A portfolio manager invested $2,000,000 in bonds in 2007. In one year the market

Question

A portfolio manager invested $2,000,000 in bonds in 2007. In one year the market value of the bonds dropped to $1,983,000. The interest payments during the year totaled $112,000.

What was the manager’s total rate of return for the year? (Round your answer to 2 decimal places.)  

What was the manager’s real rate of return if the inflation rate during the year was 2.6%? (Round your answer to 2 decimal places.)

A portfolio manager invested $2,000,000 in bonds in 2007. In one year the market value of the bonds dropped to $1,983,000. The interest payments during the year totaled $112,000.

Explanation / Answer

Solution

(a) Given that investment = $2,000,000 (in 2007)

In 2008 ( 1 year) value of bond = $1,983,000 and interest for the year = $112,000

Let r be the rate of return for an year

2,000,000(1+r) = 1,983,0000+112,000

r = 4.75%

(b) Real rate of return = ((1+nominal rate of return)/(1+inflation rate))-1

= ((1.0475)/(1.026))-1 = 2.10%

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