Question

4. Calculating Returns (L01) Suppose you bought a 7 percent coupon bond one year ago for $970. The bond sells for $940 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? c. If the inflation rate last year was 3 percent, what was your total real rate of return on this investment?

Answer 1

Solution a. Investor total return compresez of 2 elements - capital gain / loss and coupon payment Total Dollar Return = (sale value - cost of acquisition & Coupon pay) ç 940 -970 +70 = 40 Total Nominal rate of return = (sale value - cost of acquisition of Coupon pay), cost of acquisition be = (940 - 970+70)/170 = 401970 = 0.0412 - 40121%. e . Raal rate of return = [C1t nominal rate)/(1+ Inflation rate) -1 = [[10412 / 1.03)7-1 = 60109 = 1.09%