Question

What is the 1 year total return for a $1,000 face value bond with a coupon rate of 5.77% that we buy for $1,025 and sell one year later for $988?

A. −68%
B. −2.02%
C. 63%
D. 2.02%

Answer 1

The 1 year total return on a $1,000 face value bond with a 5.77% coupon rate, bought for $1,025 and sold at $988, is 2.02%. This includes the coupon payment minus the capital loss, relative to the purchase price.

Step-by-step explanation:

The 1 year total return for a $1,000 face value bond with a coupon rate of 5.77% that is bought for $1,025 and later sold for $988 can be calculated as follows:

• Total coupon payment received: 5.77% of $1,000 face value = $57.70
• Capital loss upon sale: $1,025 (purchase price) - $988 (sale price) = -$37
• Total return: $57.70 (coupon payment) - $37 (capital loss) = $20.70
• Return percentage: ($20.70 / $1,025) * 100 = 2.02%

Therefore, the 1 year total return on this bond is 2.02%, making the correct answer D. 2.02%. The 1 year total return on a $1,000 face value bond with a 5.77% coupon rate, bought for $1,025 and sold at $988, is 2.02%. This includes the coupon payment minus the capital loss, relative to the purchase price.