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%
