Question

Assume semi-annual interest payment. You purchased and held a five-year bond for one and a half years. At the time of purchase and sale, the yield is the same as the coupon rate of 10%. If you were able to reinvest all the coupon interests received at 12% per annum compounded semi-annually, what is the holding period return?

A. 10.094%

B. 10.188%

C. 11.889%

D. 13.745%

E. insufficient information

Please show working!

Answer 1

Let us assume the value of bond is $1000

Holding period return = (Ending value - beginning value + interest + interest on interest )/ beginning value

value of reinvested coupon received after 6 months = interest 8 ( 1 + rate )^ no of half years

= (1000*10%*0.5 )*(1.06)^2

= 50 *1.06^2

= 56.18

value of reinvested coupon received after 1 year = 50 * 1.06 = 53

value of reinvested coupon received after 1.5 year = 50

Holding period return = (1000 -1000 + 56.18 + 53 +50) /1000

= 159.18 /1000

= 15.92%