Question

A bond investor buys a municipal bond with a face value of $100,000 and a 3% coupon. The bond matures in one year. The investor pays $99,500 for the bond which includes accrued interest. To the nearest 1/10 of 1%, what will be the total return on the bond at maturity?

Answer 1

Answer:

3.5%

Explanation:

The formula to calculate total return is: Profit/Original Cost. 100,000 x .03 = $3,000 interest. $3,000 interest + 100,000 principal = 103,000 cash flow. $103,000 - 99,500 = $3,500 gain. $3,500 gain/$99,500 cost = .03518. .03518 = 3.5%