Question

If a bond has face value $1000, annual coupon rate of 10% is bought for $900 and sold 2 years later for $1100 what is holding period return? Annualized return?

Answer 1

Holding period return is the total return received over the time the investment was held.

For a coupon rate of 10% on face vaue, annual coupons will be 10%*1000 = $100. In two years coupon would be received twice.

Holding period return = [Income +(End of period value - Initial Value)] / Initial Value = [100+100+1100-900] / 900 = 400/900 = 44.44%

Annualized return is the geometric average return earned every year till the investment is held.

Annualized return = (1+Holding period return)^(1/number of years) - 1

= (1+0.4444)^(1/2) - 1

= 20.18%

Thus annualized retutn is 20.18% and Holding period return is 44.44%

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