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 correct answer is C.

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) – 1020/1020



RELATED FAQS
  1. Jane and Fabbio Salvatore have just discovered that a Fabulous Florence municipal ...

    The correct answer is a). The test will try to confuse you by adding extra details to the questions. It doesn't matter that ... Read Answer >>
  2. How do the returns on municipal bonds compare to those of other bonds?

    Learn how tax-free municipal bonds may provide better returns than other types of bonds, and understand the risks of municipal ... Read Answer >>
  3. What do cities do with the funds generated from municipal bonds?

    Learn more about municipal bonds, including the various types of bonds issued and the purposes of municipal bond funds, such ... Read Answer >>
  4. Where can I buy government bonds?

    The type of bond determines where you can purchase it, so you need to decide which type of bond you would like to purchase ... Read Answer >>
  5. Who or what is backing municipal bonds?

    Learn about the basics of municipal bonds, including the various revenue sources that are utilized to back or secure municipal ... Read Answer >>
Related Articles
  1. Investing

    Why Muni Bonds and Bond Funds are Perfect Together

    Municipal bonds and bond funds differ in several ways, which is partly why they complement each other well.
  2. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  3. Investing

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  4. Investing

    A Look at the Pros and Cons of Muni Bonds

    Considering muni bonds? Here's a look at their pros and cons.
  5. Financial Advisor

    Muni Bonds, Taxable Bonds or CDs: Which is Best?

    Here's how to tell if municipal bonds are a better investment than taxable bonds or CDs.
  6. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  7. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  8. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  9. Insights

    The 1% in Florence Has Been Rich for 600 Years

    A Bank of Italy study finds that intergenerational mobility might not be as strong as you think. The rich and poor of 1,427 Florentines have stayed that way.
  10. Investing

    Should You Consider Muni Bonds?

    Municipal bonds come in two types. General obligation bonds repay their holders through taxes. They often have low interest rates, but they’re safe.
RELATED TERMS
  1. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  2. Bond Yield

    The amount of return an investor will realize on a bond. Several ...
  3. Bond Buyer 20

    A representation of municipal bond trends based on a portfolio ...
  4. Bond

    A debt investment in which an investor loans money to an entity ...
  5. Bond Buyer 11

    An average yield on a particular day of 11 selected general obligation ...
  6. Dollar Price

    The percentage of par, or face value, at which a bond is quoted. ...
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center