Question

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?

Answer 1

The value of bond one year ago is 1049

inflation Rate is 4.6%

Then the value of Bond Today is 1049(1+.046) = 1097.25

VAlue of Bond After 20 Years from now is 1097.25(1+0.046)²⁰ = 1097.25(2.458) = 2697.368$

Value of interest per year of this bond is = 1000*5.8% = 58

TOtal AMount of interest received upto 20 years = 50* FVAF( 5% , 20 years) = 50*33.70 = 1954.60

Then the total amount received after 20 years = 2697.368 + 1954.60 = 4651.96$

The PV FActor after 20 years @ 5% = 2.65329

The Selling price of bond today = 4651.96/2.653 = 1753.47$

Total Real Return on investement = 2697.368 - 1097.25 = 1600 of price diffrence

and 1954.6 is from interest