bond that pays $100 in interest each year was purchased at the beginning of the year for $1,050 and sold at the end of the year for $1,100. An investor’s holding period return is: 10.5%. 10.0%. 14.3%. Explanation Input into your calculator: N = 1; FV = 1,100; PMT = 100; PV = 1,050; CPT → I/Y = 14.29 ca anyone explain why fv=1100 instead of 1050.isnt the purchase price the par value?
Holding period return = [{(Cash Flows+Vn+1- Vn)/(Vn)} +1]1/t - 1
Where
Vn+1 = Value at end of period
Vn = Value at beginning of period
t = holding period in years
In your example, Holding period return = [{(100+1,100-1,050)/1,050}+1]1 - 1= 14.30% (approximately).
Instead of using the above formula, you can also use the calculator (as you indicated). However, if you are entering the FV and PMT as positive values (cash inflows), make sure you enter the present value as a negative value (cash outflow). Otherwise you will get an error.
To answer your other questions:
FV = $1,100 because this is the bond price when it was sold.
The purchase price is $1,050 and the par value is unknown (but I am guessing it is $1,000).
Good luck on the exam!
BullishBear Finance
The purchased price is the Present value , while the future value is the sales price