A 30-year Treasury bond as a face value of $1,000, price of $1,200with a $50 coupon payment. Assume the price of this bond decreasesto $1,100 over the next year. The one-year holding period return is equal to:

A) -9.17%
B) -8.33%
C) -4.17%
D) -3.79%

The one-year holding period return is equal to -4.17%, so the right answer is C.

Explanation:

In order to calculate the the one-year holding return we would have to use the fomula for  Holding Period Return (HPR), which is the following:

HPR = Current Yield + Capital Change

Current Yield = Yearly Coupon Payment / Price Paid = 50/1200

Capital Change = (New Value-Old Value)/Original Value = (1100 - 1200)/1200 = -100/1200

HPR = (50-100)/1200 = -0.4166 = -0.417%

C) -4.17%

Explanation:

The return received on the asset in the period in which it is held is called holding period return. It included the interest / dividend received and change in the initial price and current price.

According to given data

Initial Price of Bond = $1,200

Current Value of the bond = $$1,100

Yearly Coupon Payment =  $50

Formula for Holding Period Return

HPR = [ Income + [ ( Expected value - Initial Value ) ] / initial value

HPR = [ Coupon Payment + [ ( Current Value - Initial Value ) ] / initial value

HPR = [ $50 +  ( $1,100 - $1,200 ) ] / $1,200

HPR = [ $50 - $100 ] / $1,200

HPR = -$50 / $1,200

HPR = -0.0417 = -4.17%

answer the law of increasing costs;