Question

P12-4 Calculating Returns (L01) Suppose you bought a 13 percent coupon bond one year ago for $970. The bond sells for $1,045 today. Requirement 1: Assuming a $1,000 face value, what was your the past year? al dollar return on this investment over (Click to select) Requirement 2: What was your total rate of return on this inves past year (in percent)? (Click to select) Requirement 3: If the inflation rate last year was 4 percent, what was your total "real" rate of return on this investment? Assume that the answer for "Requirement 2" above is in "nominal terms, and then use the Fisher Effect Formula (see Bond chapter) to find the "real" rate of return. (Do not round intermediate calculations.) (Click to select)

Answer 1

Requirement 1
Total dollar return on investment	(Sale price+Coupon amount)-Cost of bond
Calculation of total dollar return on investment
Cost of bond	-$970
Sale price	$1,045
Coupon amount	$130	(1000*13%)
Dollar return on investment	$205
Requirement 2
Calculation of total rate of return on investment
Total rate of return on investment	Dollar return on investment/Amount invested
Total rate of return on investment	205/970
Total rate of return on investment	21.13%
Requirement 3
Using the fisher equation we can calculate the real rate of return
(1+rn)	(1+ri)*(1+i)
rn represents nominal return
ri represents real return
I represents inflation rate
(1+ri)	((1+rn)/(1+i))
(1+ri)	(1.2113/1.04)
(1+ri)	1.16475
ri	1.16475-1
ri	16.48%
Thus, real rate of return on investment is 16.48%.