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Homework answers / question archive / One year ago, you purchased an annual coupon bond with a coupon rate of 6%, a par value of $1,000 and a maturity of 8 years

One year ago, you purchased an annual coupon bond with a coupon rate of 6%, a par value of $1,000 and a maturity of 8 years

Finance

One year ago, you purchased an annual coupon bond with a coupon rate of 6%, a par value of $1,000 and a maturity of 8 years. At the time of purchase, the yield to maturity was 5%. You received your first annual coupon today and the bond is selling at a yield to maturity of 7%. If you sell this bond today, your annual holding period return will be (approximately)

Select one:

-5.50%.

-6.18%.

4.18%.

8.95%.

-6.86%.

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We can calculate the purchase price of the bond by using the following formula in excel:-

=-pv(rate,nper,pmt,fv)

Here,

PV = Purchase price of bond

Rate = 5%

Nper = 8 periods

Pmt = Coupon payment = $1,000*6% = $60

FV = $1,000

Substituting the values in formula:

= -pv(5%,8,60,1000)

= $1,064.63

 

We can calculate the selling price of the bond by using the following formula in excel:-

=-pv(rate,nper,pmt,fv)

Here,

PV = Selling price of bond

Rate = 7%

Nper = 8-1 = 7 periods

Pmt = Coupon payment = $1,000*6% = $60

FV = $1,000

Substituting the values in formula:

= -pv(7%,7,60,1000)

= $946.11

 

Computation of the annual holding period return:-

Annual holding period return = (Selling price + Coupon payment - Purchase price) / Purchase price

= ($946.11 + $60 - $1,064.63) / $1,064.63

= -$58.53 / $1,064.63

= -5.50%

Hence, the correct option is 1) -5.50%

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