Question

Assume that you pay ​$948.58 for a​ long-term bond that carries a coupon of 8.6%.

Over the course of the next 12​ months, interest rates drop sharply. As a​ result, you sell the bond at a price of ​$1,010.87

a. Find the current yield that existed on this bond at the beginning of the year. What was it by the end of the​ one-year holding​ period?

b. Determine the holding period return on this investment.

a. The current yield that existed on this bond at the beginning of the year is_​%

Answer 1

Answer :

(a.) Calculation of Current Yield

Current yield = Annual Coupon / Market Price

Current Yield at the beginning of the year

Current yield = (1000 8.6%) / 948.58

= 86 / 948.58

= 0.09066183136 or 9.07%

Current Yield at the end of the year

Current yield = (1000 8.6%) / 1010.87

= 86 / 1010.87

= 0.08507523222 or 8.51%

(b.) Calculation of Holding Period Return

Holding Period Return = [Price at the end - Price at the beginning + Coupon ] / Price at the beginning

= [ 1010.87 - 948.58 + 86 ] / 948.58

= 148.29 / 948.58

= 15.63%