Suppose you bought a bond with an annual coupon rate of 6.2 percent one year ago

Question

Suppose you bought a bond with an annual coupon rate of 6.2 percent one year ago for $900. The bond sells for $930 today.

Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?

What was your total nominal rate of return on this investment over the past year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

If the inflation rate last year was 2 percent, what was your total real rate of return on this investment?(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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Suppose you bought a bond with an annual coupon rate of 6.2 percent one year ago for $900. The bond sells for $930 today.

Explanation / Answer

Part A)

The value of dollar return is calculated as follows:

Dollar Return = Coupon Payment + Value of Bond Today - Value of Bond 1 Year Ago

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Here, Coupon Payment = 1,000*6.2% = $62, Value of Bond Today = $930 and Value of Bond 1 Year Ago = $900

Using these values in the above formula for Dollar Return, we get,

Dollar Return = 62 + 930 - 900 = $92

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Part B)

The total nominal rate of return can be calculated as follows:

Nominal Rate of Return = Dollar Return/Value of Bond 1 Year Ago*100 = 92/900*100 = 10.22%

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Part C)

The real rate of return can be calculated with the use of following formula:

Real Rate of Return = (1+Nominal Rate of Return)/(1+Inflation) - 1

Using the values calculated above and information provided in the question, we get,

Real Rate of Return = (1+10.22%)/(1+2%) - 1 = 8.06%

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