Susan bought a 20-year corporate bond at the par value of $1,000. The corporate bond pays an annual coupon of $60 and the initial yield to maturity is 6%. Four years later, after receiving the coupon payment, Susan sells the bond and the yield to maturity has risen to 8%. Calculate her holding period return.Question 16Select one:a.- 11.70%b.- 13.64%c.4.36%d.6.30%
Question
Susan bought a 20-year corporate bond at the par value of 60 and the initial yield to maturity is 6%. Four years later, after receiving the coupon payment, Susan sells the bond and the yield to maturity has risen to 8%. Calculate her holding period return.Question 16Select one:a.- 11.70%b.- 13.64%c.4.36%d.6.30%
Solution
To calculate the holding period return, we need to consider both the coupon payments received and the price at which the bond was sold.
Step 1: Calculate the total coupon payments received over the 4 years. This is simply 240.
Step 2: Calculate the selling price of the bond. When the yield to maturity increases, the price of the bond decreases. The selling price can be calculated using the formula for the price of a bond: P = C * (1 - (1 + r)^-n) / r + F / (1 + r)^n, where C is the annual coupon payment, r is the yield to maturity, n is the number of periods until maturity, and F is the face value of the bond. Plugging in the given values, we get P = 1000 / (1 + 0.08)^16 = $828.45.
Step 3: Calculate the holding period return. This is the total return over the holding period divided by the initial investment. The total return is the sum of the coupon payments and the selling price minus the initial investment. So, the holding period return is (828.45 - 1000 = 6.85%.
So, none of the given options are correct. The holding period return is 6.85%.
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