Question

You buy a 12-year 10% annual coupon bond at par value, $1,000. You sell the bond 3 years later for $1,100. What is your total rate of return over this 3-year period?

Answer 1

Answer:

40%

Explanation:

Coupon per year = Face Value * Coupon Rate

Coupon per year = $1,000 * 10%

Coupon per year = $1,000 * 0.10

Coupon per year = $100

Total Coupon in 3 years = Coupon per year * 3 years

Total Coupon in 3 years = $100 * 3 years

Total Coupon in 3 years = $300

Rate of return = [(Selling Price - Face Value) + Coupon Received] / Face Value*100

Rate of return = [[($1,100 - $1,000) + $300] / 1000] *100

Rate of return = [[$100 + $300] / $1000] * 100

Rate of return = $400 / $1000 * 100

Rate of return = 0.40

Rate of return = 40%