You buy an 8 year $1000 par value bond today that has a 6% yield and a 6% annual payment coupon.In one year promised yields have risen to 7%.Your one year holding period return was ___.

Question

Quizplus · Accepted Answer

The correct answer is A because the bond's price will fall when promised yields rise, resulting in a negative holding period return. The formula for holding period return is:HPR = (C + (FV - PV) / N) / ((PV + FV) / 2)where:C = annual coupon paymentFV = face value of the bondPV = present value of the bondN = number of years to maturityPlugging in the given values, we get:HPR = (60 + (1000 - 943.40) / 8) / ((943.40 + 1000) / 2)HPR = (60 + 71.60 / 8) / ((943.40 + 1000) / 2)HPR = (60 + 8.95) / ((1943.40) / 2)HPR = 68.95 / 971.70HPR = 0.0709 or 0.61%

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