Question

Suppose you bought a 6 percent coupon bond one year ago for $920. The bond sells for $940 today.

Answer 1

Answer:

1. $80

2. 8.69%

3. 5.53%

Step-by-step explanation:

The computation is shown below:

1. Total dollar return

= Face value × interest rate + (Sale value - purchase value)

= $1,000 × $60 + ($940 - $920)

= $60 + $20

= $80

2. Total nominal rate of return equal to

= {Face value × interest rate + (Sale value - purchase value)} ÷ {Purchase value} × 100

= {$1,000 × $60 + ($940 - $920)} ÷ {$920} × 100

= ($60 + $20) ÷ ($920) × 100

= 8.69%

3. Total real rate of return is

= (1 + Nominal rate of return) ÷ (1 + Inflation rate) × 100

= (1 + 8.70%) ÷ (1 + 0.03) × 100

= 5.53%