A newly issued bond pays its coupons once a year. Its coupon rate is 4.1%, its maturity is 15 years, and its yield to maturity is 7.1%. a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.1% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

The holding-period return for a one-year investment : 18%

Explanation:

The holding period return formula is the next:

HPR = + Income (+Price Earn - Price Paid) / Price Paid

It means you have to sum the income of the bond (interest) plus the earning price (difference Price Ear less Price Paid), that amount must be divided by the Price Paid.

In this case the result is:

HPR : $41,0 + ($815,2 - $728,5) / $728,5 = 127,8/728,5 = 18%

It's necessary to define the Face value of the bond on both period.

At the moment of the purchase it's the present value of the cash flow at the discount rate of 7,1%

728 YTM 7,1%

1 $ 1.000 $ 41

2 $ 1.000 $ 41

15 $ 1.000 $ 1.041

The second price to find it's the Face Value but with one year less of interest and a differente discount rate, in this case, 6,1%. $815,2 YTM 6,1%