question archive Suppose you bought a bond with an annual coupon of 7 percent one year ago for $1,010
Suppose you bought a bond with an annual coupon of 7 percent one year ago for $1,010
Subject:BusinessPrice:2.87 Bought7
Suppose you bought a bond with an annual coupon of 7 percent one year ago for $1,010. The bond sells for $985 today.
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a. |
Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? |
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b. |
What was your total nominal rate of return on this investment over the past year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
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c. |
If the inflation rate last year was 3 percent, what was your total real rate of return on this investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
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Answer:
a) Dollar return = Selling Price - Buying Price + Coupon
Dollar return = $985 - $1010 + $70 = $45
b) Rate of return = Dollar return/Buy price = 45/1010 = 4.45%
c) Based on Fischer relation,
(1 + Nominal rate) = (1 + Real rate) * (1 + Inflation)
(1 + 4.45%) = (1 + Real rate) * (1 + 3%)
Real rate = 1.41%
