Suppose you bought a 6 percent coupon bond one year ago for $929. The bond sells today for $933. The face value is $1,000. If the inflation rate last year was 3.4 percent, what was your total real rate of return on this investment?

Question

Quizplus · Accepted Answer

The real rate of return is the nominal rate of return minus the inflation rate. The nominal rate of return is the coupon rate plus the capital gain. The capital gain is the difference between the purchase price and the sale price. In this case, the coupon rate is 6%, the purchase price is $929, and the sale price is $933. So, the nominal rate of return is 6% + ($933 - $929) / $929 = 6.37%. The inflation rate is 3.4%. So, the real rate of return is 6.37% - 3.4% = 3.37%.

Suppose You Bought a 6 Percent Coupon Bond One Year