You bought one of Lambert Sandblasting Company's 15-year bonds one year ago for $960. These bonds pay 7 percent annually, have a face value of $1,000, and mature 14 years from now. Suppose you decide to sell your bond today when the required return on the bonds is 8 percent. The inflation rate over the past year was 2.7 percent. What was your total real return on this investment?

A. -.028 percent 

B. 0.17 percent 

C. 2.70 percent 

D. 7.45 percent 

E. 8.00 percent 

 

Answer=B. 0.17 percent 

coupan rate=7.00%

years left to maturity=14

market interest =8%

PVIFA=1-(1+r)-n/r =8.2442

PVIF=1/(1+r)^n =0.340461

Step-by-step explanation

coupan rate=7.00%

years left to maturity=14

market interest =8%

PVIFA=1-(1+r)-n/r =8.2442

PVIF=1/(1+r)^n =0.340461

so the current price = coupan rate x face value x PVIFA+ par value x PVIF= 0.07 x 1000 x 8.2442 +(1000 x 0.340461) =$ 917.56 and the cash flow will be = (917.56- 960)+70= 27.56

A return before inflation = 2.87%

and

(1+Nominal rate)=(1+real)(1+inflation)= (1+0.0287)=(1+real)(1+0.27)

1.0287/1.027=1+real

real= 1.001655-1=0.17

ANSWER=real return on investment= 0.17 percent