You buy an 10% coupon(annually paid), , 5-year maturity bond when its yield to maturity is 9%. 3-year later, the yield

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You buy an 10% coupon(annually paid), , 5-year maturity bond when its yield to maturity is 9%. 3-year later, the yield to maturity is 8%. What is the holding period of return over the year?

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Let us suppose the face value of the bond to be $ 1000 First, we need to find the purchases price of the bond which can be found by using the formula, Current price=FV of all its coupons+FV of face value to be recd. At maturity----both discounted at its yield to maturity ie. Price=(Pmt.*(1-(1+r)^-n)/r)+(FV/(1+r)^n) where, Price---- we need to find out----?? Pmt.=the annual coupon pmt., ie. 10%*1000= $ 100 r=the yield to maturity(YTM) given as 9% n= no.of coupon periods, still pending to maturity, ie. 5 FV=Face value, $ 1000 Now, plugging all the values in the formula, ie. Price=(100*(1-(1+0.09)^-5)/0.09)+(1000/(1+0.09)^5)= 1038.90 Now, we need to find the price of the bond again, 3-year later, when the yield to maturity is 8% Using the same formula, as above, only two changes will be r=the yield to maturity(YTM), at end of 3 yrs, is 8% n= no.of coupon periods, still pending to maturity, ie. 5-3=2 so, the price is ie.Price at end of yr.3=(100*(1-(1+0.08)^-2)/0.08)+(1000/(1+0.08)^2)= 1035.67 So, the holding period $ return over the period of 3 years is Total returns from the investment =Appreciation in price +Coupon interest received (Price at end yr.3-Purchase price)+( 3 yrs.'Coupon interests) ie.(1035.67-1038.90)+(100*3)= 296.77 so, the holding return % = HPR in $/Initial Investment ie.296.77/1038.90= 28.57%

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You buy an 10% coupon(annually paid), , 5-year maturity bond when its yield to maturity is 9%

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