Question

You buy a 12-year 8 percent annual coupon bond at par value, $1,000. You sell the bond 3 years later for $1,150. What is your rate of return over this 3 year period?

Answer 1

Purchase Price of Bond = $1000

- Annual coupon Paymnet = $1000*8% = $80

Coupon payment received during the 3-year period = $80*3 = $240

Bond sold for = $1150

Calculating the Rate of Return over 3 ear period:-

Rate of Return = [(Sale price - Purchase Price) + Coupon payment received]/Purchase price

Rate of Return = [($1150 - $1000) + $240]/$1000

Rate of Return = 39%

So, rate of return over this 3 year period is 39%

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