Question

Suppose you bought a bond with an annual coupon rate of 5.5 percent one year ago for $1,017. The bond sells for $1,041 today.

Answer 1

Answer:

Dollar return is $79

Nominal rate of return is 7.77%

Real rate of return is 4.77%

Explanation:

The total return is the difference in market price plus the coupon interest received,the total dollar return is computed as follows:

Price today                                  $1,041

price a year ago                           ($1,071)

Coupon interest($1000*5.5%)       $55

Total dollar return                           $79

The nominal rate of return over the past one year is calculated thus:

Nominal rate of return =dollar return/initial price paid

dollar return is $79

initial price is $1017

nominal rate of return =$79/$1017

                                     =7.77%

Real rate of return=Nominal rate -inflation rate

inflation rate is 3%

real rate of return=7.77%-3%

                             =4.77%