Suppose you bought a bond with a coupon rate of 7.3 percent one year ago for $89

Question

Suppose you bought a bond with a coupon rate of 7.3 percent one year ago for $896. The bond sells for $924 today. Required: (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 percentage rounded to 2 decimal places (e.g., 32.16).) Total nominal rate of return % (c) If the inflation rate last year was 4.3 percent, what was your total real rate of return on this investment? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Total real rate of return %

Explanation / Answer

Part a)

Coupon = 1000 x7.30%

                = 73

Total dollar return = coupon + price change

                                     = 73 + 924 -896

                                     = 101

Part b)

Nominal return = total dollar return/ beginning price

                                = 101/ 896

                                = 11.27%

Part c)

Real return = (NR- IR)/(1+IR)

                       = (0.1127 -0.043)/(1+0.043)

                       = 6.68%

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