Question

You paid $1054 for a $1,000 par, 11-year bond with a 8% coupon rate and annual payments. You are selling it today, after receiving 3 coupon payments, for $916. You reinvested coupons at the 7.2% 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

Par Value = $1,000

Buying Price (P0) = $1054

Selling Price (P1) = $916

Annual Coupon Payment = $1000*8%

=$80

You received 3 coupon payments and Re-invested at 7.2% annual rate.

Total Coupon Income after 3 payments =

Where, C= Periodic Coupon Payments =$80
r = Periodic Interest rate = 7.2%
n= no of periods = 3

= $257.69

- Total Return on Bond = [(P1 - P0) + Total Coupon Income]/P0

=[($916 - $1054) + $257.69]/$1054

= 11.36%

So, your Total Return is 11.36%