You bought one of Rocky Mountain Manufacturing Co.\'s 8.5 percent coupon bonds o
ID: 2714707 • Letter: Y
Question
You bought one of Rocky Mountain Manufacturing Co.'s 8.5 percent coupon bonds one year ago for $1,051.30. These bonds make annual payments and mature eleven years from now. Suppose that you decide to sell your bonds today, when the required return on the bonds is 8.00 percent. Required: If the inflation rate was 3.7 percent over the past year, what would be your total real return on investment? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Total real return on investment %Explanation / Answer
Cash inflows at the end of the year:
1. Sale proceeds of the bond = 85/.08 = $ 1,062.5 (Price of a bond is a function of the Interest amount and the required rate of return).
2. Interest at the coupon rate of 8.5% = 85.0
Therefore total inflows 1,147.5
3. Investment in the beginning of the year = 1,051.3
4. Nominal rate of return = (1147.5/1051.3) - 1 =1.09151 - 1 = 0.09151
5. Real rate of return after adjusting for inflation = 0.09151/1.037 = 0.08824 = 8.82 %
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.