Suppose you bought a bond with an annual coupon rate of 8.3 percent one year ago
ID: 2566998 • Letter: S
Question
Suppose you bought a bond with an annual coupon rate of 8.3 percent one year ago for $906. The bond sells for $944 today.
a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Total dollar return $
b. What was your total nominal rate of return on this investment over the past year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Total nominal rate of return %
c. If the inflation rate last year was 4.3 percent, what was your total real rate of return on this investment?
Total real rate of return %
Explanation / Answer
a. Total dollar return over the past year = Coupon amount received + Increase in the value of investment
= (1000 * 8.3%) + (944 - 906)
= $ 83 + $ 38
= $ 121.
b. Nominal Rate of Return = (Total Dollar Return for the year / Total Investment) * 100
= (121 / 906) * 100
= 13.36%
c. Real Rate of Return = Nominal Rate of Return - Inflation Rate
= 13.36% - 4.3%
= 9.06%.
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