Suppose you bought a bond with an annual coupon rate of 7.4 percent one year ago

Question

Suppose you bought a bond with an annual coupon rate of 7.4 percent one year ago for $897. The bond sells for $926 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)    Total dollar return            $ b. What was your total nominal rate of return on this investment over the past year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Total nominal rate of return             % c. If the inflation rate last year was 4.4 percent, what was your total real rate of return on this investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Total real rate of return             %

Explanation / Answer

Answer) Intial price of bond = 897

Final price of bond = 926

Coupon payments recieved = 7.4%*1000 = 74

Total dollar return = 926 - 897 + 74 = 103

Part b) Total nominal return =( 926-897 + 74 ) / 897 = 0.114827 or 11.4827%

Part c) Real rate of investment = [(1+ return) / (1+inflation rate)] -1 = [(1+0.114827) / (1+0.044) ]-1 =0.067842 or 6.7842%

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