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Suppose you bought a bond with an annual coupon rate of 4.2 percent one year ago for $900. The bond sells for $950 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 2.5 percent, what was your total real rate of return on this investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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Answer:

a) total return = ($1,000 x 4.2%) + ($950 - $900) = $92

b) nominal rate of return = total return / total investment = $92 / $900 = 10.22%

c) we calculate the approximate real rate of return = nominal rate of return - inflation rate = 10.22% - 2.5% = 7.72%

if we want to determine the exact real rate of return:

exact real rate of return = [(1 + nominal rate) / (1 + inflation rate)] - 1 = (1.1022 /1.025) - 1 = 7.53%

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