Question

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.)

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%**

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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
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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?...

Suppose you bought a bond with a coupon rate of 4.2 percent paid
annually one year ago for $900. The bond sells for $950 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?...

3. You
bought one of BB Co.’s 10% coupon bonds one year ago for $1100.
These bonds make annual payments, have a face value of $1000 each,
and mature seven years from now. Suppose you decide to sell your
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inflation rate was 3% over the past year, what would be your total
real return on investment according to the Exact Fisher
Formula?

You bought one of Great White Shark Repellant Co.’s 8 percent
coupon bonds one year ago for $780. These bonds make annual
payments and mature 6 years from now. Suppose you decide to sell
your bonds today, when the required return on the bonds is 12
percent. If the inflation rate was 3.2 percent over the past year,
what was your total real return on investment?

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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 Great White Shark Repellant Co.’s 8 percent
coupon bonds one year ago for $760. These bonds make annual
payments and mature 14 years from now. Suppose you decide to sell
your bonds today, when the required return on the bonds is 12
percent. If the inflation rate was 3.8 percent over the past year,
what was your total real return on investment?
Multiple Choice
-6.85%
3.39%
3.46%
11.29%
3.29%

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?

You bought one of Great White Shark Repellant Co.’s 9 percent
coupon bonds one year ago for $800. These bonds make annual
payments and mature 10 years from now. Suppose you decide to sell
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percent. If the inflation rate was 3 percent over the past year,
what was your total real return on investment?

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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? (Do not round intermediate calculations.
Enter your answer...

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coupon bonds one year ago for $800. These bonds make annual
payments and mature 11 years from now. Suppose you decide to sell
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percent. If the inflation rate was 3.3 percent over the past year,
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Multiple Choice
a) 26.88%
b) 34.02%
c) 25.70%
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