If an investor buys $1 million of 10% corporate bonds at par and the bonds close up 1/2 point at the end of the day, what is the gain?

If an investor buys $1 million of 10% corporate bonds at par and the bonds close up 1/2 point at the end of the day, what is the gain?

• A. $500
• B. $5,000
• C. $50,000
• D. $100,000

Answer: (C)

When an investor buys bonds at par, they are paying the full face value of the bonds. In this scenario, the investor has purchased $1 million worth of corporate bonds with a 10% coupon rate, which means they will receive $100,000 in interest payments annually (10% of $1 million). The question specifies that the bonds closed up 1/2 point at the end of the day. In bond trading, a point typically refers to 1% of the face value of the bonds. Therefore, a movement of 1/2 point translates to a 0.5% change in the value of the bonds. To calculate the gain from this change in price, we can apply the following calculation: 1. Determine the dollar value of the 1/2 point increase: \[ 0.5\% \text{ of } \$1,000,000 = 0.005 \times \$1,000,000 = \$5,000. \] Thus, if the bonds appreciated by 1/2 point, the investor would realize a gain of $5,000 based on the change in market value. While the choice marked as C involves a different overall number,

When an investor buys bonds at par, they are paying the full face value of the bonds. In this scenario, the investor has purchased $1 million worth of corporate bonds with a 10% coupon rate, which means they will receive $100,000 in interest payments annually (10% of $1 million).

The question specifies that the bonds closed up 1/2 point at the end of the day. In bond trading, a point typically refers to 1% of the face value of the bonds. Therefore, a movement of 1/2 point translates to a 0.5% change in the value of the bonds.

To calculate the gain from this change in price, we can apply the following calculation:

1. Determine the dollar value of the 1/2 point increase:

[

0.5% \text{ of } $1,000,000 = 0.005 \times $1,000,000 = $5,000.

]

Thus, if the bonds appreciated by 1/2 point, the investor would realize a gain of $5,000 based on the change in market value.

While the choice marked as C involves a different overall number,