Suppose you bought a bond with a coupon rate of 7.5 percent one year ago for $89

Question

Suppose you bought a bond with a coupon rate of 7.5 percent one year ago for $898. The bond sells for $928 today.

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

2) 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 percentage rounded to 2 decimal places (e.g., 32.16).)

3) If the inflation rate last year was 4 percent, what was your total real rate of return on this investment?(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

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

2) 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 percentage rounded to 2 decimal places (e.g., 32.16).)

3) If the inflation rate last year was 4 percent, what was your total real rate of return on this investment?(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Purchase Price = $898

Face value = $1,000

Coupon rate = 7.5%

Selling price = $928

Annual Coupon Payment = $1,000 × 7.5%

                                          = $75

1.

Dollar return on investment for one year is calculated below:

Total dollar return = $75 + ($928 - $898)

                             = $105

Hence, total Dollar return for one year is $105.

2.

Nominal rate of return is calculated below:

Nominal rate of return = $105 / $898

                                    = 11.69%

Hence, Nominal rate of return on investment is 11.69%.

3.

Inflation rate = 4%

Real rate of return is calculated below:

Real rate of return = 11.69% 4%

                              = 7.69%

Hence, real rate of return on investment in bond for one year is 7.69%.

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