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**Unformatted text preview: **Holding Period Return and Yield to Maturity for Zero-Coupon Bonds 1 Notation: F Face value of a bond P Price of a bond V Value of a security T Years to maturity t Years until you sell the bond 1. The yield to maturity (assuming annual compounding) is defined as YTM = F P ¶ 1 /T- 1 Because the final payment F is known with certainty (the U.S. government will not default), the yield to maturity is known with certainty. P is the price “today”. 2. Recall that for any security, the holding period return is HPR = V t V ¶ 1 /t- 1 . where V is the value at which you bought the security, and t is the number of years you held the security. For a zero-coupon bond, the value equals the price (because there are no interme- diate cash flows). From the definition above, HPR = P t P ¶ 1 /t- 1 How are holding period returns and yield to maturities related? It matters whether the bond is held to maturity, or sold before it reaches maturity....

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