14. value: points 2.00 Suppose you bought a bond with an annual coupon rate of 7

Question

14. value: points 2.00 Suppose you bought a bond with an annual coupon rate of 7.6 percent one year ago for $840. The bond sells for $885 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? Total dollar return b. What was your total nominal rate of return on this investment over the past year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Nominal rate of return c. If the inflation rate last year was 2.5 percent, what was your total real rate of return on this investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Real rate of return

Explanation / Answer

Details Amt $ Purchase cost of Bond a year ago                               840 Selling price of Bond today                               885 Capital Gain in $                                 45 Annual interest @7.6% =                                 76 a Total $ return =                               121 b Nominal rate of return=121/840= 14.40% c Given Nominal rate =n=14.40% Assume Inflation rate =I & Real Rate =R Now : (1+nominal Rate)=(1+Real Rate)(1+Inflation rate) 1.1440=(1+R)*1.025 1+R=11.61% So Real Rate of Return =11.61%

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