Question

# Five years ago, Rock Steady Corp issued a semiannual coupon bond with seven years until maturity....

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 step by step solution!

Hiolding period return = ( selling price + future value of coupons ) / purchase price

Step 1 : Calculation of selling price

 Year Cash flows Discounting [email protected]% ( 1 /(1+r)^n Present values 1 40 0.952380952 \$38.10 2 40 0.907029478 \$36.28 3 40 0.863837599 \$34.55 4 1040 0.822702475 \$855.61 Value of bond after 5 years \$964.54

Selling price = 964.54

Step 2 : Calculation of future value of coupons

Future value of coupons for 5 years = Future value of annuity = coupons * [ ( 1+ periodic ytm )^no of periods -1] / periodic ytm

=40* [ 1.05 ^10 - 1] / 0.05 = 503.12

Step 3 : Holding period return = ( 964.54 + 503.12) / 1000 - 1 = 46.77%

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