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A newly issued bond pays its coupons once a year. Its coupon rate is 4.1%, its maturity is 15 years, and its yield to maturity is 7.1%. a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.1% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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mltn1980

Answer:

  • The holding-period return for a one-year investment  :  18%

Explanation:

  • The holding period return formula is the next:

HPR =   + Income ( +Price Earn - Price Paid )   /  Price Paid    

It means you have to sum the income of the bond (interest) plus the earning price ( difference Price Ear less Price Paid) , that amount must be divided by the Price Paid.

In this case the result is:

  • HPR :  $41,0 + ( $815,2 - $728,5) /  $728,5 = 127,8/728,5 = 18%  

It's necessary to define the Face value of the bond on both period.

  • At the moment of the purchase it's the present value of the cash flow at the discount rate of  7,1%

 728   YTM 7,1%  

1  $ 1.000 $ 41

2  $ 1.000 $ 41

15  $ 1.000 $ 1.041

  • The second price to find it's the Face Value but with one year less of interest and a differente discount rate , in this case, 6,1%.
  • $815,2   YTM 6,1%  

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