Question

Over the past year (from 1 year ago to today), the inflation rate was 5.46 percent, the risk-free rate was 7.63 percent, and the real rate of return for a bond was 9.47 percent. The bond was priced at 1,230.45 dollars one year ago and 1,257.69 dollars two years ago, pays annual coupons of 64.96 dollars, and just made a coupon payment. What is the price of the bond today?

Answer 1

Nominal Return = (1 + Real Return) * (1 + Inflation Rate) - 1
Nominal Return = (1 + 0.0947) * (1 + 0.0546) - 1
Nominal Return = 1.154471 - 1
Nominal Return = 0.154471 or 15.4471%

The price a year a ago was $1,230.45 and coupon payment today is 64.96

Nominal Return = (Current Price + Coupon - Price 1 year ago) / Price 1 year ago
0.154471 = (Current Price + 64.96 - 1,230.45) / $1,230.45
190.068374 = Current Price - $1,165.49
Current Price = $1,355.56

So, current price of bond is $1,355.56