Question

2 years ago, you paid $1065 for a $1,000 par bond that has a 6% coupon with semiannual payments. You are selling it today for $923. You reinvested coupons at the 3.4% annual rate. What is your total return? (Report your answer to two decimals, without the % symbol. E.g., if your answer is 5.1538%, enter it as 5.15.)

Answer 1

Selling price=	$923
Purchase price=	1065
Semiannual Coupon = Face Value*Coupon rate*1/2
Coupon received =1000*6%/2=	$30
No of coupons received (n) = 2 years*2 coupon per year (n)=	4
annual interest rate of reinvestment=	3.4%
Semiannual rate(i) =3.4%/2=	1.7%
$30 coupon reinvested each time. So it forms Annuity. future value of Annuity Formula will be applicable to Calculate amount received at time of Sale
future value of Coupon amount reinvested = P* (((1 +i)^n)-1)/i
30* (((1 +1.7%)^4)-1)/1.7%
=123.0948274
Total Return in Dollars = Sale Value- purchase price + Coupon reinvestment future value
923-1065+123.0948274
=-18.9051726
in % = Total return/purchase price =-18.9051726/1065 =	-0.01775133577 or -1.78%

So Total return is -1.78%