Question

Suppose that you buy a two-year 7.3% bond at its face value

a-1. What will be your total nominal return over the two years if inflation is 2.3% in the first year and 4.3% in the second? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Nominal return = ?

a-2. What will be your real return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

Real return = ?

b. Now suppose that the bond is a TIPS. What will be your total 2-year real and nominal returns? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Real return =

Nominal return =

( I posted this question before and all of the answers are wrong. a-1, 7.3% is wrong !! not 7.3% for a-1)

Answer 1

a) Total Nominal Return over 2 years will be 7.3% + 7.3% = 14.6%

b) Real Return for two years= inflation adjusted Nominal Rate

= 14.6% - 6.6% = 8% , real return per annum = 4%

TIPS is inflation protected bonds , So real return and Nominal Return is same , 14.6%

Real return per annum= 7.3%