You pay $100 for a 10 year 6% coupon bond with a face value of $100. You hold th

Question

You pay $100 for a 10 year 6% coupon bond with a face value of $100. You hold the bond for one year and then sell it (you buy a 10 year bond then a year later you sell a 9 year bond). If interest rate falls from 6% to 5% what is your return from holding this bond? You pay $100 for a 10 year 6% coupon bond with a face value of $100. You hold the bond for one year and then sell it (you buy a 10 year bond then a year later you sell a 9 year bond). If interest rate falls from 6% to 5% what is your return from holding this bond?

Explanation / Answer

Calculation of Bond value after 1 year 6 1 1.05 0.952380952 5.714286 6 2 1.1025 0.907029478 5.442177 6 3 1.157625 0.863837599 5.183026 6 4 1.215506 0.822702475 4.936215 6 5 1.276282 0.783526166 4.701157 6 6 1.340096 0.746215397 4.477292 6 7 1.4071 0.71068133 4.264088 6 8 1.477455 0.676839362 4.061036 6 9 1.551328 0.644608916 3.867653 6 10 1.628895 0.613913254 3.68348 100 10 1.628895 0.613913254 61.39133 Bond value after 1 year 107.7217 Holding period return =(Interest received + Proceeds from sale-Purchase value) / Purchase value(100) = (6+107.2717-100)/100 13.72%

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