Answer:
Real Rate of Return = 4.9% and Nominal rate = 0.08 or 8%
Real Rate of Return = 2.9% and Nominal rate = 0.081 or 8.1%
real rate = 5 % and Nominal rate = 0.0815 or 8.15%
real rate = 3% and Nominal rate = 0.0815 or 8.15%
Step-by-step explanation:
given data
time period = 2 year
Coupon rate = 8% = 0.08
Inflation rate 1st year = 3% = 0.03
Inflation rate 2nd year = 5% = 0.05
solution
we get here Real Rate of Return that is express as
Real Rate of Return = (Coupon Rate - Inflation rate) ÷ (1+Inflation rate) .........1
so that here 1st year Real return will be
Real Rate of Return = (0.08 - 0.03) ÷ (1+0.03)
solve it we get
Real Rate of Return = 4.9%
and
(1 + nominal rate) = (1 + real rate) × (1 + inflation rate) ............2
(1 + nominal rate) = (1 + 0.049) × (1 + 0.03)
Nominal rate = 0.08 or 8%
and
for 2nd year Real return will be
Real Rate of Return = (0.08 - 0.05) ÷ (1+0.05)
solve it
Real Rate of Return = 2.9%
and
(1 + nominal rate) = (1 + real rate) × (1 + inflation rate) ............3
(1 + nominal rate) = (1 + 0.029) × (1 + 0.05)
Nominal rate = 0.081 or 8.1%
and
now for the bond Treasury Inflation-Protected Securities, we get real and nominal return that is
for 1st year
Real rate = Coupon rate - Inflation ...............4
Real rate = 0.08 - 0.03
real rate = 0.05
and
(1 + nominal rate) = (1 + real rate) × (1 + inflation rate) ................5
(1 + nominal rate) = (1 + 0.05) × (1 + 0.03)
so
Nominal rate = 0.0815 or 8.15%
and for 2nd years it will be
Real rate = Coupon rate - Inflation ....................6
Real rate = 0.08 - 0.05
real rate = 0.03
and
(1 + nominal rate) = (1 + real rate) × (1 + inflation rate) ...................7
(1 + nominal rate) = (1 + 0.03) × (1 + 0.05)
so
Nominal rate = 0.0815 or 8.15%
