Question

Suppose that an investor with a 3-year investment horizon is considering purchasing a seven-year 6% coupon bond selling at par (semi-annual coupon payments). The investor expects that she can reinvest the coupon payments at an annual interest rate of 8% and that at the end of the investment horizon all bonds will be selling to offer a yield to maturity of 5%. What is the (annualized) expected holding period return for this bond?

Answer 1

=(((1000*3%/4%*(1.04^6-1)+1000*3%/2.5%*(1-1/1.025^8)+1000/1.025^8)/(1000))-1)*1/3
=7.83%