Suppose you bought a bond with an annual coupon rate of 6.6 percent one year ago

Question

Suppose you bought a bond with an annual coupon rate of 6.6 percent one year ago for $945. The bond sells for $980 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 1.5 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.)

Suppose you bought a bond with an annual coupon rate of 6.6 percent one year ago for $945. The bond sells for $980 today.

Explanation / Answer

a.

Interest earned during the year = Face value * Coupon rate = $1,000 * 6.6% = $6.6

Increase in value of bond during the year = $980 - $945 = $35

Total dollar return = $6.6 + $35 = $41.60

b.

Nominal rate of return = $41.60/$945 = 0.0440= 4.40%

c.

(1+real rate) = (1+nominal rate)(1+inflation rate)

Real rate = (1.0440*1.015) – 1 = 0.05966 = 5.97%

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