Question

John paid $1,000 for a coupon bond paying 9 percent interest annually. The bond had 12 years to maturity. When John sold the bond exactly three years later, the yield to maturity on the bond had declined to 7 percent. What is John's annualized holding period return assuming the coupons were reinvested at 9 percent?

Answer 1

To calculate John's annualized holding period return, we can use the formula: Annualized Holding Period Return = (Coupon Payments / Initial Investment)^(1 / Number of Years) - 1. Plugging in the values, we can find John's annualized holding period return.

Step-by-step explanation:

To calculate John's annualized holding period return, we need to consider the coupons he received and the change in the bond's price. John initially paid $1,000 for the bond, which pays 9% interest annually. After three years, John sold the bond when the yield to maturity had declined to 7%.

The coupon payments John received over the three-year period can be reinvested at the same 9% interest rate. So, the annualized holding period return can be calculated as:

Annualized Holding Period Return = (Coupon Payments / Initial Investment)^(1 / Number of Years) - 1

Plugging in the values:

Coupon Payments = 3 * ($1,000 * 0.09)

Initial Investment = $1,000

Number of Years = 3

Using this formula, John's annualized holding period return can be calculated.