Question

Consider the following information for a period of years:

                                                          Arithmetic Mean

Long-term government bonds           6.3 %

Long-term corporate bonds               6.4 %

Inflation                                              3.5%

A. What is the real return on long-term government bonds?

B. What is the real return on long-term corporate bonds?

Answer 1

1 + nominal interest rate = (1+ real interest rate)*(1+ inflation)
Long-term government bonds
nominal interest rate	0.063
inflation	0.035
(1+.063) = (1+real interest rate)*(1+.035)
(1+real interest rate) = (1.063/1.035)
(1+real interest rate) = 1.027053
real interest rate = 1.027053 - 1
real interest rate = .027053
The real return on long-term government bonds for the period was 2.71%.
Long-term corporate bonds
nominal interest rate	0.064
inflation	0.035
(1+.064) = (1+real interest rate)*(1+.035)
(1+real interest rate) = (1.064/1.035)
(1+real interest rate) = 1.028019
real interest rate = 1.028019 - 1
real interest rate = .028019.
The real return on long-term corporate bonds for the period was 2.80%.