Asked by Mahmoud Saleh on May 19, 2024
Verified
You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ________.
A) .61%
B) −5.39%
C) 1.28%
D) −3.25%
Holding-Period Return
The total return received from holding an asset or portfolio over a period, including interest, dividends, and capital gains.
Par Value Bond
A financial instrument issued with a stated face value, the amount that will be paid back to the investor at maturity, not necessarily reflecting the bond's market value.
Yield
The income return on an investment, such as the interest or dividends received, expressed as an annual percentage of the investment's cost.
- Calculate the holding-period return of bond investments and understand the impact of yield changes on bond prices.
Verified Answer
GH
Garrison Hawkins
May 26, 2024
Final Answer :
A
Explanation :
This year's price is 1,000. since the YTM equals the coupon rate.
Calculator entries for next year's price are N = 7, I/Y = 7, PMT = 60, FV = 1,000, CPT PV → −946.11
At the end of 1 year you'll have 946.11 + 60 = 1,006.11
HPR = 1,006.11/1,000 − 1 = .6107%
Calculator entries for next year's price are N = 7, I/Y = 7, PMT = 60, FV = 1,000, CPT PV → −946.11
At the end of 1 year you'll have 946.11 + 60 = 1,006.11
HPR = 1,006.11/1,000 − 1 = .6107%
Learning Objectives
- Calculate the holding-period return of bond investments and understand the impact of yield changes on bond prices.