Difference between Holding Period Yield and Yield to maturity

Holding Period of Yield (HPY) refers to the rate of return on a given investment or an asset over a stipulated or clearly set and agreed on period of time by the involved parties. In fact, HPY refers to the summation of both capital gains and income generated during the stated period, then division of the outcome by the asset value at the commencement of the period in reference. Usually, this is expressed as a percentage. HPY ,which can also be referred to as true yield, usually accounts for either gain or loss that tend to occur when the par value is repaid. Notably, HPY is one of the simplest means by which investment performance can be weighed (Ho, 1990).

On the other hand, if a bond is held by an investor until the end of its lifetime, the rate of return anticipated on it, as a result, is referred to as Yield to Maturity (YTM). Most importantly, YTM factors into consideration the present value of a bond’s future coupon payments, which is not accounted for by simple current yield calculations. Originally, given that the yield to maturity equals the coupon rate, then the price of the bond is the same as the face value. Subsequently, if the yield happens to be greater than the coupon rate then its price will be greater, and vice versa (Megginson, et al. 2000).

Question 4 (b)

The formula for determining the purchase price is:   Where,  

nbjbase  is the Number of days per year (360', 365 or 366 depending on convention) nbjvm  is the Number of days between value date and maturity date r   is the Yield Therefore,

For selling price,

The return earned is therefore the difference sale price and purchase price:

That is, {$4881334.32 -  $480498.35 }=$7635.97

Therefore, to determine the yield, we apply this equation:    =

Question  4 (c)

The formula for determining the purchase price is:  

Where,   nbjbase  is the Number of days per year (360', 365 or 366 depending on convention) nbjvm  is the Number of days between value date and maturity date r   is the Yield Therefore

For selling price,

The return earned is therefore the difference sale price and purchase price:

That is, {$- $}=   $2138.11

Therefore, to determine the yield, we apply this equation:    }         }

Question 4 (d)

If it was sold at 7.9% per annum,  

The return earned is therefore the difference sale price and purchase price:

That is, ($- $) =$2413.3434

Therefore, to determine the yield,  this equation is applied:    }  

This graph (Figure 1) seeks to depict the effect of rate of yield sale on holding price yield and the return earned by the investor. It is therefore clear that, with constant purchase price, a change in percentage yield sale from 8.5% to 7.9% leads to increase in percentage HPY as well as return earned. As argued by Megginson, et al. (2000), this observed difference can be attributed to the constancy in both the holding period and the purchase with fluctuations in sale price.

In conclusion, HPY is a crucial to investors due to its simplicity in determining the returns gained as well as the investment performance over a given period of time.

Reference List

Ho, Y. 1990. Stock Return Seasonalities in Asia Pacific Markets. J Int Financial Man & Acc,    7-77.Retrieved from,

 http://onlinelibrary.wiley.com/doi/10.1111/j.1467-646X.1990.tb00017.x/abstract

Megginson, W, N.R., N. J. & S. A. 2000. The Long-Run Return to Investors in Share Issue Privatization. Financial Management, 67-102.