Respuesta :
Answer:
(a) $45
(b) 4.45%
(c) 1.4%
Explanation:
Mentioned that,
The Value of bond one year ago is $1,010
The Annual coupon rate is 7%
The Selling value of bond today is $985
The Face value is $1,000
Based on the above information, the calculations are shown below:
a. Total dollar return on this investment is
= Current bond price - previous year price + Coupon payment
= $985 - $1,010 + ($1,000 × 7%)
= $985 - $1,010 + $70
= $45
(b) The total Nominal rate of return on this investment is
= [(Current bond price - previous year price + Coupon payment) ÷ previous year price]
= [($985 - $1,010 + ($1,000 × 7%)) ÷ $1,010]
= $45 ÷ $1,010
= 0.0445
= 4.45%
(c) In case when Inflation rate last year is 3%
The Total real rate of return is
= [(1 + Nominal rate) ÷ (1 + Inflation rate)] - 1
= [(1 + 4.45%) ÷ (1 + 3%)] - 1
= 1.0140 - 1
= 0.0140
= 1.4%
