20.) You bought one of Great White Shark Repellant Co.’s 9 percent coupon bonds
ID: 2794433 • Letter: 2
Question
20.)
You bought one of Great White Shark Repellant Co.’s 9 percent coupon bonds one year ago for $800. These bonds make annual payments and mature 11 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 13 percent. If the inflation rate was 3.5 percent over the past year, what was your total real return on investment?
You bought one of Great White Shark Repellant Co.’s 9 percent coupon bonds one year ago for $800. These bonds make annual payments and mature 11 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 13 percent. If the inflation rate was 3.5 percent over the past year, what was your total real return on investment?
Explanation / Answer
1 Par value (FV) $ 1,000 2 Coupon rate 9.00% 3 Number of compounding periods per year 1 4 = 1*2/3 Interest per period (PMT) $ 90.00 5 Number of years to maturity 10 6 = 3*5 Number of compounding periods till maturity (NPER) 10 7 Market rate of return/Required rate of return 13.00% 8 = 7/3 Market rate of return/Required rate of return per period (RATE) 13.00% Bond price PV(RATE,NPER,PMT,FV)*-1 Bond price $ 782.95 Holding period return 9.12% (782.95+90-800)/800 Total real rate of return 5.43% (1+9.12%)/(1+3.50%)-1
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