Question

Check my work Check My Work button is now enabledItem 17Item 17 0.25 points Time Remaining 2 hours 18 minutes 10 seconds02:18:10 Suppose you bought a bond with an annual coupon of 7 percent one year ago for $1,010. The bond sells for $985 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? b. What was your total nominal rate of return on this investment over the past year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. If the inflation rate last year was 3 percent, what was your total real rate of return on this investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

The dollar return is $45

nominal rate is 4.46%

real rate is 1.46%

Explanation:

The total dollar return on the bond can be calculated as: price today+coupon received-price paid last year

price today is $985

price paid last year $1010

coupon received =$1000*&7%=$70

dollar return=$985+$70-$1010

                    =$45

The nominal return on investment =dollar return return/price paid last year

                                                         =45/1010

                                                          =4.46%

nominal rate =real rate +inflation rate

real rate =nominal rate-inflation rate

nominal rate =4.46%

inflation rate=3%

real rate=4.46%-3%

real rate=1.46%