Question

28) You purchased a bond with the face value of $1,000 and a coupon rate of 7.2 percent last year for $862.5. Currently, the bonds are selling for $825.25. If the inflation rate last year was 1.9% percent, what is your exact real rate of return on this investment?

Please show the calculations. Thank you in advance :)

Answer 1

Purchase Price = $862.50
Selling Price = $825.25

Coupon = Coupon Rate * Face Value
Coupon = 7.20% * $1,000
Coupon = $72

Nominal Rate of Return = (Selling Price + Coupon - Purchase Price) / Purchase Price
Nominal Rate of Return = ($825.25 + $72 - $862.50) / $862.50
Nominal Rate of Return = $34.75 / $862.50
Nominal Rate of Return = 0.04029 or 4.029%

Real Rate of Return = (Nominal Rate of Return - Inflation Rate) / (1 + Inflation Rate)
Real Rate of Return = (0.04029 - 0.0190) / (1 + 0.0190)
Real Rate of Return = 0.02129 / 1.0190
Real Rate of Return = 0.0209 or 2.09%