The bonds of Jerrod's Welding,Inc. pay an 8% coupon,have a 7.98% yield to maturity and have a face value of $1,000. The current rate of inflation is 2.5%. What is the real rate of return on these bonds?

Question

Quizplus · Accepted Answer

The real rate of return is calculated as follows:

Real rate of return = (1 + nominal rate) / (1 + inflation rate) - 1

Plugging in the values:

Real rate of return = (1 + 0.08) / (1 + 0.025) - 1 
Real rate of return = 0.0535 or 5.35%

Therefore, the best choice is B.

The Bonds of Jerrod's Welding,Inc