Question

Suppose you bought a 8 percent coupon bond one year ago for $1,050. The bond sells...

Suppose you bought a 8 percent coupon bond one year ago for $1,050. The bond sells for $1,115 today.

Requirement 1: Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?

Requirement 2: What was your total rate of return on this investment over the past year (in percent)?

Requirement 3: If the inflation rate last year was 5 percent, what was your total "real" rate of return on this investment? Assume that the answer for "Requirement 2" above is in "nominal" terms, and then use the Fisher Effect Formula (see Bond chapter) to find the "real" rate of return. (Do not round intermediate calculations.)

Homework Answers

Answer #1

a.
We can find the total dollar return as a change in price plus the coupon payment as follows :-

coupon payment = 1000*8% = $80

Total dollar return = $1,115- 1,050+80
Total dollar return = $145

b.
We can calculate the nominal percentage of return of the bond as follows :-

R = ($1,115- 1,050+ 80) / $1,050
R = 0.1380, or 13.80%

c.
Using the Fisher equation, the real return can be calculated as follows :-
formula = (1 + R) / (1 + inflation rate) - 1

r = (1.1380 / 1.05) - 1
r = 0.0838, or 8.38%

If the inflation rate last year was 5 percent, our total "real" rate of return on this investment = 8.38%

................................Hope you are satsfied with the solution, kindly support by rating the answer.................................

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You bought 5.8 percent coupon bonds one year ago for $1,049. These bonds make annual payments...
You bought 5.8 percent coupon bonds one year ago for $1,049. These bonds make annual payments and mature twenty years from now. Suppose you decide to sell your bonds today when the required return on the bonds is 5 percent. If the inflation rate was 4.6 percent over the past year, what would be your total real return on the investment?
You bought one of Mastadon Manufacturing Co.’s 8.6 percent coupon bonds one year ago for $1,046....
You bought one of Mastadon Manufacturing Co.’s 8.6 percent coupon bonds one year ago for $1,046. These bonds make annual payments, mature fifteen years from now, and have a par value of $1,000. Suppose you decide to sell your bonds today, when the required return on the bonds is 8 percent. If the inflation rate was 3.0 percent over the past year, what would be your total real return on the investment?
Curtis bought an 8.5% annual coupon bond at par. One year later, he sold the bond...
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!
You bought a bond exactly one year ago for $1,004.50. Today, you sold the bond at...
You bought a bond exactly one year ago for $1,004.50. Today, you sold the bond at a price of $987.40. The bond paid interest semi-annually at a coupon rate of 6%. What is your holding period yield on this bond?
Suppose that you just bought a​ four-year ​$1,000 coupon bond with a coupon rate of 6.4​%...
Suppose that you just bought a​ four-year ​$1,000 coupon bond with a coupon rate of 6.4​% when the market interest rate is 6.4​%. One year​ later, the market interest rate falls to 4.4​%. The rate of return earned on the bond during the year was x %. ​(Round your response to two decimal​ places.)
Suppose that you just bought a​ four-year ​$1000 coupon bond with a coupon rate of 5.7​%...
Suppose that you just bought a​ four-year ​$1000 coupon bond with a coupon rate of 5.7​% when the market interest rate is 5.7​%. One year​ later, the market interest rate falls to 3.7​%. The rate of return earned on the bond during the year was nothing​( )%. ​(Round your response to two decimal​ places.)
1. One year ago, a bond had a coupon rate of 10.5 percent, par value of...
1. One year ago, a bond had a coupon rate of 10.5 percent, par value of $1000, YTM of 7.96 percent, and semi-annual coupons. Today, the bond’s price is 916.6 and the bond has 6 years until maturity. What was the current yield of the bond one year ago? The next coupon is due in 6 months. Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.
1. One year ago, a bond had a coupon rate of 9.78 percent, par value of...
1. One year ago, a bond had a coupon rate of 9.78 percent, par value of $1000, YTM of 7.12 percent, and semi-annual coupons. Today, the bond’s price is 1,038.21 and the bond has 9 years until maturity. What was the current yield of the bond one year ago? The next coupon is due in 6 months. Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.
​(Bond valuation​) At the beginning of the​ year, you bought a $1000 par value corporate bond...
​(Bond valuation​) At the beginning of the​ year, you bought a $1000 par value corporate bond with an annual coupon rate of 16 percent and a maturity date of 15 years. When you bought the​ bond, it had an expected yield to maturity of 8 percent. Today the bond sells for $1970. a. What did you pay for the​ bond? b. If you sold the bond at the end of the​ year, what would be your​ one-period return on the​...
At the beginning of the? year, you bought a ?$1000 par value corporate bond with an...
At the beginning of the? year, you bought a ?$1000 par value corporate bond with an annual coupon rate of 13 percent and a maturity date of 12 years. When you bought the? bond, it had an expected yield to maturity of 12 percent. Today the bond sells for ?$1200. a. What did you pay for the? bond? b. If you sold the bond at the end of the? year, what would be your? one-period return on the? investment? Assume...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT