Question

You are currently considering purchasing a 20 year, 8% bond that pays coupon seminnually. You also determine that the current YTM is 11%. In 5 years, you decide to sell the bond when the YTM is 6%. Compute the before tax holding period return.

Answer 1

Purchase price

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =20x2

Bond Price =∑ [(8*1000/200)/(1 + 11/200)^k]     +   1000/(1 + 11/200)^20x2

k=1

Bond Price = 759.31

selling price

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =15x2

Bond Price =∑ [(8*1000/200)/(1 + 6/200)^k]     +   1000/(1 + 6/200)^15x2

k=1

Bond Price = 1196

HPR = ((selling price+coupon for 5 years)/purchase price-1)*100

=(1196+80*5)/759.31-1)*100= 110.19%