Question

Curtis bought an 8.5% annual coupon bond at par. One year later, he sold the bond at a quoted price of 98. During the year, market interest rates rose and inflation was 2.5%. What real rate of return did Curtis earn on this investment?

a. 6.70% b. 6.50% c. 6.40% d. 3.90% e. 3.40%

ANS: D

Show steps please!

Answer 1

The Par Value is assumed to be $ 100. So the nominal return is (Price at end + Coupons paid - Price at beg)/ Price at beg

Anwer is D)

Formulae

Formulae as above...