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25 January, 01:11

A newly issued bond pays its coupons once annually. Its coupon rate is 5.2%, its maturity is 20 years, and its yield to maturity is 7%. a. Find the holding-period return for a 1-year investment period if the bond is selling at a yield to maturity of 6% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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  1. 25 January, 04:30
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    holding period return is 14.20%

    Explanation:

    In calculating the holding period return, the formula to use is given below

    HPR=P1-P0+interest/P0

    P1 is the price of the bond in year 1

    P0 is the price of the bond in year 0

    Interest is the coupon received in year 1

    Price is the present value of the bond calculated using the pv formula in excel

    =pv (rate, nper, pmt, fv)

    rate is the yield to maturity

    pmt is the interest payment which is 5.2%*$1000=$52

    nper is the number of years to maturity

    fv is $1000

    for P0 = pv (7%,10,52,1000)

    P0=$873.58

    For P1

    =pv (6%,9,52,1000)

    P1=$945.59

    HPR = ($945.59 - $873.58+$52) / $873.58

    HPR=14.20%
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