Company A is selling 20 year bonds with a $50,000 par value and an annual coupon rate of 6.25%. The price of Company B's bonds is currently $11,200. They offer a $10,000 par value and mature in 10 years. The coupon rate is 8% and coupon payments are made semi-annually. Further research suggests to you that both bonds, which are rated as A+, introduce the same risk to you as an investor. If you bought a Company B bond for $10,450 and sold it two years later for $11,200 what would be your holding period rate of return?
ANSWER
1) 7.18%
2) 22.49%
3) $1,600
4) .2101
5) None of the above
Holding period return is the total return received from holding the bond over a period of time.
In the above case,
Purchase Price of Bond = $10,450
Selling Price = $ 11,200
Par Value of the Bond = $10,000
Coupon Rate (Annual) = 8%
Coupon payments are made semi-annually.
Hence, semi-annual coupon rate = 8% / 2 = 4%
Semi-annual coupon amount = 4% * 10,000 = $400
The Bond is held for a period of 2 years, hence total number of times coupon received = (2*2) = 4 times
Total Coupon received = $400 * 4 =$1,600
Following is the calculation of Holding Period Return :-
Hence, Holding Period Return is 22.49%
Option 2 is correct
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