Question

You buy a ten-year bond that has a 7.75% current yield and a 7.75% coupon (paid annually). In one year, promised yields to maturity have risen to 8.75%. What is your holding-period return? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Answer:

1.69%

Explanation:

suppose that the face value is $1,000 and you purchased the bond at face  value

the market value one year later:

PV of face value = $1,000 / (1 + 8.75%)⁹ = $470.04

PV of coupon payments = $77.50 x 6.05666 (PV annuity factor, 8.75%, 9 periods) = $469.39

market value = $939.43

holding period return = [income generated + (ending value - initial value)] / initial value

holding period return = [$77.50 + ($939.43 - $1,000)] / $1,000 = 0.01693 = 1.69%