Question

Five years ago, Rock Steady Corp issued a semiannual coupon bond with seven years until maturity. This bond was originally issued at par with a $1,000 face value. The coupon rate on the bond is 8%. Today, the yield-to-maturity (YTM) is 10%. Assume an investor bought the bond at the time it was issued and sold it today. What is the holding period return for the five year period of investment? Please provide the formula you used, and show your work.

Answer 1

Purchase price of the bond 5 years ago = $1000 (purchased at par)

There are 2 years remaining for maturity

Hence there are 4 coupons remaining and face-value at maturity

We discount all these cash-flows with the YTM to get the bond value today

Semi-annual coupon = 1000*8%/2 = $40

Bond price today = 40/(1.05^1) + 40/(1.05^2) +40/(1.05^3) +1040/(1.05^4)

Bond price today = $964.54

Holding period return = (Total income + (Selling price-Purchase price))/Purchase price

Total income = Coupon payments for 5 years = 5*8%*1000 =$400

Holding period return for 5 year period of investment = (400+964.54-1000)/1000 = 0.36454 = 36.454%