What real rate of return is earned by a one-year investor in a bond that was purchased for $1,000,has an 8% coupon,and was sold for $960 when the inflation rate was 6%?
A) -1.89%
B) 1.92%
C) 5.66%
D) 11.47%

Question

Quizplus · Accepted Answer

The real rate of return can be calculated as:
(1 + nominal rate of return)/(1 + inflation rate) - 1

In this case, the nominal rate of return is the coupon rate of 8%, so:
(1 + 0.08)/(1 + 0.06) - 1 = 0.0192 or 1.92%

However, the bond was sold for $960, resulting in a loss of $40 from the original purchase price of $1,000. This loss needs to be factored in to calculate the real rate of return, so:
(1 - 0.04)/(1 + 0.06) - 1 = -0.0189 or -1.89%

Therefore, the correct answer is A) -1.89%.

What Real Rate of Return Is Earned by a One-Year