The answer I get isn\'t close to any of the answers given below. Can someone ple
ID: 2633661 • Letter: T
Question
The answer I get isn't close to any of the answers given below. Can someone please show me how to arrive at the correct answer? Thanks!
You bought one of Great White Shark Repellant Co.'s 9 percent coupon bonds one year ago for $760. These bonds make annual payments and mature 12 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 10 percent. If the inflation rate was 3.4 percent over the past year, what was your total real return on investment? 18.58% 31.54% 30.13% 30.03% 39.03%Explanation / Answer
PV of the bond= 90VIFA(10%,12)+1000PVIF(10%,12)= $931.86
YOUR cash flows: Sale price - purchase price + one coupon(<you received this b/c you held the bond for one year)
931.86 - 760 + 90 = 261.86
Return before accounting for inflation = net proceeds/initial investment = 261.86 / 760 = 0.3446 or 34.46%
the formula for Nominal rate..(1 + Nominal) = (1+Real rate)(1+inflation rate)
solving for real return...
= [1.3446/1.034]-1= Real rate
Real rate= 30.03%
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