Explanation:
Net return is the realized return when all financial costs have been deducted.
Note that the bond pays a coupon of 8/2 = USD 4 at the end of 6-months. The investor initially paid out USD 98 to buy the bond and 98 × 0.015 to cover the cost of financing.
The net realized return is therefore given by:
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Q.50 Suppose that an investor buys a bond with an annual coupon of 8%, paid semiannually. The investor proceeds to hold the bond for six months. Suppose further that the price at the beginning of the six-month period is USD 98 and the price at the end of the six months is 101. If the bond is financed at 3% per annum, what is the net return?
A
9.72%.
B
7.14%.
C
5.64%.
D
1.56%.
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