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.
What you want is called the Yield To Maturity (YTM). In one year, the net gain will be 25 + 60 = $85 on an investment of $975. that is 8.72% YTM annual interest
To determine the percentage holding period return on this investment, we need to calculate the total return and then divide it by the initial investment.
First, let's calculate the total return. This includes the principal amount ($1,000) and the interest earned ($60).
Total Return = Principal + Interest
Total Return = $1,000 + $60
Total Return = $1,060
Now, we can calculate the percentage holding period return by dividing the total return by the initial investment and multiplying by 100.
Percentage Holding Period Return = (Total Return / Initial Investment) * 100
Percentage Holding Period Return = ($1,060 / $975) * 100
Percentage Holding Period Return = 108.72%
Therefore, the percentage holding period return on this investment is approximately 108.72%.