92 = $1322

b) Holding period return = (Income received + (Current Price of bond - Buying Price of Bond))/Buying Price

Income Received = Annual Payments * No. Of Years = 120*3 =$ 360

Current Price is Calculated = $1322 , Buying Price = $1200

Therefore HPR = (360 + (1322 - 1200))/1200 = 0.401 = 40.1%,

ANNUALIZED HPR = (1+HPR)^(1/T)-1 = (1+.401)^(1/3)-1 = 0.1189 = 11.89%