Question

An investor purchases a bond on October 14, 2020 at 104.27 with a $5000 par value and a 4.2% coupon paid annually. The bond matures on October 14, 2027. If interest rates increase by 2 percent on October 14, 2024 and the investor sells the bond at that time, compute the holding period yield.

Answer 1

Step 1 : YTM (Interest Rate) as on October 14, 2020:

FV = $5000

Purchase Price = PV = 104.27% of $5000 = $-5213.50

PMT = 4.2% of $5000 = $210

N = 7

YTM = I/Y = ?

Inputting above values in financial calculator, then press "CPT" and "I/Y", we get -

I/Y = YTM = 3.50% as on October 14, 2020.

Step 2 : Price of the Bond as on October 14, 2024 (Selling Price):

FV = $5000

PMT = 4.2% of $5000 = $210

N = 3

I/Y = 3.50% + 2% increase = 5.50%

PV = ?

Inputting above values in financial calculator, then press "CPT" and "PV", we get -

PV = Value of Bond = $4,824.63 as on October 14, 2024

Step 3 : Holding Period Yield

Holding Period Yield = (Selling Price - Purchase Price) / Purchase Price

= ($4,824.63 - $5213.50) / $5213.50

= -0.07458

= -7.46%

Therefore, Holding Period Yield = -7.46% (Negative 7.46%)