Question

An investor buys a bond with a coupon rate of 7% for $1024.61. The bond pays interest semiannually. Exactly one year later, just after receiving the second coupon payment, the investor sells the bond for $1026.93. What was the investor’s rate of return over the year from owning the bond?

Answer 1

Calculation of the investor’s rate of return over the year from owning the bond
Investor's rate of return = [Coupon payment for the year + Capital Appreciation in Bond value] / Invested amount in bond
Coupon payment for the year = Bond face value x Coupon rate = $1000 x 7% = $70
Capital appreciation in bond value = Value at the time of sale - invested amount = $1026.93 - $1024.61 = $2.32
Investor's rate of return = [$70 + $2.32] / $1024.61
Investor's rate of return = $72.32 / $1024.61
Investor's rate of return = 7.06%