Question

What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19? Answer in percentage terms to 2 decimals and without the % sign.

Answer 1

5.00

Step-by-step explanation:

The rate of return for the investor can be determined using a holding period rate of return bearing in mind that the investor would incur a cash outflow of $1,054.47 whereas the investor would receive $1,037.19 and an annual coupon of 7% of the face value

holding period return=(selling price+annual coupon-purchase price)/purchase price

annual coupon=7%*$1000

annual coupon=$70.00

holding period return=($1,037.19+$70.00-$1,054.47)/$1,054.47

holding period return=5.00%