Question

Assume there is a bond with the yield to maturity (YTM) of 11%, coupon rate of 10%. Further assume that the current inflation rate is 3%. What is the bond’s real interest rate?

Answer 1

7.77%

Step-by-step explanation:

The Real Interest Rate is the interest rate that has been adjusted with the effects of Inflation. Effect of inflation is to reduce the value of money over time.

Real Interest Rate = (1 + Nominal Return) / (1 + Inflation Rate) - 1

Therefore,

Real Interest Rate = (1 + 0.11) / (1 + 0.03) - 1

= 0.0777

= 7.77%

Conclusion

The bond’s real interest rate is 7.77%