Investments, tenth edition

 Example  14.8 

Fair Holding-Period Return 

 At what price will the bond in Example 14.8 sell 

in yet another year, when only 1 year remains 

until maturity? What is the rate of return to an 

investor who purchases the bond when its price 

is $982.17 and sells it 1 year hence? 

 CONCEPT CHECK 

14.5 

   

10

 Using a calculator, enter  n   5  3,   i   5  8,  PMT  5  70,  FV  5  1000, and compute PV.  

   

11

 If interest rates are volatile, the price path will be “jumpy,” vibrating around the price path in  Figure 14.6  and 

reflecting capital gains or losses as interest rates fluctuate. Ultimately, however, the price must reach par value at 

the maturity date, so the price of the premium bond will fall over time while that of the discount bond will rise.  

bod61671_ch14_445-486.indd   464

bod61671_ch14_445-486.indd   464

7/17/13   3:51 PM

7/17/13   3:51 PM

Final PDF to printer

---

  C H A P T E R  

1 4

  Bond Prices and Yields

465

Prices should continue to adjust until 

all  securities are fairly priced in that 

expected returns are comparable, given 

appropriate risk and tax adjustments. 

 

We see evidence of this price 

adjustment in  

Figure  14.1 

. Compare 

the highlighted bond with the one 

just below it. The July 2018 bond 

has a coupon rate of 2.25%, while 

the November 2018 bond has a 

much higher coupon rate, 9%. But 

the higher coupon rate on that bond 

does not mean that it offers a higher 

return; instead, it sells at a much 

higher price. The yields to maturity on 

the two bonds are nearly identical, a 

shade below .8%. This makes sense, 

since investors should care about their 

total return, including both coupon 

income as well as price change. In the 

end, prices of similar-maturity bonds 

adjust until yields are pretty much 

equalized. 

 Of course, the yields across bonds in  Figure 14.1  are not all equal. Clearly, longer term 

bonds at this time offered higher promised yields, a common pattern, and one that reflects 

the relative risks of the bonds. We will explore the relation between yield and time to matu-

rity in the next chapter.