Question

. January 1, 2002 you bought a coupon bond for $1102. You received a coupon of $50 on December 30 . On January 1, 2003, you sold the bond for $989. What was your total rate of return? Show your work.

Answer 1

Answer:

-5.72%

Explanation:

Total rate of return = (Total return/net loss ÷ Purchase Price) × 100 ......... (1)

Loss on sales = Purchase price - Sales price = $1102 - $989 = $113.

Net loss = Coupon received - loss on sales = $50 - $113 = -$63

Substituting the values into equation (1), we have:

Total rate of return = ((-63) ÷ 1,102) × 100 = -5.72%

Therefore, the total rate of return is -5.72%. It is negative because the coupon bond led into net loss.

Answer 2

Answer:

The rate of return is found to be -5.72%. The negative sign indicate that the bond resulted in a loss.

Explanation:

The total rate of return r is given as

$r=\dfrac{Net \,Return/Loss}{Purchase\, Price}\times 100\%$

Here the value of the net return or loss  is given as

$Loss \,on\, sales = Purchase\, price - Sales \,price = \ 1102 - \ 989 = \ 113.$

$Net\, loss = Coupon\, received - loss\, on\, sales = \ 50 - \ 113 = -\ 63$

So the rate of return is as

$r=\dfrac{Net \,Return/Loss}{Purchase\, Price}\times 100\%\\r=\dfrac{63}{1102}\times 100\%\\r=-5.72\%$

As  the rate of return is found to be 5.72%. The negative sign indicate that the bond resulted in a loss.