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) 9.98%
b) .0196%
c) 12%
d) 2%
The correct answer is a).
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
at $1,020. Furthermore, one year later when the market
is at $1,000, their bond has actually depreciated.
Only 9.98% could be the answer. 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 nearly 1% of its value
and delivers a total return of 9.98%. ($1,020-$1,000
= $20)/$1,020 = .0196%. (10% + (-.0196%) = 9.98%.
RELATED FAQS
  1. Calculate the total return of the municipal bond described below.

    Jane and Fabbio Salvatore have just discovered that a Fabulous Florence municipal bond will be offered to support a bridge ... Read Answer >>
  2. How are municipal bonds taxed?

    Discover information about trading municipal bonds, specifically the various tax implications municipal bonds have at state ... Read Answer >>
  3. 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

    The City of Florence is Not Loving It (MCD)

    Yes, Florence, as in the city in Italy which McDonald's is suing for $20 million in lost profit.
  2. 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.
  3. Investing

    The Best Bet for Retirement Income: Bonds or Bond Funds?

    Retirees seeking income from their investments typically look into bonds. Here's a look at the types of bonds, bond funds and their pros and cons.
  4. 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.
  5. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  6. 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.
  7. Investing

    The 4 Biggest Bond Myths

    Bonds can be a great addition to a portfolio but be aware of these four myths.
  8. Investing

    Do Municipal Bond Mutual Funds Offer a Tax Incentive?

    Learn about individual municipal securities and municipal bond funds, whose principal stability and tax-free yield appeal to high-income investors.
  9. Financial Advisor

    Why You Should Invest In Municipal Bond ETFs

    These versatile instruments have become popular with investors in higher tax brackets and fill a specific niche in the wide selection of fixed-income offerings.
  10. Investing

    5 Basic Things To Know About Bonds

    Learn these basic terms to breakdown this seemingly complex investment area.
RELATED TERMS
  1. Bond Yield

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

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

    A debt investment in which an investor loans money to an entity ...
  4. Dollar Price

    The percentage of par, or face value, at which a bond is quoted. ...
  5. Corporate Bond

    A debt security issued by a corporation and sold to investors. ...
  6. Bond Resolution

    1. A document used with government bonds, especially general ...
Hot Definitions
  1. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  2. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  3. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  4. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  5. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  6. Zero Day Attack

    Zero Day Attack is an attack that exploits a potentially serious software security weakness that the vendor or developer ...
Trading Center