What is the total rate of return for a bond if you hold it until maturity?

Question

I am sure I am missing something really simple here but I cannot figure out how to find the the total rate of return for a bond.
About the bond:
Face: $1000
Coupon: 10% yearly, paid semi-annually
Market Interest Rate: 8%
Years to maturity: 3
Paid: 1052.42

Note: The market interest rate will stay constant in this situation. This isn't a real situation, only figurative

Answer 1

No this is not that simple!

It's tempting to calculate the current yield by taking $100 per year divided by the investment of $1052.42 which looks like 9.5%. But that is inflated since it assumes you get your $1052.42 back at maturity. You don't, you only get $1000 so you need to apply the $52.42 loss.

Do it this way:
($100 * 3 years) - $52.42 = $247.58
$247.58 divided by 3 years = $82.53 per year
$82.53 divided by initial investment of $1052.42 = 7.84%

Not sure if your question requires you to take into consideration the ability to invest the $50 semi annual payments or taxes etc though. Hopefully this gets you on the right track!

Answer 2

First, you paid a premium for the bond, $52.42. Second, there is another hit for the purchasing commission, if any. Third, there is the question of whether your interest then gains interest, say in a savings account, and if you want to include this. In fairness to the latter consideration, we sometimes reinvest dividends from stocks in programs to buy more stock, and in bank interest paid we count compound interest--how do you intend to count the potention of interest on the interest paid?

If you want to know what a bond with a 10 percent return is, that is $100. Over three years, is $300. What did you intend to do with "Market Interest Rate: 8%" unless you are applying that to the semi-annual bond interest payments, but then that is not clear. Will you have to figure for taxes? So you have $300, possibly plus 8 percent on that, and then less the $52.42 premium and whatever your commission and maybe taxes. But since you have three years, to amoritize the costs. But what if you sell it in the meanwhile? If you sell it at, say 1100 before maturity, then the cost is amortized over a smaller period and the interest stream is interrupted. Of course, if a truck runs over you tomorrow, that also makes the point moot. The point is that the arithmetic isn't the problem, the future is. What is your total return if the company goes belly-up in those three years and your bond was unsecured debt? Good luck.

Answer 3

It relies upon on the present marketplace cost of the bond, and the bond's par cost. If we assume the par cost to be $one thousand, that would supply an undemanding return of roughly sixteen.8% per 365 days, over the 15 365 days existence of the bond. yet your return for *this 365 days* could be extra or under that, using fact the marketplace cost is set by way of the marketplace, not by way of a formulation.

Answer 4

It's an interesting question

Answer 5

i've been surfing the web more than 4 hours today looking for answers to the same question, and I haven't found a more interesting debate like this. it is pretty worth enough for me.

Answer 6

You will have to hold the bond until maturity.