P-14. In the Monday, September 25th, 2017 Wall Street Journal (WSI), it was repo

Question

P-14. In the Monday, September 25th, 2017 Wall Street Journal (WSI), it was reported that: Money Rates Key annual interest rates paid to bor represent actual transactions. Inflation Aug. index Chg From (%) level July 17 Aug.16 U.S.consumer price index Allitems 245.519 0.30 1.9 Corporate Borrowing Rates and Yields Yield (%) Last Wk Bond totalreturn index 10-yr Treasury, Ryan ALM 2.262 DJ Corporate Aggregate, Barclays Capital 2.530 High Yield100, MerrilLynch 5.077 2.992 Using the most recently report annual inflation (August 2016 to August 2017) in the WSJ, and by using the four nominal bond index yields listed above, convert them to real yields by adjusting for inflation. In other words, what is the REAL (Real Yield to Maturity) on each investment?

Explanation / Answer

Real Yield is simply the Nominal Yield minus Inflation

We are given the nominal yield for the 4 bonds and the annual inflation was 1.9% (using this as proxy for expected inflation), the real yield will be:

10 year Treasury = 2.262% - 1.9% = 0.362%

DJ Corporate = 2.992% -1.9% = 1.092%

Aggregate = 2.530% - 1.9% = 0.63%

High Yield 100 = 5.077% - 1.9% = 3.177%

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