Question

At t=0, you purchase a five-year, 8 percent coupon bond (paid annually) that is priced at par. The face value of the bond is $1,000. You are also given that your investment horizon is also five years. Suppose that the market interest rate increases to 9 percent (increase by 100 basis points) during the first year of your purchase (within year 1), and it remains at that level (9 percent) for the next four years. You hold the bond till its maturity.

What is your holding period return at the end of your investment horizon (t=5)? Assume that the reinvestment rate for the first coupon payment is the new interest rate, that is, 9 percent.

Answer 1