To calculate the one-year return on the bond, we need to consider two components:

1. The bond's price at the beginning of the year.
2. The interest (coupon) earned during that year.

Step 1: Calculate the bond price at the beginning of the year

The bond's price is determined using the present value of its future cash flows, which includes the coupon payments and the face value at maturity. The market rate (8%) is used to discount these payments.

The bond's cash flows are as follows:

• Annual coupon payment = $\text{Face value} \times \text{Coupon rate} = 7000 \times 10\% = 700$
• The bond will pay $700 annually, and at the end of 5 years, it will return the face value of $7000.

Using the formula for the present value of a bond: $P = \sum_{t=1}^{n} \frac{C}{(1 + r)^t} + \frac{FV}{(1 + r)^n}$ where:

• $P$ is the price of the bond,
• $C$ is the annual coupon payment ($700),
• $FV$ is the face value ($7000),
• $r$ is the market rate (8% or 0.08),
• $n$ is the number of years (5 years).

The bond price is: $P = \frac{700}{(1.08)^1} + \frac{700}{(1.08)^2} + \frac{700}{(1.08)^3} + \frac{700}{(1.08)^4} + \frac{700}{(1.08)^5} + \frac{7000}{(1.08)^5}$

Step 2: Calculate the one-year return

To calculate the return for one year, we look at the coupon payment and the change in the bond price over one year.

Let’s first compute the bond price and then the return.The bond price at the beginning of the year (when purchased) is approximately $7558.98. After one year, the bond's price would be $7291.96.

The one-year return on the bond, calculated based on the coupon payment and price change, is approximately 5.73%.

However, none of the answer choices provided match this result. If you meant to calculate something else, such as a longer term return or a different scenario, let me know!

Would you like more details or clarification on any part of this process?

Related Questions:

1. How would the bond price change if the market rate were higher than the coupon rate?
2. How does the duration of the bond affect its sensitivity to changes in market rates?
3. What are the key factors influencing bond prices?
4. How is the yield to maturity calculated for a bond?
5. What would happen to the bond price if the market rate decreased further?

Tip:

When bond prices are higher than face value, it is said to be selling at a premium, and when lower, it’s selling at a discount.