You bought one of Bergen Manufacturing Co.’s 8.4 percent coupon bonds one year a

Question

You bought one of Bergen Manufacturing Co.’s 8.4 percent coupon bonds one year ago for $1,048. These bonds make annual payments and mature eleven 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 2.6 percent over the past year, what would be your total real return on the investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

What is the total real return (%)?

Explanation / Answer

Price today for 11 years at 7%

N = 11 ; I = 7% ; Coupon = 8.4% of 1000 = 84 ; FV = 1000 ; Price = 1105

Capital Return = ( 1105 - 1048 ) / 1048 = 5.44%

Income return = 8.4%

Total Nominal Return = 8.4% + 5.44% = 13.84%

Total Real return = ( 1 + 13.84 %) / ( 1 + 0.026) = 10.96%

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