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19 October, 19:38

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

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  1. 19 October, 20:01
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    5%

    Explanation:

    Formula for finding percentage return on this bond is;

    Percentage return = [ (New price + income - Old price) / Old price ] * 100

    New price = 1,200

    Income = coupon payment = 5% * par value = 5% * 1000 = 50

    Old Price = 1,000

    Percentage return = [ (1,200 + 50 - 1,000) / 1,000 ] * 100

    = 0.25 * 100

    = 25%

    Return in one year is therefore 5%
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