Question

On April 15, you purchased a 5-year bond at an asking price of 101:04. The bond had a 10% coupon paid semi-annually every Jan 15 and July 15. Suppose that you held the bond for only one and a half years and sold it at $1010. What's your holding period return? To the person who answered this question previously don't. you didn't answer the question.

Answer 1

The holding period return is the percentage of the total return received from the investment. In the present case, the bond investment is made on 15^th April and the bond is sold after 18 months period. The company pays the semi-annual interest on 15^th January and 15^th July.

During the period of 18 months, the bondholder receives 3 semi-annual interest, 1^st on 15^th July, 2^nd on 15^th January and 3^rd on 15^th July.

It is assumed that the bonds are purchased from the secondary market and thus, the bondholder receives 6 months' interest even if the bondholder purchases the bond 3 months prior to the interest date. The bondholder receives 6 months' interest because the bondholder pays the interest amount at the time of purchase of such bond.

Compute the total interest received, using the equation as shown below:

Total interest = Face value*Time period*Rate of interest/2

                      = $1,000*3 half-years*10%/2

                      = $150

Hence, the total interest received is $150.

Compute the purchase price, using the equation as shown below:

Purchase price = Face value*Asked price percentage

                         = $1,000*101.04%

                         = $1,010.40

Hence, the purchase price is $1,010.40.   

Compute the holding period return (HPR), using the equation as shown below:

HPR = (Selling price + Interest – Purchase price)/ Purchase price

         = ($1,010 + $150 - $1,010.40)/ $1,010.40

         = 14.806017418%

Hence, HPR is 14.806017418%.