Question

Alejandro bought a bond with a face value of $5,000. The term of the bond is 2 years. He bought the bond at a 4 percent discount from the face value. The bond pays 4 percent annual interest, and Alejandro will receive four semiannual payments. When the bond is redeemed at maturity, the total return (profit) will be $______.00. The total return on investment will be _____%. (Round return on investment percentage to one decimal place.)

Answer 1

1. When the bond is redeemed at maturity, the total return (profit) for Alejandro will be $600.00.

2. The total return on investment will be 12.5%.

What is the return on investment?

The return on investment is a profitability measure that shows the rate of an investment's profit versus the cost.

The return on investment can be computed by subtracting the initial investment cost from the terminal value of the investment, then dividing the net return by the initial investment cost, then multiplying it by 100.

Data and Calculations:

Face value of bond = $5,000

Price paid for bond = $4,800 ($5,000 x 96%)

Bond discount = $200 ($5,000 x 4%)

Maturity period = 2 years

Interest rate = 4%

Semi-annual interest receipts = $100 ($5,000 x 4% x 1.2)

Total interest receipts = $400 ($100 x 4)

Total return (profit) from the bond = $600 ($400 + $200)

Total return on investment = 12.5% ($600/$4,800 x 100)

Thus, the bond investment yields $600 at the end of the maturity period, which is 12.5% of the initial investment.

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