Question

The bonds of Frank’s Welding, Inc. pay an 8 percent coupon, have a 7.98 percent yield to maturity and have a face value of $1,000. The current rate of inflation is 2.5 percent. What is the real rate of return on these bonds?

Answer 1

->>>5.35%

( 1 + 0.0798) = (1+r) (1+h)

(1+r) = ( 1+0.0798 ) / ( 1 + 0.025) = 1.0535

r = 1.0535 - 1 = 0.0535

so answer is B 5.35%