Question

You buy an eight-year bond that has a 6% current yield and a 6% coupon (paid annually). In one year, promised yields to maturity have risen to 7%. What is your holding-period return?

Short answer

0.61%

Step-by-step solution

Given information

Since there is current yield and annual coupon rate of 6%, this implies that the bond price was at par a year ago.

Face Value = 1000

n = 7%

PMT = 60

i = 7

This gives the selling price = $ 946.11 this year.

Calculation of holding period return

The holding period return can be found by the formula (ending price-beginning price + coupon) / beginning price.

= ($ 946.11 – $1000 + $ 50) / $ 1000

= 0.0061

=0.61%