Question 2 Last year, you earned a rate of return of 8.16 percent on your bond i

Question

Question 2

Last year, you earned a rate of return of 8.16 percent on your bond investments. During that time, the inflation rate was 2.89 percent. What was your real rate of return?

Use the exact relationship between real and nominal rates. Enter answer in percents, accurate to two decimal places.

Question 3

GDebi, Inc. plans to issue 6.1 percent coupon bonds, with annual coupon frequency, 17 years to maturity and $1000 face value. If the prevailing market yield on bonds of similar riskiness and maturity is 8.2 percent, what would be the market price of GDebi's bonds?

Question 4

HexChat, Inc. has issued 16 year bonds 5 years ago. The bonds pay semiannual coupons, with a coupon rate of 3.3 percent, and $1000 face value. If your required return on this investment is 7.1 percent APR, how much would you be willing to pay for this bond?

Explanation / Answer

Answer.2

The Fisher Effect is an economic hypothesis stating that the real interest rate is equal to the nominal rate minus the expected rate of inflation.

Real Interest Rate = Nominal Interest Rate – Inflation Rate

= 8.16% - 2.89%

= 5.27%

Real interest rates can not only be postive or negative but can also be higher or lower than the nominal rates.Nominal interest rates will exceed real rates when the inflation rate is positive but real rates can also exceed nominal rates during deflationary periods.

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