You bought one of Great White Shark Repellant Co.’s 8 percent coupon bonds one y

Question

You bought one of Great White Shark Repellant Co.’s 8 percent coupon bonds one year ago for $810. These bonds make annual payments and mature 8 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 11 percent. If the inflation rate was 3.3 percent over the past year, what was your total real return on investment?

rev: 09_20_2012

18.04%

11.15%

1.06%

10.62%

10.72%

You bought one of Great White Shark Repellant Co.’s 8 percent coupon bonds one year ago for $810. These bonds make annual payments and mature 8 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 11 percent. If the inflation rate was 3.3 percent over the past year, what was your total real return on investment?

Explanation / Answer

frist you should calculate nominal rate of return

= 80 (interest) * pvifa @ 11% for 8 yrs + 1000 * pvif @ 11% for 8th yr ( assumed that resumption price is 1000)

= 411.69+ 433.93

=845.62 it is a s.b.v of bond

calculations of nominal return

= 845.62+80/810

=14.27%

calculations of real return

real ret = 1+ nominal/ 1+inflation rate -1

= 1.1427/1.033 - 1

=0.10619 *100

=10.62%

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