Question

What is the rate of return on a $5000 bond purchased at $4750 with a 12% coupon?

1)
10.71%


2)
12.63%


3)
11.4%


4)
12%

How do I solve this?

Answer 1

You earn 12% on the $5000 par value (face value) of the bond. So 0.12*5000 = 600 is the annual coupon payment. You earn $600 each year

This income is divided by the amount you paid to get

600/4750 = 0.1263 which converts to 12.63%

So the answer is choice 2) 12.63%