A:

Jane and Fabbio Salvatore have just discovered that a Fabulous Florence municipal bond will be offered to support a bridge development in Fabbio's hometown in Florence, OH. They want to purchase the bond at \$1,000, but end up buying the 10% bond at \$1,020. One year later, the Salvatores want to sell and earn a profit when the market value is at \$1,000. Calculate the total return of the Fabulous Florence bond.

A) 12%
B) 1.96%
C) 7.84%
D) 2%

The test will try to confuse you by adding extra details to the questions. It doesn't matter that the Salvatores wanted to buy at \$1,000 when, in fact, they bought it at \$1,020. Furthermore, one year later when the market is at \$1,000, their bond has actually depreciated by (\$1,020-\$1,000 = \$20)/\$1,020 = 1.96%. Note however that the total return will reflect the interest earned (yield) plus or minus any appreciation or depreciation (growth). While the bond earns 10% interest, it has lost over 1% of its value and delivers a total return of 7.84% = (1.1 x 1000) â€“ 1020/1020

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