Question

A ten-year bond is issued with 10% coupon and the discount rate is 12%. After a single year, interest rates go up two percent to 14%. What should happen to your holding period return over that single year if you did not sell your bond before the interest rate increase? (You should do the math if you have enough time; use Excel)

It will be slightly less than 12%

It will be slightly more than 12%

It will be significantly less than 12%

It will be significantly more than 12%

Answer 1

Correct option is > It will be significantly less than 12%

Using financial calculator BA II Plus - Input details:	12% rate	14% rate
I/Y = Rate or yield / frequency of coupon in a year =	12.000000	14.000000
PMT = Payment = Coupon rate x FV / frequency =	-$100.00	-$100.00
N = Total number of periods = Number of years x frequency =	10	10
FV = Future Value or Face Value =	-$1,000.00	-$1,000.00
CPT > PV = Present Value of Bond =	$887.00	$791.36

Holding period Return = (791.36 - 887)/ 887

Holding period Return = -10.78%

Return is in negative