Question

You buy a 20-year, 5.5% annual coupon bond with an 8% YTM. if you sell your bond in a year with a 6% YTM, what is your holding period return (HPR)?

ALL WORK MUST BE SHOWN

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =20

Bond Price =∑ [(5.5*1000/100)/(1 + 8/100)^k]     +   1000/(1 + 8/100)^20

k=1

Bond Price = 754.55

thus purchase price = 754.55

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =19

Bond Price =∑ [(5.5*1000/100)/(1 + 6/100)^k]     +   1000/(1 + 6/100)^19

k=1

Bond Price = 944.21 = selling price

HPR = (selling price/purchase price-1)*100

=(944.21/754.55-1)*100=25.14%