FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management
A bank treasurer reviews a bond portfolio that began the year at a market value of 200.0 million. During the year it received coupon income of 8.0 million and ended the year at a market value of 204.0 million, with no cash flows in or out. What is the portfolio's total holding-period return?
The total holding-period return is 6.0 percent. It combines the 4.0 million price gain and the 8.0 million coupon income, a total of 12.0 million, divided by the beginning value of 200.0 million. Ignoring either component understates the return.
- A2.0%
- B4.0%
- C6.0%Correct
- D8.0%
Explanation
Total return = (price change + income) / beginning value = (204 - 200 + 8) / 200 = 12 / 200 = 6.0%. Using only the price change gives 2.0%, and using only income gives 4.0%; both omit a component of return.
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