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You bought one of Great White Shark Repellant Co's 8
You bought one of Great White Shark Repellant Co's 8.6 percent coupon bonds one year ago for $1,046. These bonds make annual payments and mature 15 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 8 percent. The bonds have a par value of $1,000 If the inflation rate was 3 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.) Total real return
Expert Solution
Dear Student
Please note the solution
Price = Coupen * PVAF( rate, number of years ) + Face value * PVIF( rate, number of years )
= ( 8.6% * 1000 ) * [ 1 / 1.08 + ...... + 1 / 1.0815 ] + 1000 * 1.0815
= 86 * 8.5595 + 1000 * 0.3152
= 736.12 + 315.20
= 1051.32
Rate of return = [ ( sale price - purchase price ) + Coupen amount ] / purchase price
= [ ( 1051.32 - 1046 ) + 86 ] / 1046
= 8.73%
Real rate = 8.73 - 3
= 5.73% Answer
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