Question

Two years ago you have purchased a bond with $1000 par, semi-annual coupons with a coupon rate of 8% and maturity of 20 years for $ 1,200. Calculate your holding period return for this bond over the last two years, if you were able to reinvest coupons at 11% and the current YTM is 7%!

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A Bond par value Coupon rate Coupon frequency Maturity in years Purchase Price $1,000.00 8% 2 20 $1,200.00 Semi-annual coupon Reinvestment rate of coupon Value of coupon at end of 2nd year $40.00 11% $188.39 7% Current YTM Value of end at end of 2nd year $1,101.45 Holding period return (2 years) 7.49%

Cell reference -

B Bond par value Coupon rate Coupon frequency Maturity in years Purchase Price 1000 0.08 2 20 1200 Semi-annual coupon Reinvestment rate of coupon Value of coupon at end of 2nd year =C2*C3/04 0.11 =FV(C9,4,-C8,,0) 10 12 13 Current YTM Value of end at end of 2nd year 0.07 =PV(C12/2,18*2,-C3/2* C2,-C2,0) 15 Holding period return (2 years) =(C13+C10-C6)/C6 72

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.