Question

You have bought a 20-year 5% coupon annual-pay bond at a price of 107.5%. If the yield increases by 125 basis points on your bond over the next year, what are your holding period returns for that year? Remember to include both the coupon and the change in price in your calculations. -1.13% 0 -0.48% 0 1.33% 0 4.82%

Answer 1

using excel RATE function

Yield to maturity = RATE(number_of_periods, payment_per_period, present_value, [future_value], [end_or_beginning], [rate_guess])

YTM = RATE(20,0.05*1000,-1.075*1000,1000)

= 4.43%

price of coupon = Coupon payment per period * [1-(1+i)^-n]/i + par value/(1+i)^n

i = interest rate per period = 4.43% + 1.25% = 5.68%

n = number of periods

price after 1 year = 50 * [1-(1+0.0568)^-19]/0.0568 + 1000/(1+0.0568)^19

= 922.19

Holding period return

= (922.19 - 1075 + 100)/1075

= -0.48%