Suppose you bought a 8 percent (annually) coupon bond one year ago for $880. The

Question

Suppose you bought a 8 percent (annually) coupon bond one year ago for $880. The bond sells for $910 today. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?   

What was your total nominal rate of return on this investment over the past year?

If the inflation rate last year was 3 percent, what was your total real rate of return on this investment?

Explanation / Answer

Total return will reflect the interest earned (yield) plus or minus any appreciation or depreciation (growth).

Coupon rate=8%

Purchase price one year ago=$880

Selling price now=$910

Coupon for one year=1000*8/100=$80

Total return= (Coupon+ Capital appreciation)/Purchase price= (80+30)/880*100=12.5%

Nominal total rate of return=12.5%

Real total rate of return=Nominal rate of return-Inflation=12.5%-3%=9.5%

The primary difference between nominal and real rate of return if that while the nominal rate of return does not account for impact of inflation in the return rate while real rate of return considers the purchasing power of money and makes adjustments in the nominal rate to reflect an inflation adjusted rate of return .

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