Question

Tri-County Hauling has bonds outstanding that pay a 6 percent coupon, have a 5.47 percent yield to maturity, and a face value of $1,000. The current rate of inflation is 3.2 percent. What is the real rate of return on these bonds?

a. 0.53 percent

b. 2.71 percent

c. 2.20 percent

d. 2.80 percent

e. 2.27 percent

Answer 1

Formula to calculate real rate of return on bond
Real rate of return (Ir)	(1+i(n))/(1+i(f))-1
i(n) represents nominal interest rate
i(f) represents inflation rate
Real rate of return (Ir)	(1+0.0547)/(1+0.032)-1
Real rate of return (Ir)	(1.0547/1.032)-1
Real rate of return (Ir)	2.20%
Thus, real rate of return is 2.20%.