You bought one of Great White Shark Repellant Co.'s 5.8 percent coupon bonds one year ago for $1,030. These bonds make annual payments and mature 14 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 5.1 percent. If the inflation rate was 3.9 percent over the past year, what was your total real return on investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

Question

Carina Ochoa

Business

12 October, 01:14

You bought one of Great White Shark Repellant Co.'s 5.8 percent coupon bonds one year ago for $1,030. These bonds make annual payments and mature 14 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 5.1 percent. If the inflation rate was 3.9 percent over the past year, what was your total real return on investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

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Answers (1)

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PbJ · Answer 1

The total real return on investment is 5.29%.

Explanation:

Annual Coupon Receipt = 1,000 x 5.8% = $58

We have total receipt from the investment = Coupon receipt for 01 year hodling + Selling price of the bond = 58 + Selling price of the bond

Selling price of the bond = Present value of cash flow generating from bond in 14 years discounted at required return of 5.1% = (58/0.051) x (1 - 1.051^-14) + 1,000/1.051^14 = $1,068.85

=> Total receipt from the investment = 58 + 1,068.85 = $1126.85

=> Nominal return from the investment = Total receipt from the investment / Purchasing price - 1 = 1,126.85/1,030 - 1 = 9.40%

=> Actual return on the investment = (1 + Nominal return) / (1 + inflation) - 1 = 1.0940 / 1.039 - 1 = 5.29%.