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???
sds
To calculate the total dollar return, you need to determine the difference between the initial investment and the final value. In this case, the initial investment is $1090.00 (the purchase price of the bond), and the final value is $1063.00 (the selling price of the bond).
Total Dollar Return = Final Value - Initial Investment
Total Dollar Return = $1063.00 - $1090.00
Total Dollar Return = -$27.00
So, your total dollar return over the past year is -$27.00, indicating a loss of $27.00 on your investment.
To calculate the nominal rate of return, you can use the formula:
Nominal Rate of Return = (Total Dollar Return / Initial Investment) * 100
Nominal Rate of Return = (-$27.00 / $1090.00) * 100
Nominal Rate of Return ≈ -2.48%
Therefore, the nominal rate of return over the past year is approximately -2.48%, indicating a negative return.
To calculate the real rate of return, you need to adjust for inflation. In this case, the given inflation rate is 3%.
Real Rate of Return = (1 + Nominal Rate of Return) / (1 + Inflation Rate) - 1
Real Rate of Return = (1 + (-0.0248)) / (1 + 0.03) - 1
Real Rate of Return ≈ -0.0555 or -5.55%
So, the total real rate of return on this investment, considering an inflation rate of 3%, is approximately -5.55%. This implies that your investment lost purchasing power in real terms.