How to calculate the holding period return of a bond
About this lesson
Many of us may wonder what a holding-period return looks like in a bond investment. In this video, I will explain what holding-period return is and how it is calculated.
The formula
The holding period return (HPR) is what you earn over the time you hold an investment, whether or not you hold the bond to maturity:
HPR = (Coupon income + Ending price − Beginning price) ÷ Beginning price
Example
You buy a bond for $1,147.20: a $1,000 face value, an 8% annual coupon, 10 years to maturity, priced at a 6% yield (see how to calculate a bond price).
One year later, the yield is still 6%, and the bond has 9 years left. Its price is now:
=PV(6%,9,80,1000) → $1,136.03
HPR = (80 + 1,136.03 − 1,147.20) ÷ 1,147.20 = 68.83 ÷ 1,147.20 = 6.0%
HPR vs yield to maturity
- If the yield doesn’t change, the one-year HPR equals the yield to maturity, as in the example: 6%.
- If yields fall during the year, the bond’s price rises, and the HPR is higher than the YTM.
- If yields rise, the price falls, and the HPR is lower. It can even be negative.
The YTM is the return you lock in if you hold to maturity. The HPR is what you actually earn over your own holding period, including any price change.