The expected rate of return on a bond with a par value of $1,000, a coupon rate of 14%, and currently selling for $911 is approximately 17% when rounded to the nearest whole percent. This calculation takes into account the annual coupon payments and the capital gains achieved when the bond matures.
The expected rate of return on a bond can be calculated using the coupon payments and the difference between the purchase price and the face value of the bond. In the given case, the bond has a par value of $1,000, a coupon rate of 14%, and is selling for $911. Since the bond has annual coupon payments, the investor will receive $140 every year (14% of $1,000) until maturity. Additionally, at maturity in 7 years, the investor will receive the par value of the bond, which is $1,000.
To calculate the expected rate of return, we need to consider both the annual coupon payments and the capital gains from the bond (the difference between the purchase price and the par value). The total earnings over the life of the bond will be the sum of all coupon payments plus the increase in value when the bond is redeemed at its par value. In this case, the earnings from the coupon payments over 7 years will be $140 x 7 = $980, plus the capital gain of $1,000 - $911 = $89. The total earnings are thus $980 + $89 = $1,069.
Now, to calculate the yield or total return, we use the formula: Total Return = (Total earnings - Investment cost) / Investment cost. So, the expected rate of return over the 7 years is ($1,069 - $911) / $911, which upon solving gives an expected rate of return of approximately 17%. Upon rounding, the answer is 17%.