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20 August, 08:15

You bought a bond five years ago for $804 per bond. The bond is now selling for $770. It also paid $55 in interest per year, which you reinvested in the bond. Calculate the realized rate of return earned on this bond.

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  1. 20 August, 09:42
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    Realized rate of return earned on this bond is 2.61%

    Explanation:

    Interest Paid per year = $55

    Face / Purchase Value = $804

    Current Selling price = $770

    Coupon rate / Interest rate per year = ($55 / $804) x 100

    Coupon rate / Interest rate per year = 6.84%

    Return on sale of Bond = $770 - $804 = - $34

    Return on sale of Bond (Percent) = (-$34 / 804) x 100 = - 4.23%

    Realized rate of return = Coupon Interest rate + Return on Sale

    Realized rate of return = 6.84% + (-4.23%) = 2.61%
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