5. An investor is interested in purchasing a 30-year U. S. government bond carrying an 8 percent coupon rate. The bond's current market price is $935 for a $1000 par value instrument. Suppose the investor sells the bond at the end of 13 years for $970. What is the holding-period yield? What is the effective yield?

Holding period yield is 114.97%

effective yield is 8.72%

Explanation:

holding period yield = (Price at call-initial price+coupon payments) / initial price

= ($970-$935) + (13*$80) / $935

= ($35+$1040) / $935

=$1075/$935

=114.97%

The effective yield is the yield to call which can be computed using the excel rate formula:

=rate (nper, pmt,-pv, fv)

nper is the number of payments before the call which is 13

pmt is the periodic payment by bond which is $1000*8%=$80

pv is the current market price of $935

fv is the bond price at end of 13 years at $970

=rate (13,80,-935,970)

rate=8.72%