Question

Suppose that you buy a semi-annual coupon bond with coupon rate of 10%; the market price of $1,120, and the time to maturity of 17 years. Seven years from now, the YTM on your bond is expected to decline by 2%, and you plan to sell. What is the holding period yield (HPY) on your investment?

Please give the explanation or formula! Thanks!

Answer 1

73.45%

Step-1:Calculation of Yield to maturity at beginning
Yield to maturity	=rate(nper,pmt,pv,fv)*2
	= 8.64%
Where,
nper	=	17*2	=	34
pmt	=	1000*5%	=	$         50.00
pv			=	$ -1,120.00
fv			=	$   1,000.00
Step-2:Calculation of price of bond 7 years from nw
Price of bond	=-pv(rate,nper,pmt,fv)
	= $ 1,242.67
Where,
rate	=	(8.64%-2%)/2	=	0.03320193
nper	=	(17-7)*2	=	20
pmt			=	$         50.00
fv			=	$   1,000.00
Step-3:Calculation of holding period yield
Holding Period Yield	=	(Coupon + (Selling Price - Purchase Price))/Purchase Price
	=	(700+(1242.67-1120.00))/1120.00
	=	73.45%
Where,
Coupon	=	Semi annual coupon	*	Semi annual period of holding
	=	$    50.00	*	$         14.00
	=	$ 700.00