Question

Chelsea bought a bond with a face value of $5,000. The bond has a term of 4 years. Chelsea bought the bond at a 3 percent discount from the face value. The bond pays 3 percent annual interest, and Chelsea will receive eight semiannual payments. When the bond is redeemed at maturity, the total return (profit) will be $
_____ .00. The total return on investment will be
______ %. (Round return on investment percentage to one decimal place.)

Answer 1

Answer:

profit: $750

ROI: 15.5%

Explanation:

Answer 2

The total return of the bond will be a profit of $300 and the total return on investment (ROI) will be 6.18%.

What will be the total return and return on investment?

The profit made from the purchase of bonds is referred to as the return on bonds. The profit includes all capital gains (discounts obtained) and interest earnings till maturity.

$\text{Face value} = 5,000\\\\\text{Purchase price} = 4,850 (5,000 \text{ x } 1 - 0.03)\\\\\text{Discount} = 150 (5,000 - 4,850)\\\\\text{Maturity period} = 4 years\\\\\text{Coupon rate} = 0.03\\\\\text{Interest payment = semi-annual}\\\\\text{Annual interest} = 150 ( 5,000 \text{ x } 0.03)\\\\\\\text{Total profit at maturity} = 300 ( 150 + 150)\\\\\\text{Total return on investment} = 6.18 \text{percent} (300/4,850 \text{ x } 100)$

As a result, when Chelsea redeems the bond at maturity, his total return (profit) will be $300.00 at 6.18 percent.

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