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Suppose you bought a 8 percent coupon bond one year ago for $1,070. The bond sells for $1,135 today. Requirement 1:Assuming a $1,000 face value, what was your total dollar return on this investment over the past year

Sagot :

Hyderali230idn

Answer:

The total dollar return on this investment over the past year is $145.

Explanation:

The total return will be the sum of the interest income received from the bond and any price apppreciation received after one year period.

First we need to determine the interest income

Interest income = Face value of the bond x Coupon rate

where

Face value = $1,000

Coupon rate = 8%

Interest income = $1,000 x 8%

Interest income = $80

Now calculate the price appreciation

Price appreciation = Present value of the bond - Purchase value of the bond

Where

Present value of the bond = $1,135

Purchase value of the bond  = $1,070

Placing values in the formula

Price appreciation = $1,135 - $1,070

Price appreciation = $65

Now calculate the total return

Total return = Interest income +  Price appreication

Total return = $80 + $65

Total return = $145

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