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

An investor buys a bond for 98.50 per 100 face value. Over the next year the bond pays coupons totalling 4.00, and the investor then sells it for 99.50. Ignoring reinvestment of the coupons, what is the one-year holding period return?

The holding period return is 5.08%. Add the 1.00 price gain to the 4.00 of coupons to get a 5.00 total gain, then divide by the initial purchase price of 98.50, because return is always measured against the amount invested.

  1. A5.08%Correct
  2. B4.06%
  3. C5.03%
  4. D1.02%

Explanation

Total gain = (99.50 − 98.50) + 4.00 = 5.00. Dividing by the initial outlay gives 5.00/98.50 = 5.08%. Using the coupon alone gives 4.06%, and using the price change alone gives 1.02%. Dividing by the sale price (5.03%) uses the wrong base.

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