Question

A 6 year bond with a YTM of 9.8% is currently selling at Par. If you buy the bond today and then sell it in one year at a YTM of 8.8%, then what is your rate of return on this investment (one-year holding period return)?

Answer 1

Par Value = $1,000
Current Price = $1,000
Annual YTM = 9.80%

Par value is equal to current price, then yield to maturity is coupon rate

Annual Coupon Rate = 9.80%
Annual Coupon = 9.80% * $1,000
Annual Coupon = $98

At the end of the year:

Par Value = $1,000
Annual Coupon = $98
Annual YTM = 8.80%
Time to Maturity = 5 years

Current Price = $98 * PVIFA(8.80%, 5) + $1,000 * PVIF(8.80%, 5)
Current Price = $98 * (1 - (1/1.088)^5) / 0.088 + $1,000 / 1.088^5
Current Price = $1,039.10

Holding Period Return = (Selling Price + Coupon Received - Purchase Price) / Purchase Price
Holding Period Return = ($1,039.10 + $98.00 - $1,000) / $1,000
Holding Period Return = 0.1371 or 13.71%

answered by: anonymous