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 $1,059. These bonds make annual payments and mature 10 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 7 percent.

If the inflation rate was 4.8 percent over the past year, what was your total real return on investment?

You bought one of Great White Shark Repellant Co.’s 8 percent coupon bonds one year ago for $1,059. These bonds make annual payments and mature 10 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 7 percent.

If the inflation rate was 4.8 percent over the past year, what was your total real return on investment?

Explanation / Answer

Nominal return over past year:

= ($1,070.24+$80-$1,059)÷$1,059

= 8.6%

(1+Nominal rate) = (1+Real rate)×(1+Inflation rate)

(1+8.6%) = (1+Real rate)×(1+4.8%)

Real rate of return = 3.6%

Face value (FV) $                                         1,000 Coupon rate 8.00% Number of compounding periods per year 1 Interest per period (PMT) $                                         80.00 Number of years to maturity 10 Number of compounding periods till maturity (NPER) 10 Market rate of return/Required rate of return 7.00% Market rate of return/Required rate of return per period (RATE) 7.00% Bond price PV(RATE,NPER,PMT,FV)*-1 Bond price $                                   1,070.24

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