Question

Consider a bond that pays 6% annual coupon on a face value of $1000 and has 5 years to maturity. Suppose you buy the bond at a time when its yield to maturity is 10%. Assumer further that immediately after you buy the bond, the market interest rate YTM declines to 8%. You hold the bond for two years and sell it at the end of the second year when YTM is still 8%.

a) Calculate the annualized two year Holding Period Return or the HPR?

b) If the tax rate on interest income is 40% and the tax rate on capital gain is 20%, calculate the after tax annualized two year holding period return?

Answer 1