Question

You bought one of Great White Shark Repellant Co.’s 11 percent coupon bonds one year ago for $780. These bonds make annual payments and mature 5 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 13 percent. If the inflation rate was 3.3 percent over the past year, what was your total real return on investment?

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =5

Bond Price =∑ [(11*1000/100)/(1 + 13/100)^k]     +   1000/(1 + 13/100)^5

k=1

Bond Price = 929.66

rate of return/HPR = ((Selling price+Coupon amount)/Purchase price-1)

=((929.66+110)/780-1)

=33.29%

Real return = ((1+nominal return)/(1+inflation rate)-1)*100

Real return=((1+0.3329)/(1+0.033)-1)*100

Real return = 29.03