Final answer:
The total real rate of return on this bond investment, after adjusting for a 3.4 percent inflation rate, is approximately 3.34%.
Step-by-step explanation:
To calculate the total real rate of return on the bond investment, we must consider the coupon payment, the change in price of the bond, and adjust for inflation. The bond was purchased for $929 and sold for $933, resulting in a capital gain of $4. Additionally, the bond has a 6 percent coupon, so it paid $60 in interest ($1,000 face value × 6%).
The nominal return is therefore the sum of the interest payment and the capital gain, which is $60 + $4 = $64. To find the total return, we divide this by the purchase price: $64 / $929 = 0.0689, or 6.89%.
However, to find the real rate of return, we need to adjust for inflation.
The inflation rate was 3.4 percent.
The real rate of return is calculated using the formula (1 + nominal return) / (1 + inflation rate) - 1.
Plugging our numbers in, we get (1 + 0.0689) / (1 + 0.034) - 1,
which equals approximately 0.0334, or 3.34%.