Calculate Holding Period Return for Bond Investment

What is holding period return and how is it calculated?

Zander purchased a 100-year 5.25% bond at par 1 year ago. Today, he sold the bond at 101.5% of par. What was his holding period return?

Answer:

The holding period return is the total return gained or lost by an investor over the period the bond is held. It includes any interest earned on the bond as well as any capital appreciation or depreciation.

To calculate the holding period return, you can use the following formula:

Holding period return = (ending price - beginning price + cash flow) ÷ beginning price × 100%

A bond’s holding period return (HPR) is the total return gained or lost by an investor over the period the bond is held. It includes any interest earned on the bond as well as any capital appreciation or depreciation. Holding period return is a widely used metric to assess bond returns since it accounts for the income and capital gains (or losses) from holding a bond over a particular period.

Zander purchased a 100-year 5.25% bond at par 1 year ago. Today, he sold the bond at 101.5% of par. Since Zander held the bond for a year and sold it for 101.5% of its par value, he had an additional cash flow of 5.25% of the face value. As a result, the formula for calculating the holding period return is:

Holding period return = (ending price - beginning price + cash flow) ÷ beginning price × 100%

Plugging in the given values, we have:

Holding period return = (1.015 × 100 - 100 + 5.25) ÷ 100 × 100%

Therefore, the holding period return is 6.75%.

In conclusion, Zander's holding period return is 6.75%.