Suppose you bought a bond with an annual coupon rate of 4.4 percent one year ago

Question

Suppose you bought a bond with an annual coupon rate of 4.4 percent one year ago for $850. The bond sells for $900 today.

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

b. 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.) Nominal rate of return %

c. 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.)

Explanation / Answer

Total dollar return:

= $900+$44-$850

= $94

Nominal return:

= $94/$850

= 11.06%

(1+Nominal rate) = (1+Real rate)×(1+Inflation rate)

(1+11.06%) = (1+1.Real rate)×(1+1.5%)

Real rate = 9.42%

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