Question

Five years ago, Rock Steady Corp issued a semiannual coupon bond with seven years until maturity. This bond was originally issued at par with a $1,000 face value. The coupon rate on the bond is 8%. Today, the yield-to-maturity (YTM) is 10%. Assume an investor bought the bond at the time it was issued and sold it today. What is the holding period return for the five year period of investment?

Answer 1

Face Value of Bond = $1,000

Investor bought the bond when it was issued, and the bond was issued at par. So, Bond buying price = $1,000

Semi-annual coupon payment =$1,000*8%*1/2

=$40

No of years left to maturity from today = 7 years - 5 years = 2 years

n = 2yrs*2 = 4

Semi-annual YTM = 10%/2 = 5%

Calculating the Price of Bond today:-

Price = $141.84+ $822.70

Price =$964.54

So, Price today sold at $964.54

Coupon Payment received during 5 years = $40*2*5 years

=$400

Calculating the Holding Period Return(HPR):-

HPR = [(Selling Price - Buying Price) +Income]/Buying Price

=[($964.54 - $1000) + $400]/$1000

=36.45%

So, the holding period return for the five year period of investment is 36.45%

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