Answer:The expected rate of return on a bond is the total return that an investor can expect to receive from holding the bond. To calculate the expected rate of return, we need to consider both the interest payments and any capital gains or losses from buying the bond at a discount or premium.
In this case, the bond is selling at a discount of $15 ($1,000 - $985). Since the bond pays 6 percent annual interest semiannually, it means that the bond pays $30 ($1,000 x 6% / 2) in interest every year.
To calculate the expected rate of return, we need to add the interest payment to the capital gain or loss. The capital gain or loss is the difference between the face value ($1,000) and the selling price ($985). In this case, the capital loss is $15.
So, the total return on the bond is the sum of the interest payment and the capital gain or loss: $30 + (-$15) = $15.
To calculate the expected rate of return, we divide the total return by the selling price of the bond and multiply by 100 to get a percentage. In this case, the expected rate of return is ($15 / $985) x 100 = 1.52%.
Therefore, the bond's expected rate of return is 1.52%.
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