Question

The Ingraham Corporation has $1,000 par value bonds outstanding. The bonds have an annual coupon rate of 8.90 percent and an annual yield to maturity of 8.03 percent. The annual inflation rate is 2.66 percent. What is the real rate of return on the bonds?

Answer 1

Based on the inflation rate and the yield to maturity, the real rate of return on the bonds will be 5.23%.

What is the real rate of return?

This can be found by the formula:

=  (( 1 + nominal Return) / ( 1 + Inflation rate)) - 1

Solving gives:

= ( ( 1 + 8.0%) / ( 1 + 8.90%)) - 1

= 1.0523 - 1

= 5.23%

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