Final answer:
The subject question relates to calculating the holding-period return of a bond when market yields rise. The specific holding-period return would be a combination of the coupon payment and the price change of the bond. Without the new bond price, only a conceptual explanation can be provided.
Step-by-step explanation:
The subject question pertains to the calculation of holding-period return on a bond after a change in the market's yield to maturity. Initially, a 4.00% coupon bond is purchased when current yields are also at 4.00%. After a year, although the investor receives the annual coupon payment based on the 4.00% coupon rate (which is $40 on a $1,000 face value bond), the market yield has risen to 5.00%.
The holding-period return combines the income received (the coupon payment) and the capital gain or loss on the bond. To provide the final calculation, we would need the new price of the bond after the yield increase, which isn't provided in the question. However, the concept outlined suggests that if you hypothetically sold the bond for $964 after receiving your $40 coupon, the holding-period return would be calculated as follows:
Holding-Period Return = (Coupon Payment + Price Change) / Initial Bond Price
Holding-Period Return = ($40 + ($964 - $1000)) / $1000
Holding-Period Return = ($40 - $36) / $1000
Holding-Period Return = $4 / $1000 = 0.4%
This simple example shows a hypothetical negative return due to the bond price decreasing more than the coupon payment. In reality, the price decrease on the bond would be influenced by several factors including duration, remaining time to maturity, and the change in yield.