Question

In early January 2010​, you purchased $49,000 worth of some​ high-grade corporate bonds. The bonds carried a coupon of 5 3/8 % and mature in 2024. You paid 95.996 when you bought the bonds. Over the five years from 2010 through 2014​, the bonds were priced in the market as​ follows:

	Quoted Prices (% of $1,000 par value)
Year	Beginning of the Year	End of the Year	Average Holding Period Return on High-Grade Corporate Bonds
2010	95.996	103.023	7.30%
2011	103.023	104.743	11.72%
2012	104.743	106.876	-6.89%
2013	106.876	115.304	7.90%
2014	115.304	125.342	9.11%

Coupon payments were made on schedule throughout the​ 5-year period.

a. Find the annual holding period returns for 2010 through 2014. (Use HPR Formula) (Round to two decimal​ places.)

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.

Answer 1

Answer a.

Year	Beginning stock price	Ending stock price	Annual interest income	HPR = (Ending - Beginning Stock Price + Annual interest income)/Beginning stock price
2010	95.996	103.023	5.375	12.92%
2011	103.023	104.743	5.375	6.89%
2012	104.743	106.876	5.375	7.17%
2013	106.876	115.304	5.375	12.91%
2014	115.304	125.342	5.375	13.37%

Answer b.

Average rate of return = [12.92 + 6.89 +7.17 + 12.91 + 13.37 ] / 5

Average rate of return = 10.65%

Market rate of return = [7.30 + 11.72 +7.90 + 9.11 - 6.89 ] / 5 = 5.83%

We can say that the​ bond has outperformed the market; as the average rate of return for bond investment appears to be 10.65​% versus the average market rate of 5.83​%.