Question

Suppose you bought a bond with a coupon rate of 7.2 percent paid annually one year ago for $945. The bond sells for $990 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.) Total dollar return $

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.) Nominal rate of return %

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.) Real rate of return %

Answer 1

a) Total Dollar return = Interest coupon for one year + capital gain on the bond

or, Total Dollar return = ($1000 x 7.2%) + ($990 - $945) = $117

b) Total nominal rate of return = Total dollar return / Purchase price

or, Total nominal rate of return = $117 / $945 = 0.1238095238 or 12.38%

c) Total real rate of return = [ (1 + nominal rate of return) / (1 + inflation rate) ] - 1

or, Total real rate of return = [ (1 + 0.1238095238) / (1 + 0.03) ] - 1 = 0.0910772 or 9.11%