Question

A bond has 8 years until maturity, a coupon rate of 8%, and sells for 1,100

a. If the bond has a yield to maturity of 8% 1 year from now, what will its price be? Price $

b. What will be the rate of return on the bond? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) Rate of return %

c. If the inflation rate during the year is 3%, what is the real rate of return on the bond? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

bond has 8 years until maturity

the coupon rate of 8%

sells for 1,100

Face value = 1000

Interest paid = 8% 0f 1000 = 80-

a)

yield to maturity of 8% 1 year from now means 7 years are left for maturity

YTM = { Interest paid + (Face value - Price)/time to maturity } / { (Face value + Price)/2 }

=> 8% = { 80 + (1000 - P)/7 } / { (1000 + P)/2 }

=> Price = 1000

b)

rate of return on the bond = (Selling Price - Purchase Price)/Purchase Price = (1000 - 1100)/1100 = -9.09%

c)

Real rate = Nominal Rate - Inflation = -9.09 - 3 = -12.09%