Holding Period Return
Assume that you have a one-year investment horizon and are trying to choose among three bonds. All have the same default risk and mature in 7 years. The first is a zero-coupon bond that pays $1000 at maturity. The second is a $1000 par value coupon bond that has a coupon rate of 7% and makes an annualcoupon payment.
(a) If the YTM is equal to 3.8% what is the current prices for each of thebonds?
(b) Suppose that the YTM next year risesto 4.5%. Calculate the one year holding period return for each of the bonds. [Hint: One year has passed since you initially purchased the bond]