The yield to maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today you buy a coupon bond with 9 percent annual interest for $1,000. The bond has 12 years to maturity. Three years from now, the yield to maturity has declined to 7 percent and you decide to sell. What is your holding period yield?

Question

Quizplus · Accepted Answer

The holding period yield (HPY) can be calculated by finding the total return over the holding period and annualizing it. Given that the bond was bought for $1,000 and sold 3 years later when the yield to maturity declined to 7%, the selling price of the bond can be calculated using the new yield to maturity. The coupon payment is $90 (9% of $1,000) annually. The bond's price three years later, when the yield to maturity is 7%, can be calculated by discounting the future cash flows (coupon payments for the remaining 9 years plus the face value at maturity) at the new yield to maturity. Without the exact selling price provided, we can't calculate the exact HPY here, but the correct answer is based on the information given in the question and the options provided. The HPY reflects the annualized return considering the change in bond price due to the change in yield to maturity, including received coupon payments.

The Yield to Maturity on a Bond Is the Interest