The holding period return (or yield) formula may be used to calculate and compare the yields of different bonds in your portfolio over a given time period.
This method of return comparison helps investors to determine which bonds are generating the largest profits. Once they have this information, they can rebalance their holdings as needed.
In addition, this formula can help investors to evaluate when it is more advantageous to sell a bond at a premium or to hold it until maturity.
Key Takeaways
- A bond’s holding period return (or yield) is the total return earned on an investment during the time that it was held by an investor.
- The holding period is the period of time that the bond is owned by an investor, which may be from purchase until maturity, or else the period from the purchase to the sale of the security.
- Holding period return is useful for making like-comparisons between returns on various investments purchased and held for different periods in time.
- Once you’ve compared returns, you can then decide whether a bond still belongs in your portfolio.
What Is the Holding Period Return?
The holding period return is the total return that an investor earns on an asset or portfolio of assets during a period of time known as the holding period. It is expressed as a percentage.
The holding period is the time during which an investor holds an asset. It can last from the time of purchase to the asset’s maturity date. Or, it can last from purchase to the point when the investor sells the asset prior to maturity.
Use the Holding Period Return To Evaluate Your Bonds
You can calculate the holding period returns for the various bonds in your portfolio. Then you can compare those returns to size up their performances.
And you can make better-informed decisions about whether to hold or sell certain bonds. You may even decide to put funds into another type of asset that offers a greater return.
Note
The holding period return lets you evaluate more than simply an increase in value.
Holding Period Return Formula
Depending on the type of asset involved, different holding period return formulas can be applied to account for the compounding of interest and varying return rates.
However, bonds generate a fixed amount of income each year. This rate of return, known as the coupon rate, is set at issuance and remains unchanged for the life of the bond.
You can obtain the holding period return for a bond by adding the investment’s capital gain/loss to the total amount of interest income received during the holding period and then dividing that figure by the initial price of the investment.
Formula
Therefore, the formula for the holding period return of bonds is:
HPRY=P(Selling Price−P)+TCPwhere:P = Purchase PriceTCP = Total Coupon Payments
Note: To determine a holding period for bonds that you still hold, use the current market price of the bond instead of a selling price.
Calculation Examples
Assume you purchased a 10-year, $5,000 bond with a 5% coupon rate. You purchased the bond five years ago at par value. This means the bond has paid $1,250 during a five-year holding period ($5,000 x 5% x 5).
Assume the bond has a current market value of $5,500.
If you sold your bond today, the holding period return of the bond would be:
=(($5,500−$5,000)+$1,250)/$5,500=($500+$1,250)/$5,000=$1,750/$5,000=0.35, or 35%
However, like all bonds, the repayment of your initial investment is guaranteed by the issuing entity once the bond matures. If you hold the bond until maturity, it will generate a total of $2,500 in coupon payments, or $5,000 x 5% x 10, and the holding period return yield is:
=(($5,000−$5,000)+$2,500)/$5,000=$2,500/$5,000=0.5 or 50%
Why Is the Holding Period Return Important?
It’s important because, rather than just a snapshot of any increase in value, it provides the total return an investor has gotten from any security for a specific period of time. While useful in itself, investors can use all such calculations to compare the performances of the components of their portfolio.
What Is the Income From a Bond’s Holding Period Return?
The income that investors can receive from any holding period for a bond investment is capital appreciation and interest payments based on the coupon rate.
Are Holding Period Return and Total Return the Same?
Yes, they are the same. Holding period return refers to the capital appreciation and all income received during a particular period of time that an investor owned a security. Total return, by definition, is all return from an investment. It equals capital appreciation plus all income received (whether interest, dividends, or distributions).
The Bottom Line
Investors can use the holding period returns for the bonds they own to get a look at the total return for individual securities, rather than just changes in value. That can provide a comprehensive view of the return of the bond portion of their portfolio.
In addition, investors can consider the differences in return for the various holding period returns and use that information to decide whether it might be better to sell certain bonds, rather than to hold them longer or to maturity. They can also consider the tax implications associated with the different holding periods.