An investor bought a 120-day promissory note at a yield of 6.8% and sold it 10 days later at a yield of 6.9%. Which of the following about her holding period (HPY) is correct?

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BlackTom AI · Accepted Answer

Question restatement: An investor bought a 120-day promissory note at a yield of 6.8% and sold it 10 days later at a yield of 6.9%. Which of the following about her holding period (HPY) is correct?

Option 1: 'Her HPY is lower than 6.8%.' This is plausible because when market yields rise (from 6.8% to 6.9%), the price of the note falls. If the price drops over the 10-day holding period and there is little or no additional income beyond any accrued interest during that short window, the realized holding period yield can be less than the original yield at purchase. The combination of a price decline and the short holding period tends to push HPY downward relative to the initial coupon-like yield. This option is therefore plausible as a correct description.

Option 2: 'Her HPY is 6.8%.' For HPY to equal 6.8% over 10 days, the price movement and any income would have to conspire to produce exactly that level. Given the yield-to-maturity moved from 6.8% to 6.9% (a higher yield) over the period, the price is expected to decline rather than remain perfectly aligned with the original yield. This makes maintaining an exact 6.8% HPY unlikely, so this option is unlikely to be correct.

Option 3: 'Her HPY is greater than 6.9%.' Achieving an HPY above the higher yield observed (6.9%) over a 10-day holding period would require a substantial price increase or unusually large interim income. Since the yield rose from 6.8% to 6.9%, the prevailing price trend during the 10 days was more consistent with a price decrease, not a sharp gain. Therefore, an HPY exceeding 6.9% is inconsistent with the stated yield movement and is not correct.

Option 4: 'Her HPY is between 6.8% and 6.9%.' This would imply a holding-period return within the range defined by the two yields. However, the shift in yield from 6.8% to 6.9% typically corresponds to a fall in price when moving to the higher yield. The combination of a price drop over a 10-day horizon makes it unlikely that the HPY would neatly land between the two annualized yields, and especially not exceed or match them exactly. This makes this option less plausible.

Summary of reasoning: The key driver is the rise in yield from 6.8% to 6.9%, which implies a price decline during the 10-day holding period. A price decline, unless offset by substantial income, tends to produce an HPY that is below the original yield, i.e., below 6.8%. Given the small time frame (10 days) and the direction of price movement, the most consistent conclusion is that HPY would be lower than the initial 6.8% yield. Each alternative was evaluated in light of price-yield dynamics and the short holding period, highlighting why the other statements do not align with the observed yield change and typical price behavior for short-term notes.

25741 Capital Markets - Autumn 2025 Quiz 5 - GRADED

An investor bought a 120-day promissory note at a yield of 6.8% and sold it 10 days later at a yield of 6.9%. Which of the following about her holding period (HPY) is correct?

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