4. Calculating Returns [LO1] Suppose you bought a bond with an annual coupon of 7 percent one year ago for $1,010. The bond sells for $985 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? b. What was your total nominal rate of return on this investment over the past year? c. If the inflation rate last year was 3 percent, what was your total real rate of return on this investment? Rar+h 7.4 EXAMPLE 7.5 The Fisher Effect If investors require a 10 percent real rate of return, and the inflation rate is 8 percent, what must be the approximate nominal rate? The exact nominal rate? The nominal rate is approximately equal to the sum of the real rate and the inflation rate: 10% + 8% = 18%. From the Fisher effect, we have: 1+R = (1+r) × (1+h) = 1.10 x 1.08 = 1.1880 Therefore, the nominal rate will actually be closer to 19 percent.

4. Calculating Returns [LO1] Suppose you bought a bond with an annual coupon of 7 percent one year ago for $1,010. The bond sells for $985 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? b. What was your total nominal rate of return on this investment over the past year? c. If the inflation rate last year was 3 percent, what was your total real rate of return on this investment? Rar+h 7.4 EXAMPLE 7.5 The Fisher Effect If investors require a 10 percent real rate of return, and the inflation rate is 8 percent, what must be the approximate nominal rate? The exact nominal rate? The nominal rate is approximately equal to the sum of the real rate and the inflation rate: 10% + 8% = 18%. From the Fisher effect, we have: 1+R = (1+r) × (1+h) = 1.10 x 1.08 = 1.1880 Therefore, the nominal rate will actually be closer to 19 percent.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 23P

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