UNDERSTANDING HOLDING PERIOD RETURN: A SIMPLIFIED APPROACH

Abstract

The concept of holding period return (R) is a fundamental measure in finance, representing the ratio of future proceeds to the initial investment. For bonds, this calculation is defined as R = (B1 – B0 + iF)/B0, where Bt denotes the bond valuations at time t, iF represents interest payments at the interest rate i on face value F, and M signifies maturity, discounted at rate k, known as the yield to maturity. Corporate bonds often entail semi-annual interest payments, equivalent to half the annual iF amount. These interest payments can be conceptualized as an annuity, iF/k(1– 1/[1+k]M), while the face value is F/(1+k)M. This abstract delves into the mathematical intricacies of holding period returns for bonds and provides insights into their underlying principles