Final answer:
The total dollar return on the bond investment over the past year is $145, which consists of $70 in coupon payments and a $75 capital gain. The total nominal rate of return on this investment for the past year is approximately 17.06%, representing the combined income from interest and capital appreciation.
Step-by-step explanation:
To calculate the total dollar return on the bond investment over the past year, we take into account the annual coupon payment and the difference between the purchase price and the price at which the bond sells today. With an annual coupon of 7 percent, the interest earned on the bond with a face value of $1,000 over the past year is $1,000 * 7% = $70. The capital gain on the bond is the difference between the selling price and the purchase price, which is $925 - $850 = $75.
Therefore, the total dollar return on the bond over the past year is the sum of the interest earned and the capital gain: $70 + $75 = $145. To find the total nominal rate of return, we divide the total dollar return by the original purchase price of the bond. Thus, the nominal rate of return equals $145 / $850 = 17.06%. This reflects the total income from the bond holding, including both the coupon interest and the capital gain over the one-year period.