P12-13 Calculating Investment Returns [LO1] You bought one of Great White Shark

Question

P12-13 Calculating Investment Returns [LO1]

You bought one of Great White Shark Repellant Co.’s 9 percent coupon bonds one year ago for $760. These bonds make annual payments and mature 15 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 11 percent. If the inflation rate was 3.7 percent over the past year, what was your total real return on investment?

You bought one of Great White Shark Repellant Co.’s 9 percent coupon bonds one year ago for $760. These bonds make annual payments and mature 15 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 11 percent. If the inflation rate was 3.7 percent over the past year, what was your total real return on investment?

Explanation / Answer

Price one year ago = $760

Price today =PV(rate,nper,pmt,fv) in excel eher rate =0.11, nper =15,pmt = 9%of 1000 =$90 and fv =1000

Price today =PV(0.11,15,90,1000) = $856.18

Total returns in $ = 856.18 + 90 -760 = 186.18

So annual return = 186.18/760 = 0.24497 = 0.24497 = 24.497%

If inflation rate = 3.7%, real rate = (nominal rate - inflation rate)/ (1 + inflation rate) = (0.24497 -0.037)/(1+0.037) = 0.20055 = 20.05%

Yout total real rate of return = 20.05%

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.