Suppose a Midwest Telephone and Telegraph (MTT) Company bond,
maturing in 1 year, can be purchased today for $975. Assuming that the
bond is held until maturity, the investor will receive $1,000 (principal) plus
6 percent interest (that is, 0.06 3 $1,000 5 $60). Determine the percentage
holding period return on this investment.
Take a shot,what do you think.
Hint: an investment today of 975 will be worth 1060 one year from now. What is the rate of return?
8.71
To calculate the percentage holding period return on this investment, we need to use the formula:
Percentage Holding Period Return = (Ending Value - Beginning Value) / Beginning Value x 100
In this case:
Beginning Value = Purchase price = $975
Ending Value = Maturity value = Principal + Interest = $1,000 + $60 = $1,060
Substituting the values into the formula:
Percentage Holding Period Return = ($1,060 - $975) / $975 x 100
Percentage Holding Period Return = $85 / $975 x 100
Percentage Holding Period Return ≈ 8.7%
Therefore, the percentage holding period return on this investment is approximately 8.7%.