You purchased a bond one year ago for $839.67 and just received the annual coupon of $81. You sell the bond today for $829.31. What is your real return if inﬂation was 5%?

Question

Quizplus · Accepted Answer

First, we need to calculate the nominal return. The coupon payment plus the final sale price equals $81+$829.31=$910.31. The initial investment was $839.67, so the nominal return is ($910.31-$839.67)/$839.67 = 0.0844 or 8.44%.

To get the real return, we need to adjust for inflation. The inflation rate was 5%, so we need to divide our nominal return by (1+0.05) = 1.05. 
Real return = 8.44%/1.05 = 0.0804 or 8.04%.

Therefore, the best choice is A.

You Purchased a Bond One Year Ago for $839