Explanation:
The gross realized return is computed as: ($110 + $4 − $102) / $102 = 11.76%. The net realized return takes into account the per-period financing costs as follows:
($110 + $4 − $102) / $102 − (0.5% / 2) = 11.76% − 0.25% = 11.51%
(Book 4, Module 57.1, LO 57.a)
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Question 67
Assume that a fixed-income portfolio manager purchased a bond for $102 six months ago and financed this purchase at an annual rate of 0.5%. If the bond is currently selling for $110 and paid a $4 coupon today, what are the gross and net realized returns for this bond?
A
Gross realized return is 7.84% and net realized return is 7.34%.
B
Gross realized return is 7.34% and net realized return is 7.84%.
C
Gross realized return is 11.51% and net realized return is 11.76%.
D
Gross realized return is 11.76% and net realized return is 11.51%.
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