Question

A. You buy a 10-year US Treasury Bond with a coupon interest rate of 5% and Face Value of $1,000. You decide to sell your bond four years later when market interest rates have fallen to 4%. Find the selling price of the bond.

B. Calculate the Annualized Holding Period Return on the investment. Show your work.

Answer #1

A. The selling price will be calculated bybthe present value formula given as

PV = Price = 1000 x (0.05/1.04 + 0.05/1.04^2 + 0.05/1.04^3 + 0.05/1.04^4 + 0.05/1.04^5 + 1.05/1.04^6) = 1052.42

B. To calculate this, we need to find the initial price of the bond

Price = 1000 x (0.05/1.04 + 0.05/1.04^2 + 0.05/1.04^3 + 0.05/1.04^4 + 0.05/1.04^5 + 0.05/1.04^6 + 0.05/1.04^7 + 0.05/1.04^8 + 0.05/1.04^9 + 1.05/1.04^10) = 1081.10

Hence the holding period return will be = (1052.42 - 1081.1 + 50 x 4)/1081.1 = 15.846%

The annualized return will be = 1.15846^0.25 - 1 = 3.745%

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