You bought one of Great White Shark Repellant Co.’s 8 percent coupon bonds one y

Question

You bought one of Great White Shark Repellant Co.’s 8 percent coupon bonds one year ago for $760. These bonds make annual payments and mature 7 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 11 percent. If the inflation rate was 3.3 percent over the past year, what was your total real return on investment?

You bought one of Great White Shark Repellant Co.’s 8 percent coupon bonds one year ago for $760. These bonds make annual payments and mature 7 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 11 percent. If the inflation rate was 3.3 percent over the past year, what was your total real return on investment?

Explanation / Answer

Holding period return:

= ($859+$80-$760)÷$760

= 23.55%

(1+Nominal rate) = (1+Real rate)×(1+Inflation rate)

(1+23.55%) = (1+Real rate)×(1+3.3%)

Real rate return = 19.6%

Face value (FV) $                                         1,000 Coupon rate 8.00% Number of compounding periods per year 1 Interest per period (PMT) $                                         80.00 Number of years to maturity 7 Number of compounding periods till maturity (NPER) 7 Market rate of return/Required rate of return 11.00% Market rate of return/Required rate of return per period (RATE) 11.00% Bond price PV(RATE,NPER,PMT,FV)*-1 Bond price $                                             859

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