5.Marypurchaseda5%long-termbondwiththepriceoffacevalue$1000.Afteroneyear,shesoldthebondwith$920sincetheinterestraterises.Whatistherateofreturnofholdingthisbond(1year)?

Question

5.Mary purchased a 5% long-term bond with the price of face value $1000.
After one year,she sold the bond with $920 since the interest rate rises.
What is the rate of return of holding this bond (1 year)?

Answer 1

The annual interest payment would be 1000*5%=50
Her one year holding period return is (920+50-1000)/1000= -3%
It is -3%.