20.) You bought one of Great White Shark Repellant Co.’s 9 percent coupon bonds

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

Current price of the bond

=(1000*9%)*((1-(1+13%)^(-11))/13%)+1000/(1+13%)^11

=772.52

nominal return on the bond in the past year=(772.52+1000*9%-800)/800=7.82%

total real rate of return=((1+7.82%)/(1+3.5%))-1=4.17%

the above is the answer

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.