What is the historical real return on long-term government bonds? (Round your an

Question

What is the historical real return on long-term government bonds? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the historical real return on long-term corporate bonds? (Round your answer to 2 decimal places. (e.g., 32.16))

Refer to Table 12.2.

What is the historical real return on long-term government bonds? (Round your answer to 2 decimal places. (e.g., 32.16))

TABLE 12.2 Investment Large-company stocks Small-company stocks Long-term corporate bonds Average Return 12.1% 6.9 6.3 5.9 3.5 3.0 Average Annual Returns: 1926-2013 SOURCE: Stocks, Bonds, Bills, and Inflation: 2014 YearbookTM, annually updates and Rex A. Sinquefield (Chicago: Momingstar). All rights reserved. U.S. Treasury bills Inflation

Explanation / Answer

Based on Fischer Relation,

(1 + Nominal rate of Return) = (1 + Real rate of return) * (1 + Inflation)

{In some text, you would also see formula as nominal rate of return = Real rate of return + Inflation as formula. However, this is a more approximate version. The one mentioned above is accurate and original formula}

For long term govt bonds,

(1 + 5.9%) = (1 + Real rate) * (1 + 3%)

Real Rate = (1.059/1.03) - 1 = 0.0282

Real Rate = 2.82% --> Answer

For long term corporate bonds,

(1 + 6.3%) = (1 + Real rate) * (1 + 3%)

Real Rate = (1.063/1.03) - 1 = 0.03204

Real Rate = 3.20% --> Answer

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