Question

You buy a bond with a par value of $1000 and a coupon rate of 8% with 18 coupons remaining. You hold the bond and receive 11 coupons. If the bond had a YTM of 8.2% when you bought it and 9.1% when you sold it, what was your annual holding period ROR?

Answer 1

To find the purchase price, we need to put the following values in the financial calculator:

INPUT	18	8.2		8%*1,000=80	1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-981.51

To find the selling price, we need to put the following values in the financial calculator:

INPUT	18-11=7	9.1		8%*1,000=80	1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-944.82

Annual HPR = [(Selling Price + Coupon for 11 Years) / Purchase Price]^1/11 - 1

= [{$944.82 + ($25 x 11)} / $981.51]^1/11 - 1

= [1.2428]^1/11 - 1 = 1.02 - 1 = 0.02, or 2%