Question

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

Answer 1

5%

Step-by-step explanation:

Formula for finding percentage return on this bond is;

Percentage return =[ (New price + income- Old price)/Old price ] *100

New price = 1,200

Income = coupon payment = 5% * par value = 5% *1000 = 50

Old Price = 1,000

Percentage return = [ (1,200 + 50 - 1,000)/ 1,000 ] *100

= 0.25 *100

= 25%

Return in one year is therefore 5%