Question

You buy an eight year bond that has a 6% current yield and a 6% coupon (paid annually). In one year, promised yields to maturity have risen to 7%. What is your holding period return?

Answer 1

Assumption: Holding period - one year; return on the security is considered as cash inflow +/- apprecication/depreciation of market value of the security

At the date of purchase the bond was traded at par (coupon rate = current yield), therefore the value is 100%. In a year the buyer of the bond recieves 6% coupon; at the same time the market value of the bond depreciates on 14% (6%/7% see: Current yield formula). Suppose the holder of the bond sells it on the market. Holding period return on the bond equals 6%-14%=-8%