Question

In early January 2010, you purchased $18,000 worth of some high grade corporate bonds. The bonds curled a coupon of 6% and mature in 2024. You paid 95.624 when you bought the bonds. Over the five years from 2010 through 2014, the bonds were priced in the market as follows: Coupon payments were made on schedule throughout the 5-year period. a. Find the annual holding period returns for 2010 through 2014. (See Chapter 5 for the HPR formula b. Use the average return information in the given table to evaluate the investment performance of this bond. How do you think it stacks up against the market? Explain. 2. The holding period return for 2010 is Data Table Click on the icon located on the top-right comer of the data table below in order to copy its contents Year 2010 2011 2012 2013 2014 Quoted Prices (% of $1,000 par value) Beginning End of of the Year the Year 95 624 103.662 103 662 105.404 105 404 110.053 110053 115 240 115 249 128.727 Average Holding Period Return on High-Grade Corporate Bonds 7.30% 11.72% -6.89% 7.90 Enter your answer in the answer box and the 5 remaining Check And

Answer 1

a). Annual coupon = coupon rate*par value = 6.25%*1,000 = 62.5

This will be paid at the end of each year till maturity.

Since, we are finding out the returns (and not absolute values), we can use values for a single bond. Return for one bond or n bonds will remain the same.

Holding period return = (ending price + annual coupon - beginning price)/beginning price

Since all prices are quoted as %age of par value, to convert to absolute numbers, we need to use quoted price%*1,000

The calculations are, as follows:

Col.[a] Col.[b] Col.[c] Col.[d] Col.[e] Col.[f] Formula Bn En C (En + C-Bn)/Bn Beginning of End of the the year Year (n) 2010 year 1036.62 2011 2012 2013 2014 956.24 1036.62 1054.04 1100.53 1054.04 1100.53 1152.49 Coupon 62.5 62.5 62.5 62.5 62.5 Average Holding period return 14.94% 7.71% 10.34% 10.40% 17.12% 12.10% Avg.HPR for high- grade corporate bonds 7.30% 11.72% -6.89% 7.90% 9.11% 5.83% 1152.49 1287.27

Holding period returns for the bond are given in Col.[e] above.

b). Comparing the average return with the market return, we see that the bond has outperformed the market as it has an average return of 12.10% whereas the market has an average return of 5.83%.