Question

# You bought a 10-year, 5% coupon bond for \$1000, and sold it 1 year later for...

You bought a 10-year, 5% coupon bond for \$1000, and sold it 1 year later for \$1,100. What is the rate of return on your investment if the bond pays interest annually? Semi-annually?

Purchase Price = \$1,000
Selling Price = \$1,100
Annual Coupon = 5%*\$1,000 = \$50

Rate of Return = (Selling Price + Annual Coupon - Purchase Price) / Purchase Price
Rate of Return = (\$1,100 + \$50 - \$1,000) / \$1,000
Rate of Return = 0.15
Rate of Return = 15%

Purchase Price = \$1,000
Selling Price = \$1,100
Annual Coupon = 5%
Semiannual Coupon = 2.5%*\$1,000 = \$25

Semiannual Rate of Return = [(Selling Price + 2 * Semiannual Coupon - Purchase Price) / Purchase Price + 1]^(1/2) - 1
Semiannual Rate of Return = [(\$1,100 + 2 * \$25 - \$1,000) / \$1,000 + 1]^(1/2) - 1
Semiannual Rate of Return = (0.15 + 1)^(1/2) - 1
Semiannual Rate of Return = 1.15^(1/2) - 1
Semiannual Rate of Return = 1.0724 - 1
Semiannual Rate of Return = 7.24%

Annual Rate of Return = 2 * 7.24%
Annual Rate of Return = 14.48%

#### Earn Coins

Coins can be redeemed for fabulous gifts.