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 7 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 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 =7

Bond Price =∑ [(11*1000/100)/(1 + 13/100)^k]     +   1000/(1 + 13/100)^7

k=1

Bond Price = 911.55

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

=((911.55+110)/780-1)

=30.97%

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

Real return=((1+0.3097)/(1+0.03)-1)*100

Real return = 27.16