Question

What would be the realized return if the investor believes the bond can be sold in three years at a price of $1050 on a bond currently priced at $1010 with a 5.5% coupon rate, $1,000 par value, and nine years until maturity? A. 6.66% B. 7.98% C. 10.72% D. 5.13%

Answer 1

Answer:

realized return = 20.3%

Explanation:

the formula for calculating realized returns is:

realized return = (future value of the stock + dividend₁ + dividend₂ + dividend₃) / present value of the stock

realized return = [($1,050 + $55 + $55 + $55) / $1,010] - 1 = $1,215 / $1,010 - 1 = 1.203 - 1 = 20.3%

The realized return measures the total return yielded by an investment. It doesn't take in to account the time of the investment, e.g. the 20.3% rate is not per year, instead it is for the whole 3 year period.