You buy a $1,000 bond at par with a 10% coupon (1-year maturity) using 50% debt and 50% cash. The debt costs 5%. What is the return on the cash you put in?

Question

IBPrep · Accepted Answer

Levered return = (net payout - your cash in) / your cash in.

You put in $500 of cash and borrow $500 at 5%.

You buy a $1,000 bond at par with a 10% coupon (1-year maturity) using 50% debt and 50% cash. The debt costs 5%. What is the return on the cash you put in?

Answer

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You buy a $1,000 bond