You buy an eight-year bond that has a 5.50% current yield and a 5.50% coupon (paid annually). In one year, promised yields to ma

Question

2 years ago

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You buy an eight-year bond that has a 5.50% current yield and a 5.50% coupon (paid annually). In one year, promised yields to ma

turity have risen to 6.50%. What is your holding-period return? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Holding-period return

Business

1 answer:

Dovator [93] · Answer 1 · 2023-09-30T02:50:06+03:00

Answer:

The correct answer is 0.02%.

Explanation:

According to the scenario, the given data are as follows:

Face Value = $1,000

Coupon rate = 5.5%

Coupon Payment = $1,000 x 5.50% = $55

Yield to Maturity = 6.50%

Time period = 7 years

So, we can calculate the holding period return by using following method:

Holding-period return = [(Coupon Payment + ( Price of bond after one year - Face value)) ÷ Face value] x 100

Where, Price of bond after one year = PV of coupon payment + PV of FV

= $55[PVIFA 6.50%, 7 Years] + $1,000[PVIFA 6.50%, 7 Years]

= [$55 × 5.48452] + [$1,000 × 0.64351]

= $945.15 ( Refer to PVIFA table)

So by putting the value in the formula, we get

= [{$55 + ($945.15 - $1,000)} ÷ $1,000] x 100

= [$0.15 ÷ $1,000] x 100

= 0.02%