Question

Bartlett's 5% coupon bonds make semi-annual coupon payments and mature in 14 years. An investor buys one of these bonds for par value today. She holds the bond for 6 months, collects the coupon payment, and then sells the bond immediately therafter. If the bond's yield-to-maturity is 6.5% when the investor sells the bond, what is her percentage return (not annualized) over this 6-month holding period? Enter your answer as a decimal and show 4 decimal placesFor example, if your answer is 6.25%, enter .0625 .

Answer 1

The investor's percentage return over a 6-month period for a Bartlett's 5% coupon bond, bought at par and with semi-annual coupon payments, is 2.50% or 0.0250. This calculation does not include any capital gains or losses as the selling price after the 6-month period is not provided.

Step-by-step explanation:

To calculate the investor's percentage return over the 6-month holding period for Bartlett's 5% coupon bond, we follow these steps:

1. Determine the semi-annual coupon payment: 5% of the $1,000 par value divided by 2 (because of semi-annual payments) equals $25.
2. Calculate the initial investment, which is the par value, since the bond is bought at par: $1,000.
3. The bond is held for 6 months and then sold when the yield-to-maturity is 6.5%. However, the selling price is not given, so we cannot calculate the capital gain or loss from the sale. Therefore, the return would only include the received coupon payment.
4. Calculate the total amount received after 6 months: $25 from the coupon payment.
5. Compute the return as the total received divided by the initial investment: ($25 / $1,000) = 0.0250 or 2.50%.

Since the selling price is not provided, we can only consider the coupon payment in calculating the return. Therefore, the investor's percentage return over the 6-month period is 0.0250 (not annualized), assuming no capital gain or loss from the sale of the bond.