Question

Suppose you bought a bond with an annual coupon of 7 percent one year ago for $1,090. The bond sells for $1,160 today.

Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?

What was your total nominal rate of return on this investment over the past year?

If the inflation rate last year was 6 percent, what was your total real rate of return on this investment?

Answer 1

Annual coupon=1000*7%=70

Total dollar return=(End value-Beginning value+Dividend)

=(1160-1090+70)

=$140

Total nominal rate=Total dollar return/Beginning value

=140/1090

=12.84%(Approx)

Real rate=[(1+nominal rate)/(1+inflation rate)]-1

=[(1+0.1284)/(1+0.06)]-1

=(1.1284/1.06)-1

=6.46%(Approx)