Question

A bond par value is $1,000 and the coupon rate is 6.3 percent. The bond price was $946.86 at the beginning of the year and $984.56 at the end of the year. The inflation rate for the year was 2.1 percent. What was the bond's real return for the year

Answer 1

8.36%

Step-by-step explanation:

The computation of the real rate of return is given below:

Coupon amount = $1,000 × 6.3% = $63

Return on price is

= $984.56 - 946.86

= $37.7

Now

Nominal rate of return =( (63 + 37.7) ÷ 946.86 ) × 100

= 10.64%

And, finally

Real rate of return = (1+ nominal return) ÷ (1+inflation) - 1

= (1.1064 ÷ 1.021) - 1

= 8.36%