Final answer:
This business finance question discusses how bond prices fluctuate with market interest rates and explains the calculation of bond yield, which incorporates both interest payments and capital gains. It demonstrates the concept using an 8% coupon rate example, but the student's scenario includes a 5.80% coupon rate and an initial investment of $952.
Step-by-step explanation:
The question involves the pricing and yield calculations for a bond transaction, which falls under the subject of business, particularly within the area of finance. The student is learning about the impact of changing interest rates on bond prices and the calculation of yields. Assuming a face value of $1,000, when you buy a bond for $952 with a coupon rate of 5.80% and a maturity of 9 years, and the price increases to $1,072 after a year, this scenario illustrates the effects of market changes on bond valuation.
The yield, or total return of the bond, is calculated by accounting for both the received interest payments and any capital gains (or losses) when the bond is sold. For example, if you receive the $1,000 face value plus the last year's interest payment of $80, your total return would be $1,080. If you had originally purchased the bond for $964, the yield on your investment would be (($1080 – $964)/$964) * 100 = 12%. This indicates that despite the coupon rate remaining steady at 8%, market forces such as fluctuating interest rates can greatly affect the selling price of bonds and the return for investors.
It's important to note that the provided example uses an 8% coupon rate for illustrative purposes, but the student's scenario talks about a 5.80% coupon rate. Additionally, the correct initial investment should be $952 and not $964 as used in the example calculations. These discrepancies must be taken into account when applying the concepts to the student's bond scenario.