Getty Markets has bonds outstanding that pay a 5 percent semiannual coupon, have a 5

Finance Aug 07, 2020

Getty Markets has bonds outstanding that pay a 5 percent semiannual coupon, have a 5.28 percent yield to maturity, and a face value of $1,000. The current rate of inflation is 4.1 percent. What is the real rate of return on these bonds? Select one: O a 1.04 percent O b. 0.90 percent O c. 1.19 percent O d. 0.86 percent O e. 1.13 percent

Expert Solution

Real rate of return =[ ( 1 + Nominal Rate of return) / ( 1 + Inflation rate) ] - 1

In this case, The Nominal rate of return is the Yield to maturity.

So, Real rate of return = [( 1 + 5.28%) / ( 1+4.1%)] - 1

= (1.0528/1.041) - 1

= 0.0113 or 1.13%

Option E is the correct answer

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