Question

You bought a yen-denominated corporate bond at the beginning of the year for $100,000. The bond paid 2.5% annual interest and was trading for ¥105,000 at year-end. What holding period return, measured in yen, did you earn on the bond? a) 2.5% b) 5.0% c) 7.5% d) 10.0% e) 12.5% f) None of the options are correct.

Answer 1

The holding period return on the yen-denominated corporate bond, assuming an initial purchase price of ¥100,000 for simplification, is found to be 7.5%, making option c) the correct answer.

Step-by-step explanation:

The holding period return (HPR) on the yen-denominated corporate bond can be calculated using the formula:

HPR = (Income from investment + (End value of investment - Initial value of investment)) / Initial value of investment

Given that the bond was bought for $100,000, we don't have the exact amount in yen. However, we do know that it paid a 2.5% interest and that the end trading value was ¥105,000. This suggests that the initial value must be adjusted to reflect the same currency for a valid comparison. Assuming the initial purchase price was ¥100,000, which is a simplified representation for the sake of this example. The income from the bond, in this case, would be ¥100,000 * 2.5% = ¥2,500.

Using this information, the HPR would be calculated as:

HPR = (¥2,500 + (¥105,000 - ¥100,000)) / ¥100,000

HPR = (¥2,500 + ¥5,000) / ¥100,000

HPR = ¥7,500 / ¥100,000

HPR = 7.5%

Thus, the correct answer to the student's question is c) 7.5%.