Question

A newly issued bond pays its coupons once annually. Its coupon rate is 5.2%, its maturity is 20 years, and its yield to maturity is 7%. a. Find the holding-period return for a 1-year investment period if the bond is selling at a yield to maturity of 6% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

holding period return is 14.20%

Step-by-step explanation:

In calculating the holding period return, the formula to use is given below

HPR=P1-P0+interest/P0

P1 is the price of the bond in year 1

P0 is the price of the bond in year 0

Interest is the coupon received in year 1

Price is the present value of the bond calculated using the pv formula in excel

=pv(rate,nper,pmt,fv)

rate is the yield to maturity

pmt is the interest payment which is 5.2%*$1000=$52

nper is the number of years to maturity

fv is $1000

for P0 =pv(7%,10,52,1000)

P0=$873.58

For P1

=pv(6%,9,52,1000)

P1=$945.59

HPR=($945.59 -$873.58+$52)/$873.58

HPR=14.20%