You bought the bond for $1,040, after 6 months you received a coupon of $35 and after another 6 months you received another $35 coupon and you sold the bond for $1,070. What would be your total dollar return in that case? What would be your total percentage return?
Would the total dollar return be $100 [(1070 – 1040)+35+35]?
Would the total percentage return be 9.62% [[(1070 – 1040)+35+35]/1040]?
To calculate your total dollar return, you would add the initial price of the bond ($1,040) to the sum of the coupon payments ($35 + $35) and subtract the selling price of the bond ($1,070):
Total Dollar Return = (Selling Price + Coupon Payments) - Initial Price
= ($1,070 + $35 + $35) - $1,040
= $1,115 - $1,040
= $75
So, your total dollar return would be $75.
To calculate your total percentage return, you would divide the total dollar return ($75) by the initial price of the bond ($1,040) and then multiply by 100 to get the percentage:
Total Percentage Return = (Total Dollar Return / Initial Price) * 100
= ($75 / $1,040) * 100
= 0.0721 * 100
= 7.21%
Therefore, your total percentage return would be 7.21%.
So, the statement "total dollar return of $100" and "total percentage return of 9.62%" are incorrect. The correct values are a total dollar return of $75 and a total percentage return of 7.21%.