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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. 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%.
Expert Solution
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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