A 30-year Treasury bond as a face value of $1,000, price of $1,200with a $50 coupon payment. Assume the price of this bond decreasesto $1,100 over the next year. The one-year holding period return is equal to:

A) - 9.17%

B) - 8.33%

C) - 4.17%

D) - 3.79%

The one-year holding period return is equal to - 4.17%, so the right answer is C.

Explanation:

In order to calculate the the one-year holding return we would have to use the fomula for Holding Period Return (HPR), which is the following:

HPR = Current Yield + Capital Change

Current Yield = Yearly Coupon Payment / Price Paid = 50/1200

Capital Change = (New Value-Old Value) / Original Value = (1100 - 1200) / 1200 = - 100/1200

HPR = (50-100) / 1200 = - 0.4166 = - 0.417%

C) - 4.17%

Explanation:

The return received on the asset in the period in which it is held is called holding period return. It included the interest / dividend received and change in the initial price and current price.

According to given data

Initial Price of Bond = $1,200

Current Value of the bond = $$1,100

Yearly Coupon Payment = $50

Formula for Holding Period Return

HPR = [ Income + [ (Expected value - Initial Value) ] / initial value

HPR = [ Coupon Payment + [ (Current Value - Initial Value) ] / initial value

HPR = [ $50 + ($1,100 - $1,200) ] / $1,200

HPR = [ $50 - $100 ] / $1,200

HPR = - $50 / $1,200

HPR = - 0.0417 = - 4.17%