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

An investor buys a bond for a full (dirty) price of USD 980.00. Over the next year she receives coupons totaling USD 60.00 and sells the bond for a full price of USD 1,000.00. What is her holding-period return for the year, ignoring reinvestment of coupons?

The holding-period return is 8.16%. The investor earns a capital gain of USD 20 plus USD 60 of coupons, a total of USD 80, measured against the USD 980 purchase price. Dividing 80 by 980 gives 8.16%, so both income and price change must be included.

  1. A6.12%
  2. B8.16%Correct
  3. C2.04%
  4. D6.00%

Explanation

Total gain = (1,000 - 980) + 60 = 80. Return = 80 / 980 = 8.16%. The 6.12% figure uses only the coupon divided by price (60/980), omitting the capital gain. The 2.04% figure uses only the capital gain (20/980) and omits the coupon. The 6.00% figure divides the coupon by the face value of 1,000, ignoring both the purchase price and the capital gain.

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