Suppose you bought a 6.4 percent coupon bond one year ago for $820. The bond sel

Question

Suppose you bought a 6.4 percent coupon bond one year ago for $820. The bond sells for $880 today.

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

What was your total nominal rate of return on this investment over the past year? (Round your answer to 2 decimal places. (e.g., 32.16))

If the inflation rate last year was 2.5 percent, what was your total real rate of return on this investment?(Round your answer to 2 decimal places. (e.g., 32.16))

Suppose you bought a 6.4 percent coupon bond one year ago for $820. The bond sells for $880 today.

Explanation / Answer

a) TOTAL DOLLAR RETURN = Interest earned + Increas in value

= 1000*6.4% + (880-820)

= 64 + 60 = $124

b) Nominal rate of return = Coupon Rate= 6.40%

c) Real rate of return = Nominal Rate - Rate of Inflation

= 6.40% - 2.50% = 3.90%

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