What is the rate of return on a $10,000 bond purchased at $8,750 with a 10% coupon?
The 10% coupon guarantees a return of $1,000 on the nominal value of the bond, which is $10,000. The bond's actual sale price was $8,750, so the $1,000 coupon must be figured as a percent of $8,750. 1000 / 8750 = 11.43%
My answer is 11.43%
OP is right, it IS 11.43%
Darling....DARLING I found you!!! -Hiro
To calculate the rate of return on a bond, you need to determine the percentage gain or loss on the investment. In this case, you purchased a $10,000 bond at the price of $8,750 and it has a 10% coupon.
To find the rate of return, you first need to calculate the annual interest earned from the coupon payment. The coupon payment is 10% of the nominal value of the bond, which is $10,000. So, the coupon payment amount is $1,000 per year ($10,000 x 10%).
Next, you need to determine the percentage gain or loss based on the purchase price and the coupon payment. Since the coupon payment is $1,000, you divide it by the purchase price of $8,750. Therefore, the rate of return is calculated as follows:
($1,000 / $8,750) x 100 = 11.43%
So, the rate of return on the $10,000 bond purchased at $8,750 with a 10% coupon is 11.43%.
Even though you don't say, I will assume the time was 1 year.
so look at this way:
you started with 8750 and at the end of the year you had 10,000+ 1,000 or 11,000
8750(1+r) = 11000
1+r = 1.25714..
r = .25714 or 25.71%