Question

An investor bought a 30-year coupon-paying bond on January 1st, 2017. The bond pays a coupon C at the end of each calendar year. By January 1st, 2018 interest rates have increased at all maturities. The Holding Period Return of this investment from 1/1/2017 to 1/1/2018 must have been negative.

a) true
b) false

Answer 1

b) false

Step-by-step explanation:

lets assume that the investor purchased a 30 year coupon at par ($1,000) on January 1, 2017. The bond pays a coupon of C, and the market rate = c (bond purchased at par).

BY January 1, 2018, market interest rate = C + X, that means that the bond's market value has decreased to $1,000 - Y.

holding period return = [coupon + (ending value - initial value)] / initial value

holding period return = [C + ($1,000 - Y - $1,000)] / $1,000 = (C - Y) / $1,000

• if C ˃ Y, then the holding period return is positive
• if C < Y, then the holding period return is negative
• if C = Y, then the holding period return is zero