Suppose a bond has a par of $1000 and annual coupon rate of 7%. It pays coupon annually. An investor purchased the bond at par value. Suppose one year passed and YTM increases to 9%, and now it has five years left in its life and the investor sold the bond. What is the investor's total holding period return over the one year period?

Question

Business

Elena Bernard

4 July, 20:30

Suppose a bond has a par of $1000 and annual coupon rate of 7%. It pays coupon annually. An investor purchased the bond at par value. Suppose one year passed and YTM increases to 9%, and now it has five years left in its life and the investor sold the bond. What is the investor's total holding period return over the one year period?

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Tatiana Horne · Answer 1

-0.78%

Explanation:

Firstly, we need to calculate the bond price after one year, which is the sum of discounted coupon payment plus the par value

New bond price = 70 / (1 + 9%) + 70 / (1 + 9%) ^2 + ... + 70 / (1 + 9%) ^5 + 1000 / (1 + 9%) ^5 = 922.21

The holding period return includes:

1. Income gain = 70/1000 = 7%

2. Capital gain = 922.21/1000 - 1 = - 7.78%

Total return = 7% - 7.78% = - 0.78%