Question

Consider a bond paying a coupon rate of 20% per year, compounded annually, when the market interest rate (YTM) is only 10% per year. The market interest rate (return for an investment of like risk) will remain at 10% for the next two years.   The bond has two years until maturity.   What is the HOLDING PERIOD RETURN (or rate of return) over the first year on this bond?

Answer 1

Answer :

Holding Period return over 1st year = (Price after one year - Price today )/ Price today * 100

Price = Interest * (1+rate)^t + Face Value * (1+rate)^t

Price after one year = 200 * 1.1^1 + 1000 * 1.1^1

Price after one year = 1090.91

Price today = 200 * 1.1^1 + 200 * 1.1^2 + 1000 * 1.2^2

Price today = 1173.55

Holding period return = (1090.91-1173.55) / 1173.55 * 100 ==> -7.04%