You have been given this probability distribution for the holding-period return for Cheese, Inc stock: $$\begin{array} { l c l }
\text { State of } & \text { Probability } & \text { HPR } \
\text { Economy } & & \
\text { Boom } & .20 & 24 \% \
\text { Normal Growth } & .45 & 15 \% \
\text { Recession } & .35 & 8 \%
\end{array}$$
-An investor purchased a bond 63 days ago for $980.He received $17 in interest and sold the bond for $987.What is the holding-period return on his investment?
A)1.52%
B)2.45%
C)1.92%
D)2.68%
E)None of the above

Question

You have been given this probability distribution for the holding-period return for Cheese, Inc stock: $$\begin{array} { l c l } 
\text { State of } & \text { Probability } & \text { HPR } \
\text { Economy } & & \
\text { Boom } & .20 & 24 \% \
\text { Normal Growth } & .45 & 15 \% \
\text { Recession } & .35 & 8 \%
\end{array}$$
-An investor purchased a bond 63 days ago for $980.He received $17 in interest and sold the bond for $987.What is the holding-period return on his investment?
A)1.52%
B)2.45%
C)1.92%
D)2.68%
E)None of the above

Quizplus · Accepted Answer

First, we need to calculate the purchase price of the bond. Since the investor received $17 in interest, we can use the following formula:

Purchase price = Selling price - Accrued interest

Purchase price = $987 - $17 = $970

Next, we can use the following formula to calculate the holding-period return:

HPR = (Ending price - Beginning price + Income) / Beginning price

HPR = ($987 - $970 + $17) / $970

HPR = 0.01753 or 1.753%

However, the question asks for the answer to be expressed in annual terms. Since the holding period is 63 days, we need to annualize the holding-period return by using the following formula:

Annualized HPR = (1 + Holding-period return)^365/63 - 1

Annualized HPR = (1 + 0.01753)^365/63 - 1

Annualized HPR = 0.0245 or 2.45%

Therefore, the answer is B) 2.45%.

You Have Been Given This Probability Distribution for the Holding-Period