P12-4 Calculating Returns [LO1] Suppose you bought a 4 percent coupon bond one y
ID: 2722817 • Letter: P
Question
P12-4 Calculating Returns [LO1] Suppose you bought a 4 percent coupon bond one year ago for $860. The bond sells for $900 today. Requirement 1: Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? Requirement 2: What was your total nominal rate of return on this investment over the past year? Requirement 3: If the inflation rate last year was 6 percent, what was your total real rate of return on this investment? (Do not round intermediate calculations.)
Explanation / Answer
Total dollar return = Selling price + Interest received – Purchase price
= $900+$40-$800
= $140
Nominal rate of return = (Selling price + Interest received – Purchase price) ÷ Purchase price
= ($900+$40–$800) ÷$800
= 17.50%
(1+Nominal rate) = (1+Real rate)×(1+Inflation rate)
(1+17.5%) = (1+Real rate)×(1+6%)
Real rate of return = 10.85%
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