Question

A bond par value is $2,000 and the coupon rate is 5.8 percent. The bond price was $1,946.47 at the beginning of the year and $1,981.96 at the end of the year. The inflation rate for the year was 3.1 percent. What was the bond's real return for the year

Answer 1

The bond's real return for the year is 4.54%

Step-by-step explanation:

In order to calculate the bond's real return for the year we would have to calculate first the nominal rate of return as follows:

nominal rate of return=(price end+coupon-price beginning/price beginning)*100

nominal rate of return=(price end+coupon rate*par value-price beginning/price beginning)*100

nominal rate of return=($1,981.96+0.058*$2,000-$1,946.47/$1,946.47)*100

nominal rate of return=7.78%

Therefore, in order to calculate the bond's real return for the year we would have to use the following formula:

(1+real rate of return)*(1+inflation)=(1+nominal rate of return)

(1+real rate of return)=(1+nominal rate of return)/(1+inflation)

(1+real rate of return)=(1+0.078)/(1+0.031)

(1+real rate of return)=1.0454

real rate of return=4.54%

The bond's real return for the year is 4.54%