DEMYSTIFYING THE HOLDING PERIOD RETURN: A SIMPLE EXPLANATION

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 semiannual 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