Suppose you purchase a coupon bond with 20 years to maturity for $1000. It pays

Question

Suppose you purchase a coupon bond with 20 years to maturity for $1000. It pays coupons of $70 per year and after one year, you must sell the bond to help pay for tuition. Further suppose that the interest rates have risen so that the price of the bond has fallen to $950. What is the rate of return (R) that you earned for holding the bond for one year? (Write down the formula for R and show your calculation.)

Explanation / Answer

=> Rate of return = (( sold price- buy price)+interest earned)/buy price =((950-1000)+70)/1000 =20/1000 = 0.02 =2% rate of return (R) that you earned for holding the bond for one year =2%

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