You buy an eight year bond that has a 6% current yield and a 6% coupon (paid annually). In one year, promised yields to maturity have risen to 7%. What is your holding period return?

.61% is correct. The ultimate equation used to calculate the holding period return is (ending price-beginning price+coupon)/ beginning price.

So with the original scenario:
FV=1000
N=8
PMT=60
I/Y=6
PV=???=-1000

Since the YTM changes to 7, we need to change our I/Y. And since it is a year later, our N has one less period(one less year). So now, the PV is calculated like this:
FV=1000
PMT=60
N=8-1=7
I/Y=7
PV=???= 946.11

So with 946.11 as our ending price, our holding period return is:

(946.11-1000+60)/1000=.0061=.61%

.61%

Well, well, well, it seems our bond investor is looking for some laughs! Don't worry, my friend, I'll do my best. Let's calculate that holding period return and sprinkle some humor along the way!

To calculate the holding period return, we need to consider the coupon payment and the change in the bond's price.

Now, let's imagine you bought the bond at a party called "Face Value" for $1,000. With a 6% coupon rate, you'd receive $60 each year for eight years. That's like getting paid in tiny little hugs!

However, after one year, promised yields to maturity rose to 7% – it's like a party in the bond market! But remember, as yields increase, bond prices tend to fall.

To calculate the change in price, we take the difference between the initial yield (6%) and the new yield (7%). That's a change of 1%, so the bond's price drops accordingly. Let's say it decreased by $20 – the bond just pulled a magic trick!

To calculate the holding period return, we consider the coupon payment and the change in price. In one year, you received $60 in coupon payments, and the bond's price decreased by $20. So your total return is $60 - $20 = $40.

So, your holding period return is $40 on a $1,000 investment. That's like finding money in your pocket when doing laundry – unexpected and delightful!

I hope that brings a smile to your face! But please remember, my humor is better than my financial advice. Always consult a professional for your investment decisions.

To calculate the holding period return, we need to consider the current yield and the price change of the bond over the holding period.

First, let's calculate the price of the bond. The current yield is the annual coupon payment divided by the bond's current price. Since the bond has a 6% coupon, and a 6% current yield, we can assume that the bond is selling at par, i.e., its price is $100.

Now, let's calculate the future price of the bond after one year, considering that the promised yields to maturity have risen to 7%. To do this, we need to estimate the change in price due to the change in yield.

The change in yield from 6% to 7% is 1%. Since the bond has a duration of eight years, we can approximate the price change using the formula:

Price Change ≈ - Duration × Change in Yield × Price

Price Change ≈ - 8 × 1% × $100 = -$8

So, the future price of the bond after one year will be $100 - $8 = $92.

Finally, let's calculate the holding period return. The holding period return is the sum of the coupon payment and the price change, divided by the initial investment:

Holding Period Return = (Coupon Payment + Price Change) / Initial Investment

The coupon payment for one year is 6% of $100, which is $6. Thus,

Holding Period Return = ($6 + (-$8)) / $100 = -$2 / $100 = -0.02 or -2%

Therefore, the holding period return for this bond investment over one year is -2%.

Assumption: Holding period - one year; return on the security is considered as cash inflow +/- apprecication/depreciation of market value of the security

At the date of purchase the bond was traded at par (coupon rate = current yield), therefore the value is 100%. In a year the buyer of the bond receives 6% coupon; at the same time the market value of the bond depreciates on 14% (6%/7% see: Current yield formula). Suppose the holder of the bond sells it on the market. Holding period return on the bond equals 6%-14%=-8%