Question

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon rate and five years remaining until maturity and then sells the bond after one year for $1,085?

Answer 1

the total return is 6.82%

Step-by-step explanation:

The computation of the total return is shown below:

Total Return = (Interest + (Selling Price - Issue Price)) ÷ Issue Price

where,

Interest = Face value × Coupon rate

= $1,000 × 9%

= $90

Now

Total Return is

= ($90 + ($1,085 - $1,100)) ÷ $1,100

= ($90 - $15) ÷ $1,100

= $75 ÷ $1,100

= 0.0682

= 6.82%

Hence, the total return is 6.82%