An investor buys a 10-year, 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?

The answer is 5.71%

Explanation:

Solution

Given that

Coupon rate = 7%

Bond = $1050

Sale of the bond = $1040

n = 10 years, n = 1 year

Now we find the investor's rate of return

Thus

Coupon payment = 7% * 1000

=70

1050 = 70 / (1+r) + $1,040 / (1+r)

r = 5.71%

Therefore the rate of return of the investor is 5.71%

or

Rate of return = (P1-P0 + Interest) / P0

= (1040 - 1050 + 70) / 1050

=.0571 or 5.71%