Question

If inflation is 6%, what real rate of return is earned by an investor in a bond that was purchased for $1,000, has an annual coupon of 8%, and was sold at the end of the year for $960

Answer 1

Answer:

−1.89%

Explanation:

Calculation for what real rate of return is earned by an investor

First step is to calculate the Nominal return

Nominal return = [$960 + (0.08 × $1,000) − $1,000] / $1,000

Nominal return = [$960 + $80 − $1,000] / $1,000

Nominal return = $40/ $1,000

Nominal return= 0.04

Now let calculate the real rate of return

Real rate of return = 1.04 / 1.06 − 1

Real rate of return= −0.0189*100

Real rate of return= −1.89%

Therefore the real rate of return is earned is = −1.89%