Today Katerina purchased a bond at a quoted price of 98.7. The bond matures in ﬁve years, pays semi-annual interest, and has a 6.5% coupon rate. If Katerina holds the bond to maturity, what real
Rate of return will she earn if inﬂation remains constant at 2%?

Question

Quizplus · Accepted Answer

The nominal rate of return is the coupon rate, which is 6.5%. To find the real rate of return, we use the formula: (1 + nominal rate) / (1 + inflation rate) - 1. This gives (1 + 0.065) / (1 + 0.02) - 1 = 0.0472 or 4.72%.

Today Katerina Purchased a Bond at a Quoted Price of 98.7