Calculate the holding period return or yield, Corporate Finance

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1. Calculate the HPY on a bond that is currently selling for 103-25 (priced as % of 100% par, in 32nds), has 8 years left to maturity, carries a 7% coupon (paid semiannually), coupons can be reinvested at 4%, and your interest rate model expects an 80% probability of interest rates rising 200 basis points and a 20% probability of interest rates falling 100 basis points over a 3-year holding period.

  • Find the required YTM of the bond, since the selling price is above the par.
  • Determine the expected interest change over the holding period as a weighted average of the expectations and probabilities;
  • The required rate of return at the end of the holding period is : 1)+2)
  • Please use the formula for HPY.

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