Question

You buy a seven-year bond that has a 5.75% current yield and a 5.75% coupon (paid annually). In one year, promised yields to maturity have risen to 6.75%. What is your holding-period return? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Holding period return = 0.95%

Explanation :

As per the data given in the question,

Years of maturity = 7

Coupon rate = 5.75%

Current yield = 5.75%

Per value of bond = $1000.00

Coupon payment = Par value × Coupon rate

=1,000 ×5.75%

= $57.50

Current yield = Coupon payment ÷ price of bond

0.575 = $57.50 ÷ Price per bond

Price per bond = $1,000

In 1 year the yield to maturity increases to = 6.75%

Price of bond after 1 year = $951.96

The formula is shown below:

=-PV(RATE;NPER;PMT:FV:0)

where

Rate = 6.75%

FV = $1,000

PMT = $57.5

NPER = 7 - 1 = 6 years

Please find the attachment below:

Holding period return = (Price of bond after one year - Current bond price + Coupon payment) ÷ Current bond price

= 0.95%