Suppose you bought a 5.6 percent (annually) coupon bond one year ago for $800. T

Question

Suppose you bought a 5.6 percent (annually) coupon bond one year ago for $800. The bond sells for $865 today. (Do not round intermediate calculations and round your final answers to 2 decimal places, (e.g., 32.16)) 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? If the inflation rate last year was 2 percent, what was your total real rate of return on this investment? Real rate of return

Explanation / Answer

a.

total dollar return = (865-800) + (1000*0.056)

= 65+56= $121

b.

nominal rate of return = 121/ 800 = 15.13%

c.

Real rate = nominal rate - inflation

= 15.13% -2%

=13.13% , this is caclulated using aproximation method.

we could have also used (eal rate = (1+nominal)/(1+inflation) -1

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