Question

Suppose that an investor with a six-month investment horizon is considering purchasing a 10-year 4% coupon bond (face value=$1,000) selling at $944.66. The investor expects that six months later the bond will be selling to offer a yield to maturity of 3.7%. What is the holding period return of this bond? Assume semiannual compounding.

	A.	13.33%
	B.	15.98%
	C.	4.64%
	D.	3.70%
	E.	8.07%
	F.	10.50%

Answer 1

Value of Bond after 6 months =

Where r is the discounting rate of a compounding period i.e. 3.7%/2 = 1.85% _ _ (Semi Annual)

And n is the no of Compounding periods (10 years * 2) -1 = 19_ _ (Semi Annual )

Coupon 4%/2 = 2%

=

= $ 1023.85

Income Earned = Coupon + Capital Gain

= 20 + (1023.85 - 944.66)

= $ 99.19

Holding Period Return = 99.19 / 944.66

= 10.50%

Option F is correct.