Suppose you bought a bond with a coupon rate of 8 percent one year ago for $880.

Question

Suppose you bought a bond with a coupon rate of 8 percent one year ago for $880. The bond sells for $910 today. The bond pays annual coupons. 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. Enter your answer as a percent rounded 2 decimal places, e.g., 32.16.) Nominal rate of return [ c. If the inflation rate last year was 3 percent, what was your total real rate of return on this investment? (Do not round intermediate calculations. Enter your answer as a percent rounded 2 decimal places, e.g., 32.16.) Real rate of return %

Explanation / Answer

Requirement (a) – Total Dollar Return

= [Bond Selling Price Today – Bond Value one year ago ] + Coupon Amount

= [ $910 – 880 ] + 80

= $110

Requirement (b) – Nominal Rate of Return

= [ {($910 – 880) + 80} / 880 ] x 100

= [ $110 / 880 ] x 100

= 12.50%

Requirement (c) – Real Rate of Return

Real Return on Investment = [(1+Nominal Rate of Return)/(1+Inflation Rate)] - 1

= [ 1.1250 / 1.03 ] – 1

= [1.09223301 – 1] x 100

= 9.22%

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