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FRM Part I · FRM Exam Part I · Bond Yields and Return Calculations

An investor buys a bond for 98, receives a coupon of 4 after one year, and immediately sells the bond for 99. What is the one-year holding period return?

The holding period return is 5.10%. Total gain is the coupon of 4 plus the price gain of 1, which is 5, divided by the initial purchase price of 98. Using only the coupon or only the capital gain, or dividing by the sale price, gives incorrect answers.

  1. A4.08%
  2. B5.10%Correct
  3. C5.05%
  4. D1.02%

Explanation

Return = (99 - 98 + 4)/98 = 5/98 = 5.10%. Using 4/98 counts only income (4.08%), and 1/98 counts only the price gain (1.02%). Dividing by 99 uses the wrong base (ending price), giving 5.05%.

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