An investor buys a 10-year $1,000, 7% coupon bond for $1,050, holds it for 1 year, and then sells it for $1,040.What was the investor's rate of return?

Question

Quizplus · Accepted Answer

The investor's rate of return can be calculated by considering both the interest income and the capital gain or loss. The interest income from the bond is 7% of $1,000, which is $70. The capital loss is the difference between the purchase price ($1,050) and the selling price ($1,040), which is -$10. Therefore, the total return is $70 (interest) - $10 (loss) = $60. The rate of return is the total return divided by the initial investment: $60 / $1,050 = 0.0571 or 5.71%.

An Investor Buys a 10-Year $1,000, 7% Coupon Bond for $1,050