Consider a coupon bond with a face value of $100, a coupon rate of 20%, a time-to-maturity of three years and a yield-to-maturity of 4% (implying a price of $144.40).
a. What would be the holding period return on buying the bond today and selling it in one year’s time if interest rates in one year’s time are such that the bond’s yield-to-maturity is still 4%?
b. What would be the holding period return on buying the bond today and selling it in one year’s time if interest rates in one year’s time are such that the bond’s yield-to-maturity is 5%?
c. What would be the holding period return on buying the bond today and selling it in one year’s time if interest rates in one year’s time are such that the bond’s yield-to-maturity is 3%?