I might be making too much of what is a simple calculation, but could someone talk me through the formula? The expression is raised to the power 1/n, where n is the number of periods in the investment horizon. So, if the horizon is 5 years, n would be 10, right? Am worrying that “n” might refer to the number of coupons per year and should therefore be 2. The formula: Semi-annual return = [((Ending bond price + coupon) - starting price)/starting price] ^ 1/n (Study Session 9)
Yes, n is the number of coupons/periods in total, not per year.
Thanks Steph.
Another impt point to note is the numerator must be carried to the future value Semiannual total return = (Total future dollars/Full price of the bond)^1/n - 1 where total future dollars = expected price of bond at the end of time horizon given a forecast change in i/r + future value of the coupon paid assuming an expected reinvestment rate