You bought one of Great White Shark Repellant Co.%u2019s 8.4 percent coupon bond

Question

You bought one of Great White Shark Repellant Co.%u2019s 8.4 percent coupon bonds one year ago for $1,048. These bonds make annual payments and mature 11 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 7 percent.

If the inflation rate was 2.6 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.%u2019s 8.4 percent coupon bonds one year ago for $1,048. These bonds make annual payments and mature 11 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 7 percent.

Explanation / Answer

Bond price today = 84 PVIFA(7%,11) + 1000 PVIF(7%,11) = $1,104.98

Total Return = 84+(1104.98-1048) = $140.98

Inflation Return = 1048*2.6% = $27.25

Real Return (in $) = $113.73

Total Real Return (in %) = 113.73/1048 = 10.85%

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