Finance/Algebra
Suppose you bought an 8% coupon bond one year ago for $1090.00. The bond sells for $1063.00 today. Assuming a $1000 face value, what was ur total dollar return over the past year? What was the nominal rate of return over the past year? And, if inflation was 3%, what was ur total real rate of return on this investment???
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Answers
The total dollar return over the last year was $27 ($1090 - $1063). The nominal rate of return over the past year was 2.48% ($27 / $1090). The real rate of return on this investment was -0.52% (2.48% - 3%). This is because the real rate of return is the nominal rate of return minus the rate of inflation. Therefore, when accounting for the effect of inflation, the value of the bond decreased, resulting in a negative real rate of return.
