Question

Sue purchased a 3.5 percent, $100,000 U. S. Treasury bond 6 months ago when the bid quote was 124.1850 and the asked quote was 124.2025. Today, she sold that bond when the bid quote was 124.2175 and the asked quote was 124.2225. What was her total dollar return on this investment?

Answer 1

Answer:

The total dollar return on this investment is $1765

Explanation:

The total dollar return on the investment by Sue is a sum of the interest earned by Sue during this period and the profit due to the increase in bid/ask price of the bond.

Interest earned = [(0.035/2) x $100,000] = $1750;  

The selling price by Sue today will be the bid quote today and for the purchase price on which Sue bought the bond we will take the asked quote on purchase.

bid quote today = 124.2175

asked quote on purchase = 124.2025

Profit earned on selling = (Bid quote today - Asked quote on purchase) * $100,000

= [(124.2175 - 124.2025) x $100,000] = $15

Total return = $1750 + $15 = $1765

Answer 2

Answer:

total return 1,765

Explanation:

the bonds will be purcahse at ask quote (dealer is willing to sale at 124.2025

and sale at bid price (dealer purchase at 124.2175)

we also have  gain the interest for the period:

principal x rate x time = interest

as the rate is annual then, time is express as the portion of a year

100,000 x 0.035 x 6/12 months = 1,750

100,000 x 124.2025 = 124,202.5 purchase price

100,000 x 124.2175 = 124,217.5 sale price

capital gain: (diffeence between sale and purchase: 15

total return 1,765