A $1,000 face value bond with a 8 percent coupon rate and 10 years to maturity currently has a yield to maturity of 7.24 percent. One year later, the bond has a yield to maturity of 7.89 percent. What is the holding period return for the bond when it is sold by then?

Question

Quizplus · Accepted Answer

To calculate the holding period return, we need to know the ending price of the bond after one year.

Using the bond pricing formula, we can calculate the ending price as:

Ending Price = (Coupon Payment / Yield) * (1 - 1 / (1 + Yield)^n) + Face Value / (1 + Yield)^n

Where:
Coupon Payment = $1,000 x 8% = $80
Yield (after one year) = 7.89%
n = 9 (since there are 9 years left to maturity after one year)

Plugging in these values, we get:

Ending Price = ($80 / 0.0789) * (1 - 1 / 1.0789^9) + $1,000 / 1.0789^9
Ending Price = $1,038.69

The holding period return is then:

HPR = (Ending Price - Beginning Price + Coupon Payment) / Beginning Price

Where:
Beginning Price = $1,000
Coupon Payment = $80
Ending Price = $1,038.69

Plugging in these values, we get:

HPR = ($1,038.69 - $1,000 + $80) / $1,000
HPR = 0.0354 or 3.54%

Therefore, the best choice is B.

A $1,000 Face Value Bond with a 8 Percent Coupon