You bought one of Great White Shark Repellant Co.’s 7 percent coupon bonds one

Question

You bought one of Great White Shark Repellant Co.’s 7 percent coupon bonds one year ago for $1,045. These bonds make annual payments and mature 12 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 6 percent.

If the inflation rate was 3.2 percent over the past year, what was your total real return on investment? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

You bought one of Great White Shark Repellant Co.’s 7 percent coupon bonds one year ago for $1,045. These bonds make annual payments and mature 12 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 6 percent.

Explanation / Answer

current price = 70/1.06 + 70/1.06^2 + 70/1.06^3 .......1070/1.06^12 = 1083.84

totall return on investment =(1083.84+70-1045)/1045 = 10.42%

total real return on investment = 10.42%-3.2% = 7.22%

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