A bond with an annual coupon rate of 12 percent and face value of $1,000.00 was purchased for $990.00 and sold two years later for $1,050.00.What was the holding period return?

Question

Quizplus · Accepted Answer

The holding period return (HPR) can be calculated by considering the income from the bond (annual coupons), the capital gain (or loss) from selling the bond, and the initial purchase price. Here, the bond pays an annual coupon of 12% of its face value, which is $1,000.00, so the annual coupon payment is $120.00. Over two years, the total coupon income is $240.00. The bond was purchased for $990.00 and sold for $1,050.00, resulting in a capital gain of $60.00. The total return over the holding period is the sum of the coupon income and the capital gain, which is $240.00 + $60.00 = $300.00. The initial investment was $990.00, so the holding period return is ($300.00 / $990.00) * 100 = 30.3%.

A Bond with an Annual Coupon Rate of 12 Percent