You bought one of Rocky Mountain Manufacturing Co.’s 8.5 percent coupon bonds on

Question

You bought one of Rocky Mountain Manufacturing Co.’s 8.5 percent coupon bonds one year ago for $1,046.30. These bonds make annual payments and mature eleven years from now. Suppose that you decide to sell your bonds today, when the required return on the bonds is 8.00 percent.

If the inflation rate was 3.7 percent over the past year, what would be your total real return on investment? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

(ROUND TO TWO DECIMAL PLACES)

You bought one of Rocky Mountain Manufacturing Co.’s 8.5 percent coupon bonds one year ago for $1,046.30. These bonds make annual payments and mature eleven years from now. Suppose that you decide to sell your bonds today, when the required return on the bonds is 8.00 percent.

Explanation / Answer

Face value (FV) $                                         1,000 Coupon rate 8.50% Number of compounding periods per year 1 Interest per period (PMT) $                                         85.00 Number of years to maturity 11 Number of compounding periods till maturity (NPER) 11 Market rate of return/Required rate of return 8.00% Market rate of return/Required rate of return per period (RATE) 8.00% Bond price PV(RATE,NPER,PMT,FV)*-1 Bond price $                                   1,035.69 Holding period return 7.11% (1035.69+85-1046.3)/1046.3 Real rate of return 3.29% (1+7.11%)/(1+3.7%)-1

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