What is the return on a 10% coupon bond with a face value of $3,000 that initially sells for $2,000 and sells for $1,600 next year? A. 10 percent B. 5 percent C. -5 percent D. -10 percent
Question
What is the return on a 10% coupon bond with a face value of 2,000 and sells for $1,600 next year? A. 10 percent B. 5 percent C. -5 percent D. -10 percent
Solution
To calculate the return on a bond, we need to consider both the coupon payments received and the change in the price of the bond.
Step 1: Calculate the coupon payment The coupon payment is the face value of the bond multiplied by the coupon rate. In this case, it's 300.
Step 2: Calculate the change in the price of the bond The bond was initially sold for 1,600. So, the change in price is 2,000 = -$400.
Step 3: Calculate the total return The total return is the sum of the coupon payment and the change in price. So, the total return is 400 = -$100.
Step 4: Calculate the return as a percentage The return as a percentage is the total return divided by the initial price of the bond. So, the return as a percentage is -2,000 = -5%.
So, the answer is C. -5 percent.
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