Final Answer:
The expected rate of return on the investment is approximately
6.1905%
Step-by-step explanation:
The rate of return on a bond is commonly referred to as the yield to maturity (YTM), and it takes into account the bond's current market price, its par value, the annual coupon rate, and the time to maturity. The formula for YTM is complex but can be solved using financial calculators or spreadsheet functions. For this specific scenario:
YTM
=
Annual Coupon Interest
+
Par Value
−
Current Market Price
Years to Maturity
Par Value
+
Current Market Price
2
YTM=
2
Par Value+Current Market Price
Annual Coupon Interest+
Years to Maturity
Par Value−Current Market Price
Substituting the given values:
YTM
=
(
0.07
×
$
1
,
000
)
+
$
1
,
000
−
$
1
,
050
17
$
1
,
000
+
$
1
,
050
2
YTM=
2
$1,000+$1,050
(0.07×$1,000)+
17
$1,000−$1,050
After evaluating this expression, the YTM is approximately
0.061905
0.061905 or
6.1905
%
6.1905%. This represents the rate of return an investor can expect if the bond is held until maturity, assuming that the bond will be bought at the current market price of $1,050.
In summary, the rate of return on a bond is a crucial metric for investors, indicating the expected profitability of the investment over its remaining term. In this case, the calculated YTM of
6.1905
%
6.1905% provides insight into the anticipated return for an investor purchasing the bond with the specified parameters.