Question

In: Finance

Suppose you bought a bond with an annual coupon of 7 percent one year ago for...

Suppose you bought a bond with an annual coupon of 7 percent one year ago for $1,010. The bond sells for $985 today.

a.

Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?

b.

What was your total nominal rate of return on this investment over the past year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

c.

If the inflation rate last year was 3 percent, what was your total real rate of return on this investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Solutions

Expert Solution

a) Dollar return = Selling Price - Buying Price + Coupon

Dollar return = $985 - $1010 + $70 = $45

b) Rate of return = Dollar return/Buy price = 45/1010 = 4.45%

c) Based on Fischer relation,

(1 + Nominal rate) = (1 + Real rate) * (1 + Inflation)

(1 + 4.45%) = (1 + Real rate) * (1 + 3%)

Real rate = 1.41%


Related Solutions

Suppose you bought a bond with an annual coupon of 7 percent one year ago for...
Suppose you bought a bond with an annual coupon of 7 percent one year ago for $1,090. The bond sells for $1,160 today. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? What was your total nominal rate of return on this investment over the past year? If the inflation rate last year was 6 percent, what was your total real rate of return on this investment?
Suppose you bought a bond with an annual coupon rate of 10% percent one year ago...
Suppose you bought a bond with an annual coupon rate of 10% percent one year ago for $1,500. The bond sells for $1,650 today. Assuming a $1,000 face value: a) What was your total dollar return on this investment over the past year? b) What was your total nominal rate of return on this investment over the past year? c) If the inflation rate last year was 5 %, what was your total real rate of return on this investment?...
​Suppose you bought a bond with an annual coupon rate of 5.5 percent one year ago for $1,017
Suppose you bought a bond with an annual coupon rate of 5.5 percent one year ago for $1,017. The bond sells for $1,041 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What was your total nominal rate of return on this investment over the past year? (Do not round intermediate calculations...
Suppose you bought a bond with an annual coupon rate of 8 percent one year ago for $880. The bond sells for $910 today.
Suppose you bought a bond with an annual coupon rate of 8 percent one year ago for $880. The bond sells for $910 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? Total dollar return = $_______ b. What was your total nominal rate of return on this investment over the past year?  Nominal rate of return = _______ % c. If the inflation rate last year was 3 percent, what was your total...
You bought one of Mastadon Manufacturing Co.’s 7 percent coupon bonds one year ago for $1,045....
You bought one of Mastadon Manufacturing Co.’s 7 percent coupon bonds one year ago for $1,045. These bonds make annual payments, mature twelve years from now, and have a par value of $1,000. Suppose you decide to sell your bonds today, when the required return on the bonds is 6 percent. If the inflation rate was 3.2 percent over the past year, what would be your total real return on the investment? (Do not round intermediate calculations. Enter your answer...
Suppose that you bought a five year coupon bond with $20,000 face value, 7% coupon rate...
Suppose that you bought a five year coupon bond with $20,000 face value, 7% coupon rate and 7% yield to maturity. After holding it for a year and collecting the first coupon payment you decide to sell it. Calculate the return (in %) on this investment if the interest rate has increased to 9% while selling the bond.
You bought one of Colton Manufacturing Co.’s 5.4 percent coupon bonds one year ago for $1,053....
You bought one of Colton Manufacturing Co.’s 5.4 percent coupon bonds one year ago for $1,053. These bonds make annual payments and mature twelve years from now. Suppose you decide to sell your bonds today when the required return on the bonds is 4.5 percent. The par value is $1,000. If the inflation rate was 3.8 percent over the past year, what would be your total real return on the investment? (Do not round intermediate calculations and enter your answer...
You bought one of Bergen Manufacturing Co.’s 5.4 percent coupon bonds one year ago for $1,053....
You bought one of Bergen Manufacturing Co.’s 5.4 percent coupon bonds one year ago for $1,053. These bonds make annual payments and mature twelve years from now. Suppose you decide to sell your bonds today when the required return on the bonds is 4.5 percent.    If the inflation rate was 3.8 percent over the past year, what would be your total real return on the investment? (Do not round intermediate calculations and enter your answer as a percent rounded...
Suppose you buy a bond with a coupon of 7 percent today for$1,130. The bond...
Suppose you buy a bond with a coupon of 7 percent today for $1,130. The bond has 9 years to maturity. Assume interest payments are reinvested at the original YTM.a. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)Rate of Return %:b. Two years from now, the YTM on your bond has increased by 2 percent, and you decide to sell....
Jack bought a five-year 4.25% annual coupon bond for $974 a year ago. Today, he sold...
Jack bought a five-year 4.25% annual coupon bond for $974 a year ago. Today, he sold the bond at the market yield of 4%. What is Jack's approximate real rate of return if the inflation rate over the past year was 2.2%? a) 1.80% b) 2.05% c) 5.76% d) 5.98%
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT