Question

A bond par value is $1,000 and the coupon rate is 4.3 percent. The bond price was $945.46 at the beginning of the year and $976.26 at the end of the year. The inflation rate for the year was 2.2 percent. What was the bond's real return for the year

Answer 1

Answer:

The bond's real return for the year was 5.49%

Explanation:

In order to calculate the bond's real return for the year we would have to calculate the following formula:

bond's real return for the year=(1+Nominal rate of return)/(1+Inflation) -1

According to the given data Inflation=2.2 percent

To calculate the Nominal rate of return we would have to calculate the following:

Nominal rate of return=(Selling price + Interest coupon - Purchase price)/Purchase price

According to the given data:

Selling price=$976.26

Interest coupon=$43

Purchase price=$945.46

Therefore, Nominal rate of return=($976.26 + $43 - $945.46)/ $945.46

Nominal rate of return=7.81%

Therefore, bond's real return for the year= (1+7.81%)/(1+2.2%) -1

bond's real return for the year=5.49%

The bond's real return for the year was 5.49%