Show that if the yield to maturity increases, then holding-period return is less than that initial yield. For example, suppose in Example 10.8 that by the end of the first year, the bond’s yield to maturity is 8.5%. Find the one-year holding-period return and compare it to the bond’s initial 8% yield to maturity.

Transcribed Image Text:

EXAMPLE Yield to Maturity versus Holding- Period Return 10.8 Consider a 30-year bond paying an annual coupon of $80 and selling at par value of $1,000. The bond's initial yield to maturity is 8%. If the yield remains at 8% over the year, the bond price will remain at par, so the holding-period return also will be 8%. But if the yield falls below 8%, the bond price will increase. Suppose the yield falls and the price increases to $1,050. Then the holding-period return is greater than 8%: Holding-period return = $80 ($1,050 - $1,000) $1,000 = .13, or 13%