Problem 10-23 Calculating Investment Returns [LO 1] You bought one of Rocky Moun

Question

Problem 10-23 Calculating Investment Returns [LO 1]

You bought one of Rocky Mountain Manufacturing Co.%u2019s 8.75 percent coupon bonds one year ago for $1,051.80. These bonds make annual payments and mature eight years from now. Assume that you decide to sell your bonds today, when the required return on the bonds is 8.25 percent.

If the inflation rate was 3.8 percent over the past year, what would be your total real return on investment? (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

You bought one of Rocky Mountain Manufacturing Co.%u2019s 8.75 percent coupon bonds one year ago for $1,051.80. These bonds make annual payments and mature eight years from now. Assume that you decide to sell your bonds today, when the required return on the bonds is 8.25 percent.

Explanation / Answer

FV=1000
PV=?
I=8.25%
PMT=87.5
N=8

So PV = 1028.4625

(Bond Purchase + Interest Received + Sales Proceeds)

(-1051.8+87.5+1028.4625)=64.1625
adjust for inflation:
64.1625/(1.038)=61.8135
now do adjusted return/Bond Purchase

61.8135/1051.80 = 5.8769%

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