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?

		0.3389
		0.3422
		0.3654
		0.3838

Answer 1

Semi annual coupon = 8% *1000 * 0.5 = $40

Price of the bond today = Coupon * [ 1 - ( 1+ periodic ytm )^-n ] / periodic ytm + face value * 1/ ( 1+ periodic ytm) ^n

= 40 * [ 1 - 1.05^-4 ] / 0.05 + 1000 * 1/1.05^4

= 141.84 + 822.70 = 964.54

ytm is the rate os reinvestment.

First we need to calculate the sum of semi annual coupon paid for 5 years

sum of coupons recieved over 5 years = 40*10 = 400

Holding period return = Ending value / beginning vale = ( total value of coupons + price of bond ) / ending value

= ( 964.54 + 400.00) / 1000 - 1

= 1364.54 / 1000 - 1

= 0.3654