You spend $1,363 for a bond with a $1,000 face value and a 6% coupon. After one year, though, you decide to sell it. You’re pleased to find that the value of the bon….

Question

You spend $1,363 for a bond with a $1,000 face value and a 6% coupon. After one year, though, you decide to sell it. You’re pleased to find that the value of the bond is now $1,461, so you sell for that price.

a. Calculate your one-year rate-of-return for the bond.

b. Calculate the bond’s current yield.

Answer 1

Your one-year rate-of-return is found by dividing the sum of ending value plus the income received by the cost. Since the problem gave you a one-year period you don't have to annualize the results:

$1,461 + $60 or $1,521 / $1,363 = 11.6%

Your current yield is the coupon divided by the price:

Current yield when purchased: $60 / $1,363 = 4.4%

Current yield when sold: $60 / 1,461 = 4.1%