Question

Suppose you purchase a 15-year maturity bond that has a 7% current yield and a 7% coupon (paid semiannually) rate. In one year, the yield to maturity has risen to 9%. What is your holding-period return?

Answer 1

price of Bond now = Coupon / Current Yield = $70 / 7% = $1000

Price of Bond at the end of year 1 = $842.57

Holding Period return = [(Sale Price + Coupon) / Purchase Price] - 1

Holding Period return = (842.57 + 70) / 1000] -1

Holding Period return = -8.74%

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