Question

Suppose you bought a bond with an annual coupon rate of 8.4 percent one year ago for $907. The bond sells for $946 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 and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. If the inflation rate last year was 4.4 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.) a. Total dollar return b. Total nominal rate of return c. Total real rate of return

Answer 1

Holding Period Return = (Change in Bond Price + Annual Coupon Payments Received) / Initial Price paid Initial Price paid Bond's Price after one year Change in Bond Price Annual Coupon Payments Received a) Total Dollar Return $907 $946 $39 ($946 - $907] $84 ($1,000 X 8.4%] $123 ($39 + $84] b) Total Nominal Rate of Return Less: Inflation rate c) Total Real Return 13.56% ($123 / $907 = 0.1356 = 13.56%] 4.40% 9.16% [13.56% - 4.40%]