Question

Last year Janet purchased a $1,000 face value corporate bond with a 7% annual coupon rate and a 20-year maturity. At the time of the purchase, it had an expected yield to maturity of 7.83%. If Janet sold the bond today for $996.00, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Janet earned a rate of return of 6.60% for the past year on the sale of her corporate bond, after receiving annual coupon payments and accounting for a slight capital loss.

Step-by-step explanation:

To calculate the rate of return Janet earned over the past year, we need to consider both the interest income and the capital gain or loss from the sale of the bond.

First, Janet received a 7% annual coupon rate, which on a $1,000 face value bond is $70 for the year.

Next, we calculate the capital loss by subtracting the sale price of the bond ($996.00) from the purchase price ($1,000), which results in a capital loss of $4.00.

To find the total return, we add the interest income to the capital gain (or subtract the loss), which is $70 - $4 = $66.

The rate of return is then calculated by dividing the total return by the initial investment price and multiplying by 100 to get a percentage:

Rate of Return = ($66 / $1,000) × 100 = 6.6%

Thus, rounding to two decimal places, Janet earned a rate of return of 6.60% for the past year.