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Consider a 30-year 8 percent bond, paying coupon semi-annually, and selling for $896.81 today (note that...

Consider a 30-year 8 percent bond, paying coupon semi-annually, and selling for $896.81 today (note that the yield is 9 percent). Find the holding period return if the interest rate drops to 8 percent after six months. Make sure to annualize the rate.

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Answer #1

If coupon Rate and required Rate are equal Bond will Trade at Par.

After six month bond will be trading at Par ( $ 1000)

HPR per six Months = [ P1 - P0] / P0

= [ 1000 - 896.81 ] / 896.81

= 103.19 / 896.81

= 0.1151 i.e 11.51%

Annualized ret = HPR per Six Months * 12 / 6

= 11.51% * 12 / 6

= 23.01%

Annualized Rate is 23.01%

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