Suppose you bought a 5.2 percent coupon bond one year ago for $920. The bond sel

Question

Suppose you bought a 5.2 percent coupon bond one year ago for $920. The bond sells for $970 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? Total dollar return $ b. What was your total nominal rate of return on this investment over the past year? (Round your answer to 2 decimal places. (e.g., 32.16)) Nominal rate of return % c. If the inflation rate last year was 1.5 percent, what was your total real rate of return on this investment? (Round your answer to 2 decimal places. (e.g., 32.16)) Real rate of return %

Explanation / Answer

Answer:

Initial price of bond = $920

Final price of the bond = $970

Therefore,

Capital gain = $970 - 920 = $50

Coupon rate of bond = 5.2%

Thus,

Coupon = 5.2% of $1000 = $52

Hence

Total dollar return = $50 + $52 = $102

Now,

Nominal rate of return = $102 / $920 = 11.086%

As the rate of inflation is 1.5%, therefore,

Real return = (1.11086 / 1.015) - 1 = 9.44%

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