Consider the following information for a period of years. Series Arithmetic Mean

Question

Consider the following information for a period of years.

  Series

Arithmetic Mean

What is the real return on long-term government bonds? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What is the real return on long-term corporate bonds? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  Series

Arithmetic Mean

  Large-company stocks 11.7 %   Small-company stocks 16.4   Long-term corporate bonds 7.8   Long-term government bonds 7.7   Intermediate-term government bonds 5.6   U.S. Treasury bills 3.8   Inflation 4.8

Explanation / Answer

Answer:

1. Calculation of real return on long-term government bonds:

Real rate = [(1+ Nominal Rate) / (1 + Inflation rate)] -1

Nominal rate =7.7% = 0.077

Inflation rate =4.8% = 0.048

Hence Real rate = [(1+0.077) / (1+0.048)] -1

=0.0277

=2.77%

2. Calculation of real return on long-term corporate bonds:

Real rate = [(1+ Nominal Rate) / (1 + Inflation rate)] -1

Nominal rate =7.8% = 0.078

Inflation rate =4.8% = 0.048

Hence Real rate = [(1+0.078) / (1+0.048)] -1

=0.0286

=2.86%

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