Question

Today, Maureen purchased a coupon bond for $1,020. It has a face value of $1,000, an 8% coupon rate (with coupons paid just once per year), and a maturity of 4 years. Maureen plans to hold the bond for just one year and then sell it and she expects to sell at a price of $1,060. What is Maureen's expected rate of return? (to the nearest hundredth of a percent) a. 14.00% b. 3.92% c. 7.80% d. 8.00% e. 11.76%

Answer 1

Answer: e. 11.76%

Step-by-step explanation:

The annual coupon is;

= 8% * 1,000

= $80

This is the amount she will make in coupon after 1 year of holding the bonds.

Assuming she sells at a price of $1,060 her return then would be;

= ( Selling price - Cost price + coupon) / Cost price

= ( 1,060 - 1,020 + 80) / 1,020

= 11.76%