Question

You purchased a 5-year, 6% annual-coupon bond with $1,000 par value. The yield to maturity at the time of purchase was 4%. You sold the bond after one year, right after receiving the first coupon payment. The bond's yield to maturity was 3.4% when you sold it. What is your holding period return on the bond

Answer 1

Answer:

6.12%

Explanation:

the market value of the bond when you purchased it was:

PV of face value = $1,000 / 1.04⁵ = $821.93

PV of coupon payments = $60 x 4.4518 (PV annuity factor, 4%, 5 periods) = $267.11

initial investment = $1,089.04

after 1 year, you receive $60 +

PV of face value = $1,000 / 1.034⁴ = $874.82

PV of coupon payments = $60 x 3.6818 (PV annuity factor, 3.4%, 4 periods) = $220.91

market price = $1,095.73

total holding return = ($1,095.73 + $60 - $1,089.04) / $1,089.04 = 6.12%