Question

Suppose you bought a bond with an annual coupon rate of 5.5 percent one year ago for $1,017. The bond sells for $1,041 today.

a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
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.)
c. If the inflation rate last year was 3 percent, what was your total real rate of return on this investment?

Answer 1

Dollar return is $79

Nominal rate of return is 7.77%

Real rate of return is 4.77%

Step-by-step explanation:

The total return is the difference in market price plus the coupon interest received,the total dollar return is computed as follows:

Price today $1,041

price a year ago ($1,071)

Coupon interest($1000*5.5%) $55

Total dollar return $79

The nominal rate of return over the past one year is calculated thus:

Nominal rate of return =dollar return/initial price paid

dollar return is $79

initial price is $1017

nominal rate of return =$79/$1017

=7.77%

Real rate of return=Nominal rate -inflation rate

inflation rate is 3%

real rate of return=7.77%-3%

=4.77%