Holding period return of bond question

CFA Level I
#1

Hey guys,

Really simple question that’s been bugging me for a while… I can’t believe I can’t solve it. Can someone help? Here it is:

Person A purchased an annual bond coupond (par value) and kept it for one year. The coupon’s rate is 5.5% and the residual maturity of the bond is 6 years, and it had a YTM of 8% when it was sold. What is the holding period return?

Thank you in advance!

#2

So . . . what’s the price when you sell it?

#3

I’m in the dark with this. Either too simple or too complicated.

If I understand correctly he bought the bond at par (100), sold it at 6 yrs to maturity when interest rate was 8% (consequently at PV=88.4) but received 1 coupon PMT.

Not?

I’m afraid I’m gonna go and re-read the whole FI…

#4

So . . . we bought it at 100, sold it at 88.4, received a cash flow of 5.5. Our HPR is . . . ?

#5

minus 6.1%

#6

Thanks Moosey, but how did you get that number? Can you show me the calculation please? The part that is bugging me the most is the fact that he kept the bond for one year. I can’t seem to remember what calculation to do relating to this part.

#7

HPR = (P1 – P0 + D) / P0

= (88.4 – 100 + 5.5) / 100

= -6.1 / 100

= -6.1%

#8

Thank you!

#9

You’re welcome.