Question

You buy a ten-year bond that has a 6.75% current yield and a 5.00% coupon (paid annually). In one year, promised yields to maturity have fallen to 5.75%. What is your holding-period return?

Answer 1

Assuming face value to be $1000

Annual coupon = 5% of 1000 = 50

Current yield = Annual coupon / Price

Price = 50 / 0.0675

Price = 740.74074

Price in 1 year = Coupon * [1 - 1 / (1 + r)^n] / r + FV / (1 + r)^n

Price in 1 year = 50 * [1 - 1 / (1 + 0.0575)^9] / 0.0575 + 1000 / (1 + 0.0575)^9

Price in 1 year = 50 * [1 - 0.604612] / 0.0575 + 604.611795

Price in 1 year = 50 * 6.876317 + 604.611795

Price in 1 year = $948.427625

Holding period return = [(Ending value + coupon - beginning value) / beginning value] * 100

Holding period return = [(948.427625 + 50 - 740.74074) / 740.74047] * 100

Holding period return = 34.79%