how to calculate holding period returns of a bond if they coupon is reinvested?
I was reading a book about debt securities and bonds. There is a way given in the book that calculates HPR of the bond.
If an investor purchases a bond at Rs. 104, earns Rs. 8 as coupon,
which he reinvests at 7% for a period of 1 year, and finally sells the
bond at Rs. 110 after 1 year then his HPR would be: HPR = [(8) + (8 *
7%) + (110-104)]/ 104 = 14.00%
What i don't under stand is this part :
[(8) + (8 * 7%)
Why is that 7% interest rate is multiplied with 8 and why '8' is added to it ?
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It states that RS 8 was received as payout by bond. Reinvest RS 8 at 7% interest.
So total money received is RS 8 plus 7% interest on RS 8 plus profit from sale of bond
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