Question

Assume that you purchased a $1000 par value bond for $960. The bond pays 10% coupon annually. You sold the bond a year later for $1,040, right after you received the bond’s annual interest payment. The bond was yielding 11.0% at the time of purchase and 9.5% at the time of sale. Calculate your annual realized rate of return on this investment. (a) 4.0%

Answer 1

Annual realized rate of return is 18.75%

Step-by-step explanation:

Bond Purchase Price = $960

Bond selling Price = $1040

Gain from bond price appreciation = $1040 - $960 = $80

Coupon received = 10% of $1000 = $100

So, total return = $100 + $80 = $180

So, Annual realized return = 180/960 = 0.1875 = 18.75%