Question

Over the past year (from 1 year ago to today), the inflation rate was 6.63 percent, the risk-free rate was 8.31 percent, and the real rate of return for a bond was 9.2 percent. The bond was priced at 1,124.65 dollars one year ago and 1,148.58 dollars two years ago, pays annual coupons of 47.51 dollars, and just made a coupon payment. What is the price of the bond today?

Answer 1

Real Return = 9.20%
Inflation Rate = 6.63%

Nominal Return = (1 + Real Return) * (1 + Inflation Rate) - 1
Nominal Return = (1 + 0.0920) * (1 + 0.0663) - 1
Nominal Return = 1.1644 - 1
Nominal Return = 0.1644 or 16.44%

Price 1 year ago = $1,124.65
Coupon = $47.51

Nominal Return = (Current Price + Coupon - Price 1 year ago) / Price 1 year ago
0.1644 = (Current Price + $47.51 - $1,124.65) / $1,124.65
$184.89 = Current Price - $1,077.14
Current Price = $1,262.03

So, current price of bond is $1,262.03