You buy a seven-year bond that has a 5.75% current yield and a 5.75% coupon (paid annually). In one year, promised yields to mat
urity have risen to 6.75%. What is your holding-period return? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
1 answer:
Answer :
Holding period return = 0.95%
Explanation :
As per the data given in the question,
Years of maturity = 7
Coupon rate = 5.75%
Current yield = 5.75%
Per value of bond = $1000.00
Coupon payment = Par value × Coupon rate
=1,000 ×5.75%
= $57.50
Current yield = Coupon payment ÷ price of bond
0.575 = $57.50 ÷ Price per bond
Price per bond = $1,000
In 1 year the yield to maturity increases to = 6.75%
Price of bond after 1 year = $951.96
The formula is shown below:
=-PV(RATE;NPER;PMT:FV:0)
where
Rate = 6.75%
FV = $1,000
PMT = $57.5
NPER = 7 - 1 = 6 years
Please find the attachment below:
Holding period return = (Price of bond after one year - Current bond price + Coupon payment) ÷ Current bond price
= 0.95%
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