Question

You buy a(n) eleven-year bond that has a 8.00% current yield and a 8.00% coupon (paid annually). In one year, promised yields to maturity have risen to 9.00%. What is your holding-period return? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Assuming face value to be $1000

Coupon = 8% of 1000 = 80

Current yield = Annual coupon / price

0.08 = 80 / price

Price = 1,000

Yield to maturity 9%:

Price = Coupon * [1 - 1 / (1 + r)^n] / r + FV / (1 + r)^n

Price = 80 * [1 - 1 / (1 + 0.09)^10] / 0.09 + 1000 / (1 + 0.09)^10

Price = 80 * [1 - 0.422411] / 0.09 + 422.410807

Price = 80 * 6.417656 + 422.410807

Price = 935.8234

Holding period return = [(Ending value + coupon - beginning value) / beginning value] * 100

Holding period return = [(935.8234 + 80 - 1,000) / 1,000] * 100

Holding period return = 1.58%