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Unformatted text preview: $80(1 . 06) 2 = $89 . 89 $80-→ $80(1 . 06) = $84 . 80 $1080 $1080 = $1080 Total = $1350 1 Notes for Finance 100 (sections 301 and 302) prepared by Jessica A. Wachter. HPR = ± $1350 $1000 ¶ 1 4-1 = 0 . 078 < YTM Because the coupons are reinvested at a rate lower than the YTM, we achieve a lower return. 3. Suppose instead that we reinvest the coupons at a rate greater than the YTM. I leave it to you to show that HPR > YTM when the coupons are reinvested at a higher rate. What can we conclude? While YTM is a useful yardstick, it is a ﬂawed measure of returns for coupon bonds. HPR = YTM only if we can and do reinvest the coupons at the YTM. Question: Suppose we sold the coupon bond before maturity? How would we calculate the holding period return in this case?...
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- Fall '09
- Finance, YTM, Zero-coupon bond