Question

A newly issued bond pays its coupons once a year. Its coupon rate is 4.1%, its maturity is 15 years, and its yield to maturity is 7.1%. a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.1% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

• The holding-period return for a one-year investment : 18%

Step-by-step explanation:

• The holding period return formula is the next:

HPR = + Income ( +Price Earn - Price Paid ) / Price Paid

It means you have to sum the income of the bond (interest) plus the earning price ( difference Price Ear less Price Paid) , that amount must be divided by the Price Paid.

In this case the result is:

• HPR : $41,0 + ( $815,2 - $728,5) / $728,5 = 127,8/728,5 = 18%

It's necessary to define the Face value of the bond on both period.

• At the moment of the purchase it's the present value of the cash flow at the discount rate of 7,1%

728 YTM 7,1%

1 $ 1.000 $ 41

2 $ 1.000 $ 41

15 $ 1.000 $ 1.041

• The second price to find it's the Face Value but with one year less of interest and a differente discount rate , in this case, 6,1%.
• $815,2 YTM 6,1%