Final answer:
The holding period return for a bond includes both the coupon payments and capital gains or losses due to price changes. To calculate HPR, subtract the new bond price from the original purchase price and add the coupon payment. Without the bond's original purchase price, the exact HPR cannot be calculated.
Step-by-step explanation:
To calculate the total holding period return (HPR) for the investment in the bond, we need to consider both the coupon payment received and the change in the bond's price due to the increase in interest rates. Initially, the bond had a 10.5% annual coupon rate (0.105 of the $1,000 face value), which means you received $105 in coupon payments. The yield to maturity (YTM) was originally 12.5% (0.125), but the interest rates rose by 0.6% (0.006) over the year.
Since interest rates rose, the price of the bond would decrease. We must calculate the new price of the bond considering that new YTM would be the original YTM (0.125) plus the rise in interest rates (0.006), equating to a new YTM of 13.1% (0.131).
Let's estimate the new bond price using the given information. We have the expected cash flow of $1,080 one year from now, which includes the face value and the final year's interest payment. If the market interest rate is now 13.1%, the present value of this future cash flow would be calculated by dividing the expected cash flow by the market interest rate: $1,080 / (1 + 0.131).
We then subtract the new bond price from the original purchase price and add the coupon payment to determine the HPR. However, to give a precise HPR value, we need the original purchase price of the bond. Unfortunately, this value hasn’t been provided in the question, which leaves us unable to calculate the exact HPR.