Question

Suppose a bond has a par of $1000 and annual coupon rate of 7%. It pays coupon annually. An investor purchased the bond at par value. Suppose one year passed and YTM increases to 9%, and now it has five years left in its life and the investor sold the bond. What is the investor’s total holding period return over the one year period?

Answer 1

-0.78%

Step-by-step explanation:

Firstly, we need to calculate the bond price after one year, which is the sum of discounted coupon payment plus the par value

New bond price = 70/(1 + 9%) + 70/(1 + 9%)^2 +...+ 70/(1 + 9%)^5 + 1000/(1 + 9%)^5 = 922.21

The holding period return includes:

1. Income gain = 70/1000 = 7%

2. Capital gain = 922.21/1000 - 1 = -7.78%

Total return = 7% - 7.78% = -0.78%