Question

You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You...

You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You sell the bond at year-end. What is your holding period return (i.e., HPR)?

3.34%

6.00%

4.00%

5.20%
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Homework Answers

Answer #1

Coupon = 0.04 * 1000 = 40

Price = Coupon * [1 - 1 / (1 + r)n] / r + FV / (1 + r)n

Price = 40 * [1 - 1 / (1 + 0.06)10] / 0.06 + 1000 / (1 + 0.06)10

Price = 40 * [1 - 0.558395] / 0.06 + 558.394777

Price = 40 * 7.360087 + 558.394777

Price = $852.7983

Price = Coupon * [1 - 1 / (1 + r)n] / r + FV / (1 + r)n

Price in 1 year = 40 * [1 - 1 / (1 + 0.06)9] / 0.06 + 1000 / (1 + 0.06)9

Price in 1 year = 40 * [1 - 0.591898] / 0.06 + 591.898464

Price in 1 year = 40 * 6.801692 + 591.898464

Price in 1 year = $863.9661

Holding period return = [(Ending value + coupon - beginning value) / beginning value] * 100

Holding period return = [(863.9661 + 40 - 852.7983) / 852.7983] * 100

Holding period return = 6.00%

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