Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 12, Problem 13QP
Summary Introduction
To determine: The real return on the investment.
Introduction:
The real
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8.2 Suppose you bought a 10 percent coupon bond one year ago for $1,150. The bond
sells for $1,080 today.
a.
1
Assuming a $1,000 face value, what was your total dollar return on this investment over the
past year?
b.
What was your rate of return on this investment over the past year? (this will be a nominal
rate of return)
C.
If the inflation rate last year was 2 percent, what was your total real rate of return on this
investment?
23. Calculating Investment Returns You bought one of Elkins Manufacturing Co.'s 5.4 percent coupon
bonds one year ago for $1,030. These bonds make annual payments, mature eight years from now,
and have a par value of $1,000. Suppose you decide to sell your bonds today, when the required
return on the bonds is 5.1 percent. If the inflation rate was 2.9 percent over the past year, what would
be your total real return on the investment?
Calculating Returns Suppose you bought a 6 percent coupon bond one year ago for $1,040. The bond sells for $1,063 today. • Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? • What was your total nominal rate of return on this investment over the past year? • If the inflation rate last year was 3 percent, what was your total real rate of return on this investment?
Chapter 12 Solutions
Fundamentals of Corporate Finance
Ch. 12.1 - Prob. 12.1ACQCh. 12.1 - Why are unrealized capital gains or losses...Ch. 12.1 - What is the difference between a dollar return and...Ch. 12.2 - Prob. 12.2ACQCh. 12.2 - Why doesnt everyone just buy small stocks as...Ch. 12.2 - What was the smallest return observed over the 88...Ch. 12.2 - About how many times did large-company stocks...Ch. 12.2 - What was the longest winning streak (years without...Ch. 12.2 - How often did the T-bill portfolio have a negative...Ch. 12.3 - Prob. 12.3ACQ
Ch. 12.3 - What was the real (as opposed to nominal) risk...Ch. 12.3 - Prob. 12.3CCQCh. 12.3 - What is the first lesson from capital market...Ch. 12.4 - In words, how do we calculate a variance? A...Ch. 12.4 - With a normal distribution, what is the...Ch. 12.4 - Prob. 12.4CCQCh. 12.4 - What is the second lesson from capital market...Ch. 12.5 - Prob. 12.5ACQCh. 12.5 - Prob. 12.5BCQCh. 12.6 - What is an efficient market?Ch. 12.6 - Prob. 12.6BCQCh. 12 - Chase Bank pays an annual dividend of 1.05 per...Ch. 12 - The risk premium is computed as the excess return...Ch. 12 - Prob. 12.4CTFCh. 12 - Prob. 12.5CTFCh. 12 - Prob. 12.6CTFCh. 12 - Investment Selection [LO4] Given that Fannie Mae...Ch. 12 - Prob. 2CRCTCh. 12 - Risk and Return [LO2, 3] We have seen that over...Ch. 12 - Market Efficiency Implications [LO4] Explain why a...Ch. 12 - Efficient Markets Hypothesis [LO4] A stock market...Ch. 12 - Semistrong Efficiency [LO4] If a market is...Ch. 12 - Efficient Markets Hypothesis [LO4] What are the...Ch. 12 - Stocks versus Gambling [LO4] Critically evaluate...Ch. 12 - Efficient Markets Hypothesis [LO4] Several...Ch. 12 - Efficient Markets Hypothesis [LO4] For each of the...Ch. 12 - Calculating Returns [LO1] Suppose a stock had an...Ch. 12 - Calculating Yields [LO1] In Problem 1, what was...Ch. 12 - Prob. 3QPCh. 12 - Prob. 4QPCh. 12 - Nominal versus Real Returns [LO2] What was the...Ch. 12 - Bond Returns [LO2] What is the historical real...Ch. 12 - Prob. 7QPCh. 12 - Risk Premiums [LO2, 3] Refer to Table 12.1 in the...Ch. 12 - Calculating Returns and Variability [LO1] Youve...Ch. 12 - Calculating Real Returns and Risk Premiums [LO1]...Ch. 12 - Calculating Real Rates [LO1] Given the information...Ch. 12 - Prob. 12QPCh. 12 - Prob. 13QPCh. 12 - Calculating Returns and Variability [LO1] You find...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Using Return Distributions [LO3] Suppose the...Ch. 12 - Prob. 18QPCh. 12 - Distributions [LO3] In Problem 18, what is the...Ch. 12 - Blumes Formula [LO1] Over a 40-year period an...Ch. 12 - Prob. 21QPCh. 12 - Calculating Returns [LO2, 3] Refer to Table 12.1...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Prob. 1MCh. 12 - Prob. 2MCh. 12 - Prob. 3MCh. 12 - Prob. 4MCh. 12 - A measure of risk-adjusted performance that is...Ch. 12 - Prob. 6M
