An investor bought a bond at par and held it for one year.If the coupon rate is 5%, original maturity of the bond is 8 years, and the yield to maturity of the bond when it was sold was 6%, what is the holding period return of the bond? Assume annual interest coupon payments.

Question

Quizplus · Accepted Answer

The holding period return (HPR) is the total return earned by the investor for the period of time during which the bond was held. To calculate the HPR, we need to consider the change in the price of the bond, the coupon payments received, and the initial investment.

In this case, the bond was bought at par, which means the initial investment was $1,000 (assuming a face value of $1,000). The coupon rate is 5%, which means the investor received $50 in interest payments over the year.

To calculate the change in price, we need to use the formula for yield to maturity (YTM) and solve for the price of the bond:

$50 = $50/$1,000 + $1,000/x
where x is the price of the bond when sold.

Solving for x, we get:
x = $1,000.60

Therefore, the bond was sold for $1,000.60, which means the change in price was $0.60.

The HPR can now be calculated:

HPR = (Interest earned + Change in price) / Initial investment - 1
HPR = ($50 + $0.60) / $1,000 - 1
HPR = 0.051 or -1.21%

Therefore, the holding period return of the bond is -1.21%. Choice C is the correct answer.

An Investor Bought a Bond at Par and Held It