Question

Suppose you bought a bond with an annual coupon rate of 5.5 percent one year ago for $1,017. The bond sells for $1.041 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.) 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.) c. If the inflation rate last year was 3 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.) inces

Answer 1

a. Total dollar return =(Price today-Price one year ago + Coupon) =1041-1017+55 =79

b. Total nominal return =Total dollar return/Price =79/1017 =7.77%

c.  Real Nominal return =(1+Total Nominal return)/(1+Inflation)-1

                        so

        (1+.0777)/(1+.03)-1 = .0463 * 100 = 4.63%

Answer 2

Coupon =5.5%*1000 =55

a. Total dollar return =(Price today-Price one year ago + Coupon) =1041-1017+55 =79
b. Total nominal return =Total dollar return/Price =79/1041 =7.59%
c. Real Nominal return =(1+Total Nominal return)/(1+Inflation)-1 =(1+79/1041)/(1+3%)-1 =4.46%