Question

What real rate of return is earned by a one-year investor in a bond that was purchased for $1,000, has an 8 percent coupon, and was sold for $960 when the inflation rate was 7 percent?

		2.80 percent
		3.72 percent
		5.39 percent
		-1.89 percent

Answer 1

Solution

Here Nominal return=(Coupon payment+(Selling price-Buying price))/buyinmg price

Putting values

Nominal rate=(80+(960-1000))/1000=4%

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

Real rate of return=((1+4%)/(1+7%))-1

Solving

Real rate of return= -2.80%