What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

5%

Explanation:

Formula for finding percentage return on this bond is;

Percentage return = [ (New price + income - Old price) / Old price ] * 100

New price = 1,200

Income = coupon payment = 5% * par value = 5% * 1000 = 50

Old Price = 1,000

Percentage return = [ (1,200 + 50 - 1,000) / 1,000 ] * 100

= 0.25 * 100

= 25%

Return in one year is therefore 5%