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- 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?arrow_forwardYou bought one of Great White Shark Repellant Company's 11 percent coupon bonds one year ago for $810. These bonds make annual payments and mature 10 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 13 percent. If the inflation rate was 3.6 percent over the past year, what was your total real return on investment? Multiple Choice O O O O O 28.09% 19.44% 20.31% 6.23% 19.34%arrow_forwardDog Suppose you purchase a 10-year bond with 6.6% annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was 5.4% when you purchased and sold the bond, a. what cash flows will you pay and receive from your investment in the bond per $100 face value? b. what is the annual rate of return of your investment?arrow_forward
- Suppose you bought a $1,000 face value bond with a coupon rate of 5.6 percent one year ago. The purchase price was $987.50. You sold the bond today for $994.20. If the inflation rate last year was 2.6 percent, what was your exact real rate of return on this investment? O 4.88% O 5.32% O 3.65% O 3.78% AMoving to another question will save this response. «< Question 3 of 30arrow_forwardPlease include the excel formula Suppose you bought a bond with an annual coupon of 6 percent one year ago for $1,010. The bond sells for $1,025 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? Input area: Coupon rate 6% Initial price $1,010 Ending price $1,025 Par value $1,000 Inflation rate 3% (Use cells A6 to B10 from the given information to complete this question.) Output area: Coupon paid Dollar return Nominal return Real returnarrow_forwardA short question 4) You are managing a portfolio of $1 million. Your target duration is 10 years, and you can choose from two bonds: a zero-coupon bond with maturity of 5 years, and a perpetuity*, each currently yielding 5%. a. How much of each bond will you hold in your portfolio? b. How will these ratios change next year if target duration is now 9 years? *: Perpetuity: a specal case of annuity, where n-> Inf, thus the maturity of the instrument is perpetual.arrow_forward
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- 1. Suppose most investors expect the inflation rate to be 5% next year, 6% the following year, and 7% thereafter. The real risk-free rate is 3.5%. The maturity risk premium is zero for bonds that mature in 1 year or less, 0.3% for 2-year bonds, and then the MRP increases by 0.3% per year thereafter for 20 years, after which it is stable. What is the interest rate on 1-year, 9-year, and 18-year Treasury bonds? Percentage answers should be rounded to 2 decimal places (0.12%) while decimal answers are to be rounded to 4 decimal places (0.1234).arrow_forward4. Suppose that an investment institution offers you two kinds of bonds and you are willing to take one of them. The first bond, called 'Bond A1' pays you $5000 in 10 years, while the second bond, called 'Bond B1' pays you the same amount but in 20 years. а. If the interest rate is 5%, what is the value of each bond today? Which bond is worth more? Why? b. If the interest rate increases to 8%, what is the value of each bond? Which bond has a larger percentage change in value? After knowing the answer of A and B, you will С. be able to complete this sentence: "The value of bond [rises / falls] when the interest rate increases, and bonds with longer time to maturity are [more/less] sensitive to changes in the interest rate"arrow_forward5 The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy an annual coupon bond with a coupon rate of 8.2 percent for $845. The bond has 10 years to maturity and a par value of $1,000. What rate of return do you expect to earn on your investment? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b-1. Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b-2. What is the HPY on your investment? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. eBook a. Rate of return b-1. Price b-2. Holding…arrow_forward
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