Question

Please show work, if completed in Excel, please show details:

Practice Question:

part a: What is the annual rate of return for this mutual fund: price $25 (January 1),12/31 price $22.50 (December 31), annual dividend $1.25?

part b: What is the total rate of 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?  

*** for part b, I'm not sure if I calculate the bond interest at $1000, as with most bond questions, or at $1100 (.09x1000 or .09x1100) Please explain.

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

A. Annual rate of return = (ending price+dividend-starting price)/starting price

= (22.5+1.25-25)/25
= -0.05
=-5% (ANSWER)

B. Coupon amount (or Interest) is always calculated on the face value of the bond. Because the company pays interest on the face value of the bond.

The total rate of return = (selling price of the bond+ coupon amount-buying price of the bond)/Buying price of the bond.

=(1085+90-1100)/1100
= 6.82% (answer